Category: Real-World Crypto

With that said, we believe there are fundamental problems with gold, oil, and the U.S. dollar as stores of value going forward. Below, we will make the case that bitcoin is ultimately the only long-term protection against inflation.

– The Case for $500K Bitcoin

This piece is especially important in the context of the ongoing sharp rise in the dollar price of bitcoin. As bitcoin and cryptocurrency gains even more mainstream awareness and institutional acceptance, one must ask how much of this rise is pure speculation and how much is an educated guess about the future of assets & capital in general. The article lays out Winklevoss Capital’s case against the current liquidity boom fulled by relentless currency printing:

Even before COVID-19, and despite the longest bull run in U.S. economic history, the government was spending money like a drunken sailor, cutting taxes like Crazy Eddie, and printing money like a banana republic. 

What began as a shot in the arm during the credit crisis of 2008, never stopped, despite the U.S. economy being out of the woods for years. And so what started as an acute prescription, has morphed into chronic dependence and denial (aka addiction). The resulting maladaptive behavior is, not surprisingly, very difficult to correct. 

… if stock market gains are your measure of success, you will choose not to upset the apple cart, even if it’s wildly untethered to reality. 

The Winklevosses have been early and big believers in cryptocurrency, and have historically held large amounts of it. They also set up the cryptocurrency exchange Gemini which received New York state’s “bitlicense” to operate.

I posted this on my bitcoin and crypto Whatsapp group on 20th Feb:

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Tether, or USDT, is supposed to be a ‘stablecoin’, always valued at USD 1 because it’s supposed to be backed by actual USD cash reserves. That’s been under question for years now. But it hasn’t stopped the token from being widely traded exchanges and used as part of financial products based on crypto. From a Bloomberg article:

“It has a market capitalization of about $34 billion, according to CoinGecko — but in a sign of how much it’s used in the system, the 24-hour trading volume on Friday was about $107 billion.”

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I’m posting this today because of news from earlier this week about a settlement that Tether and Bitfinex, the crypto exchange closely associated with it, reached with the state of New York. The statements made by the state’s attorney-general are pretty damning:

Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie,” she added. “These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

The investigation found that, no later than mid-2017, Tether “had no access to banking, anywhere in the world, and so for periods of time held no reserves to back Tethers in circulation at the rate of one dollar for every Tether, contrary to its representations.”

Regardless of this, its trading volumes didn’t fall much (down to USD 93 billion from the high of USD 107 billion in the Bloomberg article above). The price is still ~ USD 1, meaning buyers and sellers still treat it as the stablecoin it claims to be but cannot prove. Here are stats from the industry monitor CoinMarketCap. Blue is price, green is trading volume.

Essentially, if USDTs are simply created out of thin air without needing to be backed by anything, unlike other crypto tokens that need to be mined, and people are fine with pricing it at one dollar, then the company behind Tether is simply a parallel US Federal Reserve – printing money not backed by anything and (implicitly) pricing it at one dollar to every dollar.

You can resist an invading army; you cannot resist an idea whose time has come.

– Victor Hugo

Governments’ reactions around the world to cryptocurrency remind me of this. Everything about bitcoin, by design, was intended to run outside of the existing monetary system. Not merely untouched by it, but also untouchable.

Short of a total internet shutdown, it’s difficult to cut off a region from global blockchains. Even then, tokens in offline wallets will survive indefinitely, like seeds, until they are reconnected.

Bitcoin – and many other cryptocurrencies – have no concept of a central issuing authority, no need for KYC or other identification, no need for a custodian like a bank, no vulnerability to being unilaterally devalued or demonetised.

In short, they strike at any government’s ability to distribute value and tax gains, the one thing more important to it than its monopoly on legitimate violence.

Yet, countries around the world are creating regulatory frameworks for cryptocurrency. Many have created separate agencies to work with the cryptocurrency industry. And it’s not just tax havens whose competitive advantage depends on them being not just receptive but ahead of the curve on financial innovation. It’s major economies whose government departments are learning to live with cryptocurrency.

The USA SEC is creating a standalone office to deal with digital assets.

“Our action to establish FinHub as standalone office furthers our commitment **to facilitate the introduction of new technologies for the benefit of investors **and the efficiency and resiliency of our markets,” said SEC Chairman Jay Clayton.

In the UK, a recent report commissioned by the Chancellor of the Exchequer in 2020 and led by the businessman Ron Kalifa, recommended “a new UK regime for the regulation of cryptoassets”, saying that

The UK has the potential to be a leading global centre for the issuance, clearing, settlement, trading and exchange of crypto and digital assets… the UK needs to act quickly to preserve its position.

The EU recognises that existing regulation “predated the emergence of crypto-assets and DLT. This could hamper innovation.” and is developing something called Markets in Crypto-Assets Regulation – MiCA – which “will support innovation while protecting consumers and the integrity of crypto-currency exchanges”

I think most governments, left to themselves, would simply like to ban crypto, likening ownership, distribution and use of cryptocurrency to that of drugs. They’d wage a War on Crypto and drum up public support. This is already happening in India, China and Nigeria where governments have raised the spectre of cryptocurrency being used to fund terrorism and other anti-national activities and have banned it.

But around the world, cryptocurrency has already reached critical mass (which doesn’t need to be very large). More importantly, financial institutions have seen it as an opportunity to create wealth and generate new buseiness In today’s finance-dominated era, these institutions are politically important enough for cryptocurrency to gain, if not outright legitimacy, then at least a guarantee of survival.

It is the idea whose time has come. At least for those that matter.

Over the weekend, I started a Whatsapp group on bitcoin and cryptocurrency. It’s going to be non-technical – in fact, I began it specifically to cut through the hype and focus on the genuine excitement around cryptocurrency as a world-wide financial asset.

Here’s the chat URL: https://chat.whatsapp.com/BnoKrjH8hrHAtCQbE0F5f1

The idea is to share a link or two around a particular development and write a ~100 word commentary around it.

So far we’ve discussed Bitcoin as insurance, the controversy around Tether or USDT, digital collectibles or non-fungible tokens, Bitcoin ETFs that have just been launched in Canada, the fate of Bitcoin in growing economies with young populations, like Nigeria and India, China’s plans for its digital currency the e-yuan, and a few other topics.

Since Saturday, it’s grown to over 120 subscribers from many countries. Here’s part a recent message I sent out:

I plan to cross-post from the group here often, so I can expand on the topic a little more than what’s appropriate for a message group.