Bitcoin and cryptocurrencies have grown increasingly popular as the public – ranging from amateur investors to technology experts – try and profit from the potential of the digital applications that blockchain technology provides. At the time of writing, Bitcoin has reached new highs, rising above $4700, which is up 350% from roughly $1000 on 1st January, and even considerably more than its price of $0.08 in July 2010.
With a market cap of near $70bn (44.7%), Bitcoin is the leading cryptocurrency. Acting as a decentralised and public ledger, each bitcoin transaction is permanently, yet partially anonymously, recorded. This improves the transparency (through public key cryptography) and speed of transactions whilst simultaneously reducing costs.
The decentralised nature of bitcoin has, in part, roots in the financial crisis and resistance against traditional banks and government control. Despite a few scandals, such as that of Silk Road, its usage has increased widely and can now be used to buy goods online, while services like bitcoin ATMs and bitcoin debit cards exist.
Notably, on 1st August, bitcoin was made legal tender in with 300,000 retail stores accepting the digital currency. Bitcoin has moved from being confined to the field of technology to the heart of everyday life.
Innovation in Adversity
Its popularity and increasing usage has meant that the coin recently experienced a ‘fork’, resulting in the creation of a new currency- Bitcoin cash– to help facilitate transaction speed and improve the processing power of the network. Bitcoin started experiencing high transaction costs and lower speeds due to limited blocks, raising concerns about its future ability to cope with higher usage. The result of the fork is the increased processing power of Bitcoin, which increases the longevity of its use and can sends a signal to people about its ability to cope with increasing demands.
This ‘scaling’ of the currency was met with price rallies and optimism about the future of the coin and its potential role in society. As bitcoin innovates and responds to adversity, questions about its ability to truly displace conventional monetary systems are raised. So- will bitcoin replace traditional money?
The Future of Bitcoin
According to Saxo Bank analyst Kay Van-Petersen, Bitcoin could be responsible for 10% of the $5trn average daily volume in the foreign exchange market within 10 years. This assertion is supported by Adam Davies, a consultant at Altus, who states society could be about five years away from bitcoin becoming popular enough to be used alongside physical currencies.
It should come by no surprise, then, that more and more countries are asking regulators to look at bitcoin and are investing in blockchain, helping to legitimise the cryptocurrency with institutions. Further, large institutions such as Goldman Sachs have said that they can no longer go on ignoring cryptocurrencies.
However, some have likened this rally and rapid growth (the cryptocurrency market cap is up 800% this year alone) to the early 2000s and the technology boom, fearing a potential bubble, thus over-estimating the impact bitcoin might have.
For bitcoin to replace normal currencies, the plurality of society will need to understand it, regulate it, adopt it and then effectively manage it. Initially, people will need to be willing to adopt, and successfully switch, to digital currencies.
This will require improved infrastructure, information and security. Alongside this there will be an overhaul of regulation and a change to accounting, billing and payment systems. Eventually, if universally adopted, bitcoin will have to be managed; vexing issues such as rising transaction costs and slowing speeds will need to be resolved.
When cryptocurrencies can be used to pay taxes, acquire debt and manage an economy, they will begin to take over. In some countries like Japan, this has seen success, whilst China are also working positively towards developing a national cryptocurrency.
In the case of bitcoin, the ability of it to be used as widespread money is quite limited when one considers the adoption and regulation required. It’s also important to remember that the growth of the Bitcoin money supply is constrained by the increasing difficulty of verifying transactions, as mining becomes increasingly difficult.
The current reality is that Bitcoin’s market cap is still tiny compared to the value of dollars and pounds issued by central banks. The Federal Reserve alone issues amount summing to about $1.4trn, and we are therefore nowhere near the point yet where cryptocurrencies pose a credible threat of ‘supplanting central-bank-issued money’ according to former Bank of England Economist Tony Yates in the Financial Times.
Difficult Economy Management
One major issue is that there is a finite supply of bitcoin, with a limit of about 21 million coins. Fluctuations in demand for Bitcoin and its competitors, in the face of relatively fixed supply cause wild swings in the price. This makes Bitcoin impractical as a money. Businesses would need to constantly adjust prices to reflect changes, whilst economies across the world have differing structures and requirements, which makes managing economies simultaneously very difficult.
Currently, we have different currencies where the values adjust against each other, then allowing individual countries to provide stimulus or raise interest rates to control inflation. With a universal bitcoin currency, or even individual country cryptocurrencies, this would be a daunting challenge, without even considering the extensive regulation and re-shaping of the market and monetary infrastructure that would be required.
Without a state directing fiscal transfers to make up for the inability to adjust exchange rates within the area, the result is going to be a monetary policy consistently too tight and too loose for different groups, like that of the Eurozone. However, this central state goes against the initial motivations for a decentralised bitcoin.
As bitcoin and other currencies gain attention and momentum, regulation will only toughen. Japan’s legal tender included legislation to protect uses from being stung by a collapse of exchanges, whilst also making exchanges comply with anti-money laundering regulations, officially authorising it as a normal payment method.
This type of regulation is quite limited and varied however, with some countries treating it as a commodity and some as money, making it difficult to enforce a universal law. In Venezuela, it is seen as a safe haven as the country struggles to deal with the downturn of the oil industry, whilst in Ecuador the government has issued a ban on cryptocurrencies. In the UK, the BoE and policy makers are talking about digital currency which could help tax evasion, with a digital pound rivalling bitcoin. Clearly, there is no general consensus.
Different countries, people and business have different motivations for using the cryptocurrencies. The likelihood of one digital currency across the world seems far-fetched at present, especially when you consider the infrastructural improvements and subsequent transition required to move from money to digital currency.
What is more likely is the idea of different countries using cryptocurrencies how they see fit, some more than others. Some may use it as a central currency which will then need to be regulated against conventional currencies, and some may use it alongside conventional currencies.
What is more promising is the variety of decentralised applications of cryptocurrencies and blockchain technology, such as Ripple being used in banks, and Dash being used to ‘revolutionise digital money systems’, with people owning these coins to use its associated applications. Bitcoin appears to be on a clear upward trajectory and its progress is set to continue in the coming months.
Two New Blockchain ETFs, So What?
With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.
On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.
What are They?
BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.
However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”
So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.
Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company. That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.
For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.
Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed. The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.
Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
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Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
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