The Next Crypto Wave: The Rise of Stablecoins and its Entry to the U.S. Dollar Market
Author: Christian Hsieh, CEO of Tokenomy This paper examines some explanations for the continual global market demand for the U.S. dollar, the rise of stablecoins, and the utility and opportunities that crypto dollars can offer to both the cryptocurrency and traditional markets. The U.S. dollar, dominant in world trade since the establishment of the 1944 Bretton Woods System, is unequivocally the world’s most demanded reserve currency. Today, more than 61% of foreign bank reserves and nearly 40% of the entire world’s debt is denominated in U.S. dollars1. However, there is a massive supply and demand imbalance in the U.S. dollar market. On the supply side, central banks throughout the world have implemented more than a decade-long accommodative monetary policy since the 2008 global financial crisis. The COVID-19 pandemic further exacerbated the need for central banks to provide necessary liquidity and keep staggering economies moving. While the Federal Reserve leads the effort of “money printing” and stimulus programs, the current money supply still cannot meet the constant high demand for the U.S. dollar2. Let us review some of the reasons for this constant dollar demand from a few economic fundamentals.
Demand for U.S. Dollars
Firstly, most of the world’s trade is denominated in U.S. dollars. Chief Economist of the IMF, Gita Gopinath, has compiled data reflecting that the U.S. dollar’s share of invoicing was 4.7 times larger than America’s share of the value of imports, and 3.1 times its share of world exports3. The U.S. dollar is the dominant “invoicing currency” in most developing countries4. https://preview.redd.it/d4xalwdyz8p51.png?width=535&format=png&auto=webp&s=9f0556c6aa6b29016c9b135f3279e8337dfee2a6 https://preview.redd.it/wucg40kzz8p51.png?width=653&format=png&auto=webp&s=71257fec29b43e0fc0df1bf04363717e3b52478f This U.S. dollar preference also directly impacts the world’s debt. According to the Bank of International Settlements, there is over $67 trillion in U.S. dollar denominated debt globally, and borrowing outside of the U.S. accounted for $12.5 trillion in Q1 20205. There is an immense demand for U.S. dollars every year just to service these dollar debts. The annual U.S. dollar buying demand is easily over $1 trillion assuming the borrowing cost is at 1.5% (1 year LIBOR + 1%) per year, a conservative estimate. https://preview.redd.it/6956j6f109p51.png?width=487&format=png&auto=webp&s=ccea257a4e9524c11df25737cac961308b542b69 Secondly, since the U.S. has a much stronger economy compared to its global peers, a higher return on investments draws U.S. dollar demand from everywhere in the world, to invest in companies both in the public and private markets. The U.S. hosts the largest stock markets in the world with more than $33 trillion in public market capitalization (combined both NYSE and NASDAQ)6. For the private market, North America’s total share is well over 60% of the $6.5 trillion global assets under management across private equity, real assets, and private debt investments7. The demand for higher quality investments extends to the fixed income market as well. As countries like Japan and Switzerland currently have negative-yielding interest rates8, fixed income investors’ quest for yield in the developed economies leads them back to the U.S. debt market. As of July 2020, there are $15 trillion worth of negative-yielding debt securities globally (see chart). In comparison, the positive, low-yielding U.S. debt remains a sound fixed income strategy for conservative investors in uncertain market conditions. Source: Bloomberg Last, but not least, there are many developing economies experiencing failing monetary policies, where hyperinflation has become a real national disaster. A classic example is Venezuela, where the currency Bolivar became practically worthless as the inflation rate skyrocketed to 10,000,000% in 20199. The recent Beirut port explosion in Lebanon caused a sudden economic meltdown and compounded its already troubled financial market, where inflation has soared to over 112% year on year10. For citizens living in unstable regions such as these, the only reliable store of value is the U.S. dollar. According to the Chainalysis 2020 Geography of Cryptocurrency Report, Venezuela has become one of the most active cryptocurrency trading countries11. The demand for cryptocurrency surges as a flight to safety mentality drives Venezuelans to acquire U.S. dollars to preserve savings that they might otherwise lose. The growth for cryptocurrency activities in those regions is fueled by these desperate citizens using cryptocurrencies as rails to access the U.S. dollar, on top of acquiring actual Bitcoin or other underlying crypto assets.
The Rise of Crypto Dollars
Due to the highly volatile nature of cryptocurrencies, USD stablecoin, a crypto-powered blockchain token that pegs its value to the U.S. dollar, was introduced to provide stable dollar exposure in the crypto trading sphere. Tether is the first of its kind. Issued in 2014 on the bitcoin blockchain (Omni layer protocol), under the token symbol USDT, it attempts to provide crypto traders with a stable settlement currency while they trade in and out of various crypto assets. The reason behind the stablecoin creation was to address the inefficient and burdensome aspects of having to move fiat U.S. dollars between the legacy banking system and crypto exchanges. Because one USDT is theoretically backed by one U.S. dollar, traders can use USDT to trade and settle to fiat dollars. It was not until 2017 that the majority of traders seemed to realize Tether’s intended utility and started using it widely. As of April 2019, USDT trading volume started exceeding the trading volume of bitcoina12, and it now dominates the crypto trading sphere with over $50 billion average daily trading volume13. https://preview.redd.it/3vq7v1jg09p51.png?width=700&format=png&auto=webp&s=46f11b5f5245a8c335ccc60432873e9bad2eb1e1 An interesting aspect of USDT is that although the claimed 1:1 backing with U.S. dollar collateral is in question, and the Tether company is in reality running fractional reserves through a loose offshore corporate structure, Tether’s trading volume and adoption continues to grow rapidly14. Perhaps in comparison to fiat U.S. dollars, which is not really backed by anything, Tether still has cash equivalents in reserves and crypto traders favor its liquidity and convenience over its lack of legitimacy. For those who are concerned about Tether’s solvency, they can now purchase credit default swaps for downside protection15. On the other hand, USDC, the more compliant contender, takes a distant second spot with total coin circulation of $1.8 billion, versus USDT at $14.5 billion (at the time of publication). It is still too early to tell who is the ultimate leader in the stablecoin arena, as more and more stablecoins are launching to offer various functions and supporting mechanisms. There are three main categories of stablecoin: fiat-backed, crypto-collateralized, and non-collateralized algorithm based stablecoins. Most of these are still at an experimental phase, and readers can learn more about them here. With the continuous innovation of stablecoin development, the utility stablecoins provide in the overall crypto market will become more apparent.
In addition to trade settlement, stablecoins can be applied in many other areas. Cross-border payments and remittances is an inefficient market that desperately needs innovation. In 2020, the average cost of sending money across the world is around 7%16, and it takes days to settle. The World Bank aims to reduce remittance fees to 3% by 2030. With the implementation of blockchain technology, this cost could be further reduced close to zero. J.P. Morgan, the largest bank in the U.S., has created an Interbank Information Network (IIN) with 416 global Institutions to transform the speed of payment flows through its own JPM Coin, another type of crypto dollar17. Although people argue that JPM Coin is not considered a cryptocurrency as it cannot trade openly on a public blockchain, it is by far the largest scale experiment with all the institutional participants trading within the “permissioned” blockchain. It might be more accurate to refer to it as the use of distributed ledger technology (DLT) instead of “blockchain” in this context. Nevertheless, we should keep in mind that as J.P. Morgan currently moves $6 trillion U.S. dollars per day18, the scale of this experiment would create a considerable impact in the international payment and remittance market if it were successful. Potentially the day will come when regulated crypto exchanges become participants of IIN, and the link between public and private crypto assets can be instantly connected, unlocking greater possibilities in blockchain applications. Many central banks are also in talks about developing their own central bank digital currency (CBDC). Although this idea was not new, the discussion was brought to the forefront due to Facebook’s aggressive Libra project announcement in June 2019 and the public attention that followed. As of July 2020, at least 36 central banks have published some sort of CBDC framework. While each nation has a slightly different motivation behind its currency digitization initiative, ranging from payment safety, transaction efficiency, easy monetary implementation, or financial inclusion, these central banks are committed to deploying a new digital payment infrastructure. When it comes to the technical architectures, research from BIS indicates that most of the current proofs-of-concept tend to be based upon distributed ledger technology (permissioned blockchain)19. https://preview.redd.it/lgb1f2rw19p51.png?width=700&format=png&auto=webp&s=040bb0deed0499df6bf08a072fd7c4a442a826a0 These institutional experiments are laying an essential foundation for an improved global payment infrastructure, where instant and frictionless cross-border settlements can take place with minimal costs. Of course, the interoperability of private DLT tokens and public blockchain stablecoins has yet to be explored, but the innovation with both public and private blockchain efforts could eventually merge. This was highlighted recently by the Governor of the Bank of England who stated that “stablecoins and CBDC could sit alongside each other20”. One thing for certain is that crypto dollars (or other fiat-linked digital currencies) are going to play a significant role in our future economy.
There is never a dull moment in the crypto sector. The industry narratives constantly shift as innovation continues to evolve. Twelve years since its inception, Bitcoin has evolved from an abstract subject to a familiar concept. Its role as a secured, scarce, decentralized digital store of value has continued to gain acceptance, and it is well on its way to becoming an investable asset class as a portfolio hedge against asset price inflation and fiat currency depreciation.Stablecoins have proven to be useful as proxy dollars in the crypto world, similar to how dollars are essential in the traditional world. It is only a matter of time before stablecoins or private digital tokens dominate the cross-border payments and global remittances industry. There are no shortages of hypes and experiments that draw new participants into the crypto space, such as smart contracts, new blockchains, ICOs, tokenization of things, or the most recent trends on DeFi tokens. These projects highlight the possibilities for a much more robust digital future, but the market also needs time to test and adopt. A reliable digital payment infrastructure must be built first in order to allow these experiments to flourish. In this paper we examined the historical background and economic reasons for the U.S. dollar’s dominance in the world, and the probable conclusion is that the demand for U.S. dollars will likely continue, especially in the middle of a global pandemic, accompanied by a worldwide economic slowdown. The current monetary system is far from perfect, but there are no better alternatives for replacement at least in the near term. Incremental improvements are being made in both the public and private sectors, and stablecoins have a definite role to play in both the traditional and the new crypto world. Thank you. Reference:  How the US dollar became the world’s reserve currency, Investopedia  The dollar is in high demand, prone to dangerous appreciation, The Economist  Dollar dominance in trade and finance, Gita Gopinath  Global trades dependence on dollars, The Economist & IMF working papers  Total credit to non-bank borrowers by currency of denomination, BIS  Biggest stock exchanges in the world, Business Insider  McKinsey Global Private Market Review 2020, McKinsey & Company  Central banks current interest rates, Global Rates  Venezuela hyperinflation hits 10 million percent, CNBC  Lebanon inflation crisis, Reuters  Venezuela cryptocurrency market, Chainalysis  The most used cryptocurrency isn’t Bitcoin, Bloomberg  Trading volume of all crypto assets, coinmarketcap.com  Tether US dollar peg is no longer credible, Forbes  New crypto derivatives let you bet on (or against) Tether’s solvency, Coindesk  Remittance Price Worldwide, The World Bank  Interbank Information Network, J.P. Morgan  Jamie Dimon interview, CBS News  Rise of the central bank digital currency, BIS  Speech by Andrew Bailey, 3 September 2020, Bank of England
Arguments rage about cryptocurrencies. They're a scam or a fraud - or are they the future of money? People I talk to are often divided on the question on what amount to political grounds! At the same time their underlying political positions may be very close. "Cryptocurrencies are a symptom of the worst excesses of the financial industry! It's fake wealth at its most obvious" or "Crypto is the way the common man can be freed from the tyranny of central banks". I'm not really sure who is the closest to the truth on that one. In my opinion cryptos are in effect much like precious metals: their monetary cost is hugely greater than the value of their utility and there are limitations on their supply. Crypto coins do have inherent value - by design they can be stored and exchanged independently and easily. Their supply is also limited by the way they work - this leads them having a price. There is no more volatile asset class. A daily 10% move is commonplace. Nevertheless, in most periods since Bitcoin's inception investors would have made money. At this stage in history it's fair to say that they have been good investments. They're different from other asset classes in their histories too: stocks, commodities, currencies, interest rates all existed hundreds of years ago. These legacies remain in the way they're traded and who trades them. By contrast crypto was invented in 2008 by technologists. Their exchanges were created, mostly, by technologists with little history in finance. The results were - by the standards of the financial world - disastrous. Multi-day outages - outages every day! Clients' actual assets lost permanently! But they continue... This is the clearest example of the great distinction between crypto and other asset classes: they come from Wall Street, crypto from Silicon Valley. While crypto exchanges may have the reliability of websites, they gain natural benefits from Silicon Valley too: openness. Stock exchanges don't waste time making their data available - unless there's money in it - and only for reputable clients. Brokers guard their data jealously. With crypto exchanges trading data is free to all on day one, by default - no-one would have discussed any other option. The same with electronic trading: these exchanges were build on web protocols, therefore the API comes for free, basically. This leads to unforeseen results: algotrading. For equities, when finally approved users have to fight through unwieldy, buggy authentication sequences before they can get a trade in with their online brokers like Schwab and TDAmeritrade and remain second-class citizens in getting to the order book. With crypto - there's no broker! You trade straight to the exchange just as an professional trader does. E.g. if you have a BitMEX account, you can be algorithmically trading there in less than 5 minutes from now. I've pointed this out to people - to reactions of stunned amazement: algotrading is supposed to be for professional financial geniuses! But no, it's for everone and I think it's going to change the world. So that's why I created this Subreddit: crypto trading is a special area and algo is its native way to trade.
JPMorgan, the oldest bank in the world, opens the doors to cryptocurrencies
With this move, the giant of banking institutions secures an important position in the American crypto ecosystem, being the first major service provider for these two crypto companies. A difficult path for cryptocurrencies Since the birth of Bitcoin in 2009, cryptocurrency exchanges have had a difficult way of being accepted by major banks like JPMorgan. This, due to fear of fraud, money laundering and regulatory sanctions, due to the bad reputation that Bitcoin formed in its early days. But, both Coinbase and Gemini are heavily regulated by the United States, after successfully passing all kinds of tests imposed on it by regulators in that country. This, together with background investigation and compliance processes of KnowYourClient (KYC) or (translated as Know Your Client), have paved the way for JPMorgan to reach out to these important exchanges. Never say of this water I won't drink JPMorgan's relationship with Bitcoin was not always as rosy as it is now. In the past, JPMorgan CEO Jamie Dimon called Bitcoin a "fraud." But, seeing the sustained growth that both Bitcoin, and many other cryptocurrencies have had, the CEO backed down, claiming that he regretted his statement but still did not consider himself a fan of cryptocurrencies. JPMorgan may or may not like cryptocurrencies, but no doubt no one can deny the enormous potential that Bitcoin has, especially in the midst of the possible havoc that the passage of the Coronavirus leaves in the world.
As someone who has been extremely involved in the cryptocurrency space the past 2 years, and 6 as an investor I want to point some things out.
The whole space is full of egomaniacs
When I first got involved as an investor in 2013 buying 2.5 BTC I thought very little of where it could go. It was a small tight group of believers back then. As the space evolved you found there were more and more Craig Wright's. What I mean by that is there were tons of people with massive egos who did not care what others said. It was okay before 2016-2017 as I wasn't so closely following what was going on. Once I got involved in the space more quit my job and went deep into the space I noticed something. I saw a tom of egomaniacs pretending they really knew what they were talking about, I saw people acting like they knew everything about everything and I saw CEOs who had little to not hope other then big talk and hopium. In my opinion we need more humble leaders in the space, people who truly care about it more than making as much money from people as they can. People who aren't showing off watches during a hash war that ended with zero winners, and led us into the longest crypto winter in the spaces history. The egos need to go in the space and all that big timer, know it all, bickering needs to take the back seat. Guys like Roger Ver, Jimmy Song, and Craig Wright need to stay focused and deliver. How can they do they always competing and putting each other down? It all seems very childish and like the space it is very immature.
Scams, Faulty Exchanges, Faulty Volume
The sickening amount of scams I have seen and that still somehow go on have put a serious dent on the goal for adoption. When one thinks deep enough about this they realize that for us to move forward cryptocurrencies can't be seen as a rabbit hole or a giant scam/Ponzi scheme. There are already options out there like www.trustedintrading.com that make everyone do KYC to be on the platform. They provide insights into projects, they do serious Due Diligence on all projects including (KYC on all members of the team/advisory, Company and business registration checks, location checks etc they verify the company is real. The only issue is many do not even want to do their KYC and that in itself is a bit silly. Scams are easy to pull off if you have ever been to a network marketing / MLM event you will see how they do them in crypto. My issue is the people are still being scammed into this. Just recently evencoin was saying they partnered with some of Thailands top hospitals, then the hospitals denied it, but for many it was too late. So this is a huge burden that seems to have a solution ready made that people will soon use. I just think this has really caused adoption to feel like it won't happen as there have been countless exits. We just saw Quadriga, we have seen Bitgrail, we have seen My.Gox and the list goes on. Why does this keep happening and will dex's be the answer in the short term the answer to that is not really, long term potentially. My huge issue is there are so many scam exchanges that currently exist in the space, using bots and market makers to create approximately 87% of the volume in crypto to be fake. We have seen centralized exchange after centralized exchange be hacked, lose funds most recently Quadriga is a prime example everyone feels it was an exit scam. My point here is who wants to put money on a crypto exchange? Most do not have insurance and most are giant scams with less than 100k of daily volume. Many don't feel secure and think if I can lose everything I better stick to fiat then take this risk. The volume issue is bad enough for a report that was recently completed by bitwise to show, really only 10 real crypto exchanges exist, a scary thought for someone thinking to adopt especially the institutions and several traditional investment firms/banks, VCs and Hedge funds.
JP Morgan and Other haters
We have seen over time big institutions call Bitcoin a scam over and over. We have need Nouriel Roubini bashing on it and several other institutional investors and also the likes of Warren Buffet. Some of them believe that crypto truly is a scam, and that it has very little value for example. We see guys like Jamie Dimon says things like crypto is a scam, I regret saying that to going on saying that hey guys look at JPM coin within the last 3 years. That alone should tell you something, along with the likes that when Jamie said it was a scam the price dropped almost 25%. What's even more ridiculous is the fact that JP Morgans Asian branch bought 100m worth of BTC after that happens what a nice 25% discount right? This hurts and helps adoption actually, in one way many think it still is a scam in another people will think hmm if they have bought maybe it isn't so bad. Also Marc Faber just bought some BTC so this side of things may be improving, but still several people like Roubini and Buffet maintain their stance. We all also know of Jack Dorsey Twitter's CEO buying tons of BTC weekly so sediment might be changing. I recently spoke at the DS Summit in Bangkok, and I saw something eye opening. Several people at their first conference ever as we were focused on STOs at this conference. I spoke at this conference and after when I was outside chatting I met several investment banks, credit Swiss VP of Asia and even banks looking to learn about the space. This was about 3 weeks ago and what it showed me was there is a shift among us where digitized assets are being taken seriously. For this one it's not all bad, but still tons of growth and education is needed for these players to even entertain the market place, or understand why they should even do it in the first place.
People in the space including influencers
This is the big one I'd like to address as I believe this is the biggest issue in the whole blockchain and crypto space. The constant social media keyboard warriors, they know everything, nobody knows better than they do, they won't listen to anyone and when you present good hard facts you are either a fudster or a scammer. The whole space needs to mature I have seen project argue with users via telegram, I have seen projects argue with people face to face in an environment that was totally unacceptable. I have seen influencers screaming on live feeds at conferences at projects they don't like. Constantly I have seen one after another event happen which totally makes everyone in the space look bad. There is a reason so many call scams in this space and it's mostly to do with the fact that we as investors, influencers, educators etc need to stop attacking everyone. When I say this I mean it in the way that I see people make a typo and get crap for it, I see people with good points attacked because someone disagrees I see so much crap everyday like this. I have at several times told people how bad this is for outsiders looking in. We all have a responsibility to evolve and mature the space, but right now it feels like a middle school with kids arguing for the sake of it to be right or be cool. I am so sick of the daily attacks on influencers trying to help for free, this makes it even worse because if you can't even learn without being attacked why would you want to be involved in crypto. I know there are fakers but we all can weed them out together. Why don't we all work together more or at least practice what our moms taught us that if you don't have anything nice to say, say nothing at all? Imagine if people treated each other not with big egos and were truly friendly and wanted adoption to happen how different the landscape would be! To end I would love to see some real adoption of cryptocurrencies worldwide. I know if we started to really help that and focus less money and more on usecase and creating tools to make it easier to get started that would be truly what would be beautiful. I have a friend who says let's get the children out of the way and let the adults do the work. I don't agree if we talk about age but I do agree with her, because she's talking about just mature adults not adults acting like children. Let's start truly helping each other, teams, and supporting real exchanges and real projects with use cases for adoption. Let's see the bad projects die off and lets get the space ready for true adoption. It's time to stop arguing and start building the foundation this space truly needs. Without that nobody I have met from the traditional finance world is truly going to consider this other then for monetary reasons. If you want to connect with me or have any questions please comment below. Joel - Coach K
Financial Uncertainties and The Eurasia Debt May Welcome A Bulls for Bitcoin
The financial industry is currently seeking to integrate the new financial technology with the traditional financial tech. Bitcoin is among the cryptocurrencies that serve as a digital asset globally. Speculators believe that a bull market trend for BTC will necessitate a universally neutral reserve asset. Rona Foroohar, an associate editor and columnist at Financial Times, recently published an opinion article on the “gold bugs,” which attracted comments from central bankers and investors. Foroohar wrote that for investors to hoard physical bars in the new digital financial world, they have to strongly believe that that the sky is falling. The columnist attributes the “gold bug” to the urgencies welcomed by mild geopolitical fears, and the post-2008 horizon, which she believes was systematically fragile. The Dutch Central Bank issues a warning in October that if the system fails or witnesses a monetary reset, gold would be the go-to solution to rebuild the system. There is a sense of security in gold due to the stability of the DCB’s balance, which gold bolsters have high confidence in. According to Ray Dalio, speaking at a conference at the Institute for International Finance, there is a likelihood that gold would save the situation if America’s creditors betrayed the signs of edginess. Jamie Dimon, the Chief at JPMorgan, and Stanley Druckenmiller, fund manager, had warned back in 2016 that there was an unsustainable financial situation due to unfunded healthcare and pension entitlements in the U.S. The U.S Dollar is at the risk of depreciating due to fiscal imbalances, which have led to inflated balance sheets and low-interest rates. Such a situation would scare off investors from holding the USD nor federal debts. She points out that there is a need to develop an asset that is no one’s liability. These words from Foroohar meant gold or any other independent asset. Recently, China edged away from petrodollar when it Issued its pioneer Eurobond in fifteen years. Eurasia is gradually de-dollarizing, and this is so critical that it would force the U.S to sell USD in an effort to settle the balance of payments in the country. However, the co-founder of Gemini cryptocurrency exchange, Cameron Winklevoss, has an opinion contrary to Dalio’s. Winklevoss believes that Bitcoin holds a solution that is not confined to being a “digital gold” or a safe-haven digital asset. Winklevoss had also forecast that Bitcoin will break gold’s market cap of $7 trillion. https://altcoinn.com/Thread-Financial-Uncertainties-and-The-Eurasia-Debt-May-Welcome-A-Bulls-for-Bitcoin
Bitcoin at $136,000: Can it become the new gold standard?
Over the past year, Bitcoin’s been on a wild ride from a low of $1,183 to a peak of $19,401. With Bitcoin’s skyrocketing prices, detractors from J.P. Morgan chief Jamie Dimon (“[Bitcoin] is a fraud”) to Berkshire Hathaway CEO Warren Buffett (“I can say almost with certainty that [cryptocurrencies] will come to a bad ending”) have been quick to decry the digital currency as a bubble. Predicting a crypto bubble has become the latest trend as Bitcoin and other currencies have risen meteorically. In spite of this, Bitcoin has shown that it is still a new asset with room to grow. Bitcoin’s current market cap of $134 billion, is massive compared to most companies, and even some countries. But this pales in significance compared to traditional assets like gold. If Bitcoin becomes a widely accepted store of value, it may one day replace some of the functions of gold in the market. Today, there is an estimated 190,040 tonnes of gold above ground in the world, with 54,000 known reserves below ground that can be mined. At today’s rate of $1,335 per ounce, that means there’s around $11.5 trillion worth of gold in the world that we know about. Imagine that Bitcoin replaces 25% of today’s gold market. Bitcoin would leapfrog another 17x above today’s current prices. Here’s some (very rough) back-of-the-paper-wallet math: 25% of $11.5 trillion gold reserves = $2.86 trillion $1.975 trillion market cap of bitcoin / 21 million bitcoin = 136,190 price per bitcoin While this scenario may seem extremely far-fetched, it’s not completely out of the realm of reality. In this article, we’ll look at some of the key characteristics that Bitcoin shares with gold that make it useful as a store of value and speculate around how Bitcoin might eat into the dominance of gold. What is a Store of Value? Skeptics like to point out that Bitcoin isn’t that useful as a currency. It can have high fees, long transaction times, and comes with numerous security risks. It’s still much easier to pay for goods and services with a credit card than sending bitcoin to someone’s public address. Yet all these things actually make Bitcoin similar to something people have valued for thousands of years: gold. Gold has certain properties that make it useful. It conducts electricity well, and it looks pretty. But if you compare gold to more common metals such as copper or nickel, it’s actually a lot less useful for making things — it bends too easily. The main utility of gold is that it functions as a store of value. Because gold is extremely scarce and expensive to produce it tends to retain value over time. If you buy gold today, you’ll likely be able to exchange it for a similar amount in the future. To understand how gold functions as a store of value and how Bitcoin might replace it, we have to dig deeper into the history of gold. A Brief Primer on Gold Gold has been valued and used as a store of value for millennia. The first known use of gold as currency began several thousand years ago in Asia. Even with the widespread adoption of paper currency in the form of bank notes in the 19th century, the gold standard remained the most popular financial system in the world. Nations would set a fixed price that they would trade gold for paper money. For centuries, gold was an acceptable form of currency. That’s a big part of why gold is still valuable today — we believe that gold is valuable, and this belief has been culturally ingrained. Gold has a number of properties that make it useful for this purpose. For starters, it lasts a really long time.The chemical half-life of gold is 168 days, compared to 130 days for silver, and a mere 61 hours for copper. Gold is also easy to split up into smaller parts and transport. You can remelt a gold ingot into smaller gold coins, or even smaller pieces of jewelry. It’s also portable: an ounce of gold is worth $1,335 and weighs the same as a slice of bread. It’s estimated that the 190,040 tonnes of gold above ground would fit into a cube with 67 foot sides. Today, we use gold for many different things. Jewelry is the most common use-case representing roughly 48% of all above-ground gold. 21% is used for private investment, whether in the physical form of gold bullion or in financial instruments like exchange-traded funds. Another 17% is used by the official sector by central banks as a reserve currency. The other 14% is used for other purposes, from industrial applications like electronics to dentistry. source: World Gold Council While the gold standard has largely been abandoned, gold remains a useful hedge against currency instability. That’s because gold is inherently scarce, with a limited supply. On average, 1,500–3,000 tonnes of gold is mined each year, adding a mere 1–2% annual increase to the supply of gold. It’s also highly liquid and can be exchanged for money anywhere in the world. Central banks buy gold to avoid currency risks and hedge against inflation. Gold is held in reserve and can be liquidated quickly in times of crises. In 2016, Russia’s central bank purchased 201 tonnes of gold in response to a weakening rouble and international sanctions, making it the largest acquirer of gold. Today, gold continues to retain its significance because it operates as a store of value that’s removed from the financial system. The Bull Case for Bitcoin: Why Bitcoin may replace Gold On the surface, Bitcoin and gold couldn’t be more different. Bitcoin is a digital, peer-to-peer currency created in 2008, and distributed across nodes around the world. Gold is a natural element that is mined from the ground, and which has been used as a store of value for millennia. Despite these differences, Bitcoin and gold both share characteristics that make them useful as a store of value: Just like the supply of gold is constrained to the amount that can be mined, the supply of Bitcoin is written into the code and maxes out at 21 million coins. While gold is relatively portable, can be verified, and divided into smaller units, Bitcoin is cryptographically secured, controlled via private key, and can be divided infinitely. That gives it distinct advantages over gold as a store of value. While gold is useful as a store of value because it’s valuable relative to physical size, this still adds up when you’re operating at scale. For example, when the German central bank wanted to bring home 374 metric tons of gold back to Frankfurt, the gold had to be assessed for purity, be remolded from bullion into bars, then secured and transported. The whole operation cost $ 9 million. There’s a clear argument that a digital currency like Bitcoin would be much better suited to maintain reserves than gold bars. Central banks are already beginning to look at the benefits of digital currencies. The Swedish central bank is investigating the possibility of launching a digital supplement to cash, called the e-krona. Singapore is experimenting with use-cases for cryptocurrency from cross-border payments to creating a digital Singapore dollar. Similar to gold, Bitcoin sees high usage as a store of value in countries with currency controls or instability. In Argentina, for example, people use Bitcoin to circumvent government currency controls mean, saving nearly 40% on foreign currency exchanges. In Venezuela, Bitcoin usage has become widespread to buy everything from food to movie tickets in the face of 2,616% inflation. The Venezuelan government even launched its own contentious cryptocurrency, called the Petro, in an effort to circumvent international sanctions. Like gold, Bitcoin provides a store of value that’s separated from the official financial system. Unlike gold, Bitcoin is far easier to hold onto and exchange. If 25% of the gold that’s used as a store of value in jewelry, private investment, and the official sector moves to Bitcoin, we may see Bitcoin at $136,190. The New Gold Standard Bitcoin rose from the 2008 financial crash, promising a digital currency free from central bank intervention. This is something that we’ve always needed — just look at gold. Gold is useful because it provides a store of value outside of currency and stock markets. Bitcoin, if it’s able to address key technical and scalability challenges, has the potential to do the same. What’s important to remember is that despite the boom-and-bust hype cycle, we’re still in the early innings. https://blog.sfox.com/bitcoin-at-136-000-can-it-become-the-new-gold-standard-ee98b11aacfc
The Great Bitcoin Bull Market Of 2017 by Trace Mayer
By: Trace Mayer, host of The Bitcoin Knowledge Podcast. Originally posted here with images and Youtube videos. I just got back from a two week vacation without Internet as I was scouring some archeological ruins. I hardly thought about Bitcoin at all because there were so many other interesting things and it would be there when I got back. Jimmy Song suggested I do an article on the current state of Bitcoin. A great suggestion but he is really smart (he worked on Armory after all!) so I better be thorough and accurate! Therefore, this article will be pretty lengthy and meticulous. BACKGROUND As I completely expected, the 2X movement from the New York Agreement that was supposed to happen during the middle of my vacation flopped on its face because Jeff Garzik was driving the clown car with passengers willfully inside like Coinbase, Blockchain.info, Bitgo and Xapo and there were here massive bugS and in the code and miners like Bitmain did not want to allocate $150-350m to get it over the difficulty adjustments. I am very disappointed in their lack of integrity with putting their money where their mouths are; myself and many others wanted to sell a lot of B2X for BTC! On 7 December 2015, with Bitcoin trading at US$388.40, I wrote The Rise of the Fourth Great Bitcoin Bubble. On 4 December 2016, with Bitcoin trading at US$762.97, I did this interview:
As of 26 November 2017, Bitcoin is trading around US$9,250.00. That is an increase of about 2,400% since I wrote the article prognosticating this fourth great Bitcoin bull market. I sure like being right, like usual (19 Dec 2011, 1 Jul 2013), especially when there are financial and economic consequences. With such massive gains in such a short period of time the speculative question becomes: Buy, Hold or Sell? FUNDAMENTALS Bitcoin is the decentralized censorship-resistant Internet Protocol for transferring value over a communications channel. The Bitcoin network can use traditional Internet infrastructure. However, it is even more resilient because it has custom infrastructure including, thanks to Bitcoin Core developer Matt Corrallo, the FIBRE network and, thanks to Blockstream, satellites which reduce the cost of running a full-node anywhere in the world to essentially nothing in terms of money or privacy. Transactions can be cheaply broadcast via SMS messages. SECURITY The Bitcoin network has a difficulty of 1,347,001,430,559 which suggests about 9,642,211 TH/s of custom ASIC hardware deployed. At a retail price of approximately US$105/THs that implies about $650m of custom ASIC hardware deployed (35% discount applied). This custom hardware consumes approximately 30 TWh per year. That could power about 2.8m US households or the entire country of Morocco which has a population of 33.85m. This Bitcoin mining generates approximately 12.5 bitcoins every 10 minutes or approximately 1,800 per day worth approximately US$16,650,000. Bitcoin currently has a market capitalization greater than $150B which puts it solidly in the top-30 of M1 money stock countries and a 200 day moving average of about $65B which is increasing about $500m per day. Average daily volumes for Bitcoin is around US$5B. That means multi-million dollar positions can be moved into and out of very easily with minimal slippage. When my friend Andreas Antonopolous was unable to give his talk at a CRYPSA event I was invited to fill in and delivered this presentation, impromptu, on the Seven Network Effects of Bitcoin. These seven network effects of Bitcoin are (1) Speculation, (2) Merchants, (3) Consumers, (4) Security [miners], (5) Developers, (6) Financialization and (7) Settlement Currency are all taking root at the same time and in an incredibly intertwined way. With only the first network effect starting to take significant root; Bitcoin is no longer a little experiment of magic Internet money anymore. Bitcoin is monster growing at a tremendous rate!!
SPECULATION For the Bitcoin price to remain at $9,250 it requires approximately US$16,650,000 per day of capital inflow from new hodlers. Bitcoin is both a Giffen good and a Veblen good. A Giffen good is a product that people consume more of as the price rises and vice versa — seemingly in violation of basic laws of demand in microeconomics such as with substitute goods and the income effect. Veblen goods are types of luxury goods for which the quantity demanded increases as the price increases in an apparent contradiction of the law of demand. There are approximately 16.5m bitcoins of which ~4m are lost, ~4-6m are in deep cold storage, ~4m are in cold storage and ~2-4m are salable. (http://www.runtogold.com/images/lost-bitcoins-1.jpg) (http://www.runtogold.com/images/lost-bitcoins-2.jpg) And forks like BCash (BCH) should not be scary but instead be looked upon as an opportunity to take more territory on the Bitcoin blockchain by trading the forks for real bitcoins which dries up more salable supply by moving it, likely, into deep cold storage. According to Wikipedia, there are approximately 15.4m millionaires in the United States and about 12m HNWIs ($30m+ net worth) in the world. In other words, if every HNWI in the world wanted to own an entire bitcoin as a 'risk-free asset' that cannot be confiscated, seized or have the balance other wise altered then they could not. For wise portfolio management, these HNWIs should have at least about 2-5% in gold and 0.5-1% in bitcoin. Why? Perhaps some of the 60+ Saudis with 1,700 frozen bank accounts and about $800B of assets being targetted might be able to explain it to you. In other words, everyone loves to chase the rabbit and once they catch it then know that it will not get away. RETAIL There are approximately 150+ significant Bitcoin exchanges worldwide. Kraken, according to the CEO, was adding about 6,000 new funded accounts per day in July 2017. Supposedly, Coinbase is currently adding about 75,000 new accounts per day. Based on some trade secret analytics I have access to; I would estimate Coinbase is adding approximately 17,500 new accounts per day that purchase at least US$100 of Bitcoin. If we assume Coinbase accounts for 8% of new global Bitcoin users who purchase at least $100 of bitcoins (just pulled out of thin error and likely very conservative as the actual number is perhaps around 2%) then that is approximately $21,875,000 of new capital coming into Bitcoin every single day just from retail demand from 218,750 total new accounts. What I have found is that most new users start off buying US$100-500 and then after 3-4 months months they ramp up their capital allocation to $5,000+ if they have the funds available. After all, it takes some time and practical experience to learn how to safely secure one's private keys. To do so, I highly recommendBitcoin Core (network consensus and full validation of the blockchain), Armory (private key management), Glacier Protocol (operational procedures) and a Puri.sm laptop (secure non-specialized hardware). WALL STREET There has been no solution for large financial fiduciaries to invest in Bitcoin. This changed November 2017. LedgerX, whose CEO I interviewed 23 March 2013, began trading as a CFTC regulated Swap Execution Facility and Derivatives Clearing Organization. The CME Group announced they will begin trading in Q4 2017 Bitcoin futures. The CBOE announced they will begin trading Bitcoin futures soon. By analogy, these institutional products are like connecting a major metropolis's water system (US$90.4T and US$2 quadrillion) via a nanoscopic shunt to a tiny blueberry ($150B) that is infinitely expandable. This price discovery could be the most wild thing anyone has ever experienced in financial markets. THE GREAT CREDIT CONTRACTION The same week Bitcoin was released I published my book The Great Credit Contraction and asserted it had now begun and capital would burrow down the liquidity pyramid into safer and more liquid assets. (http://www.runtogold.com/images/Great-Credit-Contraction-Liquidity-Pyramid.jpg) Thus, the critical question becomes: Is Bitcoin a possible solution to the Great Credit Contraction by becoming the safest and most liquid asset? BITCOIN'S RISK PROFILE At all times and in all circumstances gold remains money but, of course, there is always exchange rate risk due to price ratios constantly fluctuating. If the metal is held with a third-party in allocated-allocated storage (safest possible) then there is performance risk (Morgan Stanley gold storage lawsuit). But, if properly held then, there should be no counter-party risk which requires the financial ability of a third-party to perform like with a bank account deposit. And, since gold exists at a single point in space and time therefore it is subject to confiscation or seizure risk. Bitcoin is a completely new asset type. As such, the storage container is nearly empty with only $150B. And every Bitcoin transaction effectively melts down every BTC and recasts it; thus ensuring with 100% accuracy the quantity and quality of the bitcoins. If the transaction is not on the blockchain then it did not happen. This is the strictest regulation possible; by math and cryptography! This new immutable asset, if properly secured, is subject only to exchange rate risk. There does exist the possibility that a software bug may exist that could shut down the network, like what has happened with Ethereum, but the probability is almost nil and getting lower everyday it does not happen. Thus, Bitcoin arguably has a lower risk profile than even gold and is the only blockchain to achieve security, scalability and liquidity. To remain decentralized, censorship-resistant and immutable requires scalability so as many users as possible can run full-nodes. (http://www.runtogold.com/images/ethereum-bitcoin-scability-nov-2017.png) TRANSACTIONS Some people, probably mostly those shilling alt-coins, think Bitcoin has a scalability problem that is so serious it requires a crude hard fork to solve. On the other side of the debate, the Internet protocol and blockchain geniuses assert the scalability issues can, like other Internet Protocols have done, be solved in different layers which are now possible because of Segregated Witness which was activated in August 2017. Whose code do you want to run: the JV benchwarmers or the championship Chicago Bulls? As transaction fees rise, certain use cases of the Bitcoin blockchain are priced out of the market. And as the fees fall then they are economical again. Additionally, as transaction fees rise, certain UTXOs are no longer economically usable thus destroying part of the money supply until fees decline and UTXOs become economical to move. There are approximately 275,000-350,000 transactions per day with transaction fees currently about $2m/day and the 200 DMA is around $1.08m/day. (http://www.runtogold.com/images/bitcoin-transaction-fees-nov-2017.png) What I like about transaction fees is that they somewhat reveal the financial health of the network. The security of the Bitcoin network results from the miners creating solutions to proof of work problems in the Bitcoin protocol and being rewarded from the (1) coinbase reward which is a form of inflation and (2) transaction fees which is a form of usage fee. The higher the transaction fees then the greater implied value the Bitcoin network provides because users are willing to pay more for it. I am highly skeptical of blockchains which have very low transaction fees. By Internet bubble analogy, Pets.com may have millions of page views but I am more interested in EBITDA. DEVELOPERS Bitcoin and blockchain programming is not an easy skill to acquire and master. Most developers who have the skill are also financially independent now and can work on whatever they want. The best of the best work through the Bitcoin Core process. After all, if you are a world class mountain climber then you do not hang out in the MacDonalds play pen but instead climb Mount Everest because that is where the challenge is. However, there are many talented developers who work in other areas besides the protocol. Wallet maintainers, exchange operators, payment processors, etc. all need competent developers to help build their businesses. Consequently, there is a huge shortage of competent developers. This is probably the largest single scalability constraint for the ecosystem. Nevertheless, the Bitcoin ecosystem is healthier than ever before. (http://www.runtogold.com/images/bitcoin-ecosystem.jpg)(/images/bitcoin-ecosystem-small.jpg) SETTLEMENT CURRENCY There are no significant global reserve settlement currency use cases for Bitcoin yet. Perhaps the closest is Blockstream's Strong Federations via Liquid. PRICE There is a tremendous amount of disagreement in the marketplace about the value proposition of Bitcoin. Price discovery for this asset will be intense and likely take many cycles of which this is the fourth. Since the supply is known the exchange rate of Bitcoins is composed of (1) transactional demand and (2) speculative demand. Interestingly, the price elasticity of demand for the transactional demand component is irrelevant to the price. This makes for very interesting dynamics! (http://www.runtogold.com/images/bitcoin-speculation.jpg) On 4 May 2017, Lightspeed Venture Partners partner Jeremy Liew who was among the early Facebook investors and the first Snapchat investor laid out their case for bitcoin exploding to $500,000 by 2030. On 2 November 2017, Goldman Sachs CEO Lloyd Blankfein (https://www.bloomberg.com/news/articles/2017-11-02/blankfein-says-don-t-dismiss-bitcoin-while-still-pondering-value)said, "Now we have paper that is just backed by fiat...Maybe in the new world, something gets backed by consensus." On 12 Sep 2017, JP Morgan CEO called Bitcoin a 'fraud' but conceded that "(http://fortune.com/2017/09/12/jamie-dimon-bitcoin-cryptocurrency-fraud-buy/)Bitcoin could reach $100,000". Thus, it is no surprise that the Bitcoin chart looks like a ferret on meth when there are such widely varying opinions on its value proposition. I have been around this space for a long time. In my opinion, those who scoffed at the thought of $1 BTC, $10 BTC (Professor Bitcorn!), $100 BTC, $1,000 BTC are scoffing at $10,000 BTC and will scoff at $100,000 BTC, $1,000,000 BTC and even $10,000,000 BTC. Interestingly, the people who understand it the best seem to think its financial dominance is destiny. Meanwhile, those who understand it the least make emotionally charged, intellectually incoherent bearish arguments. A tremendous example of worldwide cognitive dissonance with regards to sound money, technology and the role or power of the State. Consequently, I like looking at the 200 day moving average to filter out the daily noise and see the long-term trend. (http://www.runtogold.com/images/bitcoin-price-200dma-nov-2017.png) Well, that chart of the long-term trend is pretty obvious and hard to dispute. Bitcoin is in a massive secular bull market. The 200 day moving average is around $4,001 and rising about $30 per day. So, what do some proforma situations look like where Bitcoin may be undervalued, average valued and overvalued? No, these are not prognostications. (http://www.runtogold.com/images/bitcoin-price-pro-forma.png) Maybe Jamie Dimon is not so off his rocker after all with a $100,000 price prediction. We are in a very unique period of human history where the collective globe is rethinking what money is and Bitcoin is in the ring battling for complete domination. Is or will it be fit for purpose? As I have said many times before, if Bitcoin is fit for this purpose then this is the largest wealth transfer in the history of the world. CONCLUSION Well, this has been a brief analysis of where I think Bitcoin is at the end of November 2017. The seven network effects are taking root extremely fast and exponentially reinforcing each other. The technological dominance of Bitcoin is unrivaled. The world is rethinking what money is. Even CEOs of the largest banks and partners of the largest VC funds are honing in on Bitcoin's beacon. While no one has a crystal ball; when I look in mine I see Bitcoin's future being very bright. Currently, almost everyone who has bought Bitcoin and hodled is sitting on unrealized gains as measured in fiat currency. That is, after all, what uncharted territory with daily all-time highs do! But perhaps there is a larger lesson to be learned here. Riches are getting increasingly slippery because no one has a reliable defined tool to measure them with. Times like these require incredible amounts of humility and intelligence guided by macro instincts. Perhaps everyone should start keeping books in three numéraires: USD, gold and Bitcoin. Both gold and Bitcoin have never been worth nothing. But USD is a fiat currency and there are thousands of those in the fiat currency graveyard. How low can the world reserve currency go? After all, what is the risk-free asset? And, whatever it is, in The Great Credit Contraction you want it! What do you think? Disagree with some of my arguments or assertions? Please, eviscerate them on Twitter or in the comments!
JPMorgan Chase's decision to launch a crypto coin shows how blockchain poses a long-term threat to the traditional payment system. The bitcoin price has swung wildly since JPMorgan chief executive Jamie Dimon called bitcoin a "fraud" in September 2017—rising to around $20,000 per bitcoin before crashing to under $4,000 . Just recently news.Bitcoin.com reported on JP Morgan executive Jamie Dimon calling bitcoin a “fraud” and claiming he would fire any employee from his firm who traded the digital currency for ... Bitcoin 'is a fraud' and will blow up, Jamie Dimon, chief executive of JPMorgan Chase & Co, said on Tuesday. Speaking at a bank investor conference in New York, Dimon said, 'The currency isn't ... Welcome to our Jamie Dimon news page. Here you'll find some of our featured Jamie Dimon's Bitcoin content pieces as well as all our latest Jamie Dimon CNBC Interview posts. Jamie Dimon Talks About
FUD Master Jamie Dimon, China Bitcoin Ban and the unstoppable blockchain revolution
Jamie Dimon shares his thoughts on Bitcoin Jamie Dimon Loves Bitcoin - ETH Moving Up, ETC, Token Exchanges, Preparing For A BTC Run - Ep120 ... Meanwhile Ethereum has been very bullish based on the recent token usage through exchanges and ... Just days after Jamie Dimon proclaimed that "Bitcoin is a Fraud!" and he would "Fire any trader that worked for him that bought Bitcoin"...JP Morgan Securities LTD in Europe was the 4th largest ... Jamie Dimon has finally shown just how idiotic (and criminal) he truly is. Why he should be shit talking about Bitcoin from JAIL??!! The China FUD about the ban of bitcoin exchanges and even banning bitcoin mining in China. ... Jamie Dimon; who told the world that bitcoin was for criminals and drugdealers and bought-in the day ...