There’s recently been a whirlwind of activity in the cryptocurrency space that could begin to shape its very future. Both the Fed and the SEC have started to weigh in heavily on potential regulations, China is charging ahead with its own digital currency, El Salvador is very close to accepting Bitcoin for basically all government services, and Venmo will let you convert your US Dollar cash balance to crypto for a ridiculous fee. There is significant expansion and regulatory attention being paid to the cryptocurrency markets right now and that can only mean one thing: prices will go up, down, stay the same, or go up and down and back to the same.
According to the Economist, there are three types of crypto investors: Fundamentalists, who believe a non-governmental currency has long-term societal benefit and value above the daily network transaction costs, Tacticians who basically think the price will go up because more people will buy it in the near or medium future, and Speculators who respond to Elon’s Twitter account faster than their latest Tinder match. Take a moment to reflect and put yourself in one of those buckets. Now try that same exercise with a few different asset classes. I bet you never pegged yourself as a Speculator. That’s unfortunate. That’s where all the upside is.
Before we chart out a path for the price of Bitcoin, let’s take an aside to talk about Stablecoins and GovCoins. In theory, these classes provide all the value of a cryptocurrency with none of the dreaded price swings. A couple of weeks ago Yale in combination with the Fed released a well researched paper about the place of stablecoins and its impact on the US Dollar. It’s a good read if you appreciate the history of money.
What Are Stablecoins?
Stablecoins, as the Economist put it (but I’m rewording), are the proverbial grease for the crypto wheels. They are a form of private money that is backed one-for-one with government fiat currency. Of course it’s not that simple. Economists generally agree that money has to satisfy three properties: money is a store of value, a unit of account, and a medium of exchange. However, there is a fourth property known as the ‘No Questions Asked’ property, which means that money is accepted in a transaction without due diligence on its value. This ill-defined property is where there be dragons.
We all know banks do not actually hold onto your money when you deposit it; they lend it out. If there is a run on a particular bank because customers do not trust its ability to pay back its deposits at par, the bank’s federal insurance policy would kick in and pay back its customers at par. Since the creation of the FDIC, no person in the US has ever lost money putting their money in a checking account. Regulations on how banks can invest demand deposits, Federal insurance on these deposits, and the backing of the US Government and its army creates the stability of the dollar that we all take for granted.
The advantage of Stablecoins is portability, openness, and low fees (known as gas for all you Ethereum fans). You can send a Stablecoin to anyone in the world without the use of a financial institution. Banks charge customers monthly account fees, minimum balance fees, overdraft fees, overdraft protection fees, returned deposit fees, check fees, ATM fees, debit card transaction fees, lost card fees, foreign transaction fees, wire transfer fees, savings withdrawal fees, inactivity fees, account closing fees and even reserve the right to charge negative interest. Those fees hit hardest when your account is at its nadir; digital currency and wallets remove this burden and open up the world of finance.
Now that we’ve established a place for Stablecoins, here’s the catch. They’re not backed 1:1 by a US dollar and they’re not regulated. If you’ve ever seen an advertisement from BlockFi, Linus, Gemini or even Coinbase offering a 10%+ yield on USDC (a Stablecoin), this is an example of unregulated money market fund. And if left unchecked, can have dire consequences for the entire US economy.
I would go into the intricacies of GovCoins, but is literally a government’s currency converted to cryptocurrency. Nothing really changes except the medium of exchange and even that looks the same. Banks can still be custodians of your cash and can even shield every day customers from even knowing the US Dollar is now a cryptocurrency. Institutions can still transfer money between themselves to represent customer digital transactions. I don’t know, but it’s probably a good, if not a necessary, idea to hop on.
Will GovCoins Usurp Bitcoin?
I think there will always be a place for a currency not tied to a government. There’s more than enough people in this world who do not trust any government entity with their wealth. The intrinsic value of any digital currency is the total sum of fees charged for processing and recording transactions. If transactions seize up, the currency is no longer a medium of exchange and the value of the currency should go to $0. The value of any currency is tied to its ability to fulfill the three properties of money: a store of value, a unit of account, and a medium of exchange and of course the fourth property ‘No Questions Asked’.
Today it takes about 10 minutes to send money via Bitcoin, but can take as long as an hour. Sometimes days. Also, the fees are variable. It can easily cost $20 to send $1. A lot of work is being done on lots of different crypto currencies to reduce both fees and transaction time, but I hope we can agree Bitcoin is hobbling in its attempt to look and feel like money. That said, today the average transaction fee is $2.23, which is a far cry from the $35 international wire transfer fee. Not so great for buying a cup of coffee though.
Side note: I hate sending money on crypto rails. It’s terrifying and irreversible. Banks can reverse ACH transactions and can generally work with other banks to return errant wires. What I’d really like is the ability to ‘ping’ a wallet’s address across the network. The ping should probably go through faster rails so it is received in minutes, not hours and it should cost about $.01. So next time you want to pay for your house in BTC, you at least can be confident you’re sending it to the right person.
So let’s just agree the current value of Bitcoin is speculative. Gold, Bitcoin’s physical counterpart, is part tactical and part speculative. The dollar is fundamental. Stablecoins are in a murky area, but leaning towards fundamental assuming there are no bad actors. Speculative value is ok, but if you invest in something speculative, you should expect speculative returns. This post isn’t about how high Bitcoin can go or the chances it disappears (which is very low, but also its disappearance would literally be without a trace), but its about whether or not you should ‘invest’ in it.
My simple advice is ‘no’, Bitcoin is not that interesting of a speculative investment, but if you do, do so without paying any fees. Venmo recently opened up ‘investing’ in crypto currencies and charges a 1.8-2.5% fee for doing so. What really grinds my gears is hedge funds whose sole strategy is to buy and hold Bitcoin. The literal point of Bitcoin is that is universally accessible to anyone with a computer and internet connection. How on earth would anyone pay fees, let alone a 20% promote for an asset designed to serve every human on earth in an open and equitable way? Classic sales adage: if you customers are struggling to see the value of your product, just charge more.
Here’s a look at who is trading Bitcoin, brought to you by the Economist and further brought to you by Chainanalysis. Algorithmic traders dominate crypto markets, grinding out profits from bid-ask price discrepancies and exchange price differences. Wealthy people all over the world started parking some of their money in Bitcoin and a few very loud Reddit traders starting posting gain and loss porn on the Internet. Frenzies ensue, followed by periods of cooling off where those late to the game are left holding the bag. Invest if you will, but certainly not because you must.
But Do You Believe?
So I’m clearly not a fundamentalist investor. I don’t belong to any financial church and I believe in things that exist. So if asked if I ‘believe in Bitcoin’, yes, of course. It exists. Do I believe it will stick around? It’s been around since 2009, so, yes, it will probably stick around for the foreseeable future. Will I park my money in it? No. It doesn’t create any value and in my opinion it’s not a scarce resource because by some measure by Statista there are over 6000 crypto currencies in existence. DogeCoin was created as a joke and has captivated the world’s attention and achieved a market capitalization of over $55bn. Woof indeed.
So am I a speculative investor in Bitcoin? Not since 2017. When it comes to speculation, I prefer to be doing things other people aren’t doing. Everyone knows about cryptocurrencies. So, I must be a tactician! Tactician is rather generous term, but, yes, I believe that offering cryptocurrencies as a product and reward to existing financial customers, such as Venmo or Visa, means the pool and awareness of cryptocurrencies will increase in the near future. I only like to write about speculation, so I’m not going to actually act on any tactical Bitcoin investments. If I were to invest in Bitcoin, I would do so tactically.
The headwinds are plentiful. China is doing its best to remove both investors and miners from its country. Money laundering is still rampant, though only represents about 2% of all Bitcoin and the rise of Stablecoins or Govcoins might usurp the medium of exchange and No Questions Asked part of money. The price is so heavily influenced by Bitcoin celebrities like Elon Musk that it dwarfs any intrinsic or fundamental value created by widespread awareness and adoption and will probably also overshadow any tactical gains by crypto permeating into the every day financial lives of billions of people. There is currently little to no regulation, but that will certainly change. Oh, and Bitcoin mining accounts for 35.95 million tons of carbon dioxide each year. Honestly, if you care about the environment, don’t buy it, hold it, or even talk about it.
I don’t have any interesting big bet ideas today. Crypto is a fine place to take a risk, but the returns aren’t what they used to be. Even if you 3x your money. So what? You can just as easily lose 70% in a few days. I’m staying away, but I don’t necessarily disagree with anyone taking the other side.
What’s Next and What’s Happened?
I haven’t written much recently. Honestly, my last few posts summed it up. I dumped all my Robinhood speculative stocks, bought some real estate and put the rest of it in ETFs and Big Tech. Nothing interesting, but it was a bit nerve racking buying real estate, mainly because I hate paying fees and even though buyers don’t technically pay the fees, I know they are there.
The next idea I’m toying with is patience. There’s a strong correlation between broader market bull runs and derivative asset, like BTC, ETH, $MEME, and $WSB. Unfortunately we are at the tail end of a few-times-in-a-lifetime bull run from trough to peak, but that shouldn’t stop speculation. A few solid days for market indices could mean high volume stocks and crypto could have a short-term pop. Think of it like a pass line bet in craps; you’re supposed to bet the house max. But this isn’t Vegas and the house is anyone showing up late.