Everything besides Bitcoin is a speculative bet on some as yet unproven application for the blockchain. “Use our great software that for some reason needs its own money!” Just doesn’t make sense to me. I know why you would want to print your own currency, but I have no idea why I would want to use it.
Bitcoin is holding up well because it has one purpose only - digital monetary asset. It has performed this function very well and continues to grow in attractiveness in the QE infinity world.
Arnold is correct - one hurdle is the perceived difficulty of self custody. Self custody is critical because it removes counter party risk which is a key feature of Bitcoin. It is now much easier in the past, but needs to improve further. Big gains have happened here this cycle and they will continue. (See unchained capital, swan Bitcoin, casa)
I’m not sure why a fidelity or BNY Mellon providing custody services wouldn’t be attractive to some large portion of the investment community. The investment community doesn’t custody their own stocks, why would they be immediately hung up on this for Bitcoin (the only thing they should be buying as a digital asset)?
I have a hard time seeing how cryptocurrency cannot have ongoing social and financial significance, at least in emerging markets. In places like Argentina, stable coins are becoming increasingly integrated into the daily financial life of ordinary people who need to move their paychecks in and out of their rapidly inflating fiat currency frequently. In Nigeria, something like 40% of adults under 60 own or have recently traded crypto and Bitcoin in particular is often used to facilitate cross-border payments. Central Banks in many such places (see India going back to 2018) seem convinced that crypto will disrupt monetary control without global regulatory cooperation.
Does this widespread grassroots adoption of cryptocurrency in low-middle and high-middle income countries figure into the discussion above or not really?
Blockchain, the technology underlying crypto, is useful. The NFT market, I think, will be big. Not million dollar pieces of art, but low cost songs, books, or movies. There are already analogous platforms, e.g. iTunes or Amazon. Artists will drive the adoption - to avoid fees and the ever more common censorship by tech companies. Apple is already (or planning) charging 30% on NFTs bought on iOS. They see the threat, but that response is a bit like the record labels’ response to Napster. I don’t see much value in crypto as a replacement to actual currency, but smart contracts will remake black markets. Last summer two relatively high level Boston drug dealers were killed in a dive bar fight in Providence. The case was solved with help from the secret service. Why was the secret service involved? Guess who is tasked with crypto crimes. It remains to be seen what other uses will be discovered.
Finally, one way of looking at crypto, even more so with governance tokens, is as stock in the blockchain network.
I see two crypto platforms that could survive for different reasons.
The first is BitCoin. I see it as the reserve currency for crime and porn. As long as identity thieves and ransom ware attackers willing to take payment in Bitcoin, it can survive (for the same reason that even a weak currency can survive as long as it’s issuing state takes tax payments in its own currency). As other coins fail, people will move to BitCoin in a flight to relative safety and liquidity.
The second is Ethereum. The reason is totally different. Ethereum has focused on being a distributed computing environment. It has had failures and survived. It’s roadmap focuses on platform efficiency -- first the move to proof of stake and now renewed work on sharding. If Ethereum fails, I suspect it will be because the delay in native sharding led to a non-native roll up layer, and that layer is pretty centralized. So one big failure there could now sink the platform. But if it succeeds, I think it will be on the back of smart contracts being broader than just crypto transactions. If they do succeed at that, then it might eventually replace BitCoin in its dominant space.
I don’t see any other standouts. There are others that seem like they are competing on the same strategies as BitCoin and Ethereum, but don’t have the depth or scale. Sometime a more nimble second-mover can win, but I’d think that the flight to liquidity will make that even more difficult.
Crypto had three eras. The first, romantic stage was driven by libertarians and nerds interested in a new and cool technology. After bitcoin blew up in 2017 started the second era with crypto bros pulling Ponzi scams over get-rich-quick customers. The third era is the rapid death of most of the crypto ecosystem. Final era will be a handful of libertarians and nerds still hodling bitcoins.
Customers have lost any hope of making money and are selling their crypto and are exiting the market. Exchanges can't or don't want to give their USD for sh!tcoins so they are going to pull the rug. Bitfinex/Tether has issued coins worth 66 billion USD but have only about 3% backing in real currency for their stable coins. This was not a problem when money were moving into crypto but it is when money are moving out.
Serious banks will not create crypto exchanges because they can't compete with the Ponzi schemes in attracting clients. FTX was offering sign up bonuses, 8% yield for what are basically saving accounts, allowed users to place margin bets for 95% of their account, allowed traders to place bets 100x the value of their account, spent 1 billion USD on ads, 100 million on charity and 50 millions on democrats. Crypto dot com spent similar money on ads and had amazing card offerings that they had to scale down a bit. A serious business can't offer all these and keep 1:1 matching funds in currency for safety. A Ponzi scheme can because they spend money only on client acquisition.
This is why Coinbase despite being older and having submitted to US regulations and IPO audits was smaller than FTX which was founded in 2019, has the HQ in Bahamas and was opaque to public, investors and regulators. Most crypto investors want to make money fast so they go for the highest yielding offers not the safest ones. Many of those who lost money on FTX could have kept their crypto safe in cold wallets if they wanted but they were chasing yields.
Binance is the biggest crypto exchange but doesn't even has a HQ and is banned in multiple countries. Crypto bros don't care about safety but about going to the moon.
What about the digital currency experiment or pilot project by the NY Fed and several banks? How would that work? Does it rely on blockchain technology?
I just believe my son's understanding of the subject. He has been working in the area since the start. https://www.youtube.com/watch?v=abcKL_x_aoA
Step one: separate Bitcoin from crypto.
Everything besides Bitcoin is a speculative bet on some as yet unproven application for the blockchain. “Use our great software that for some reason needs its own money!” Just doesn’t make sense to me. I know why you would want to print your own currency, but I have no idea why I would want to use it.
Bitcoin is holding up well because it has one purpose only - digital monetary asset. It has performed this function very well and continues to grow in attractiveness in the QE infinity world.
Arnold is correct - one hurdle is the perceived difficulty of self custody. Self custody is critical because it removes counter party risk which is a key feature of Bitcoin. It is now much easier in the past, but needs to improve further. Big gains have happened here this cycle and they will continue. (See unchained capital, swan Bitcoin, casa)
I’m not sure why a fidelity or BNY Mellon providing custody services wouldn’t be attractive to some large portion of the investment community. The investment community doesn’t custody their own stocks, why would they be immediately hung up on this for Bitcoin (the only thing they should be buying as a digital asset)?
I have a hard time seeing how cryptocurrency cannot have ongoing social and financial significance, at least in emerging markets. In places like Argentina, stable coins are becoming increasingly integrated into the daily financial life of ordinary people who need to move their paychecks in and out of their rapidly inflating fiat currency frequently. In Nigeria, something like 40% of adults under 60 own or have recently traded crypto and Bitcoin in particular is often used to facilitate cross-border payments. Central Banks in many such places (see India going back to 2018) seem convinced that crypto will disrupt monetary control without global regulatory cooperation.
Does this widespread grassroots adoption of cryptocurrency in low-middle and high-middle income countries figure into the discussion above or not really?
It isn't a game of cat and mouse where the mouse is more agile- it is a case of confusing which is the cat and which is the mouse.
Blockchain, the technology underlying crypto, is useful. The NFT market, I think, will be big. Not million dollar pieces of art, but low cost songs, books, or movies. There are already analogous platforms, e.g. iTunes or Amazon. Artists will drive the adoption - to avoid fees and the ever more common censorship by tech companies. Apple is already (or planning) charging 30% on NFTs bought on iOS. They see the threat, but that response is a bit like the record labels’ response to Napster. I don’t see much value in crypto as a replacement to actual currency, but smart contracts will remake black markets. Last summer two relatively high level Boston drug dealers were killed in a dive bar fight in Providence. The case was solved with help from the secret service. Why was the secret service involved? Guess who is tasked with crypto crimes. It remains to be seen what other uses will be discovered.
Finally, one way of looking at crypto, even more so with governance tokens, is as stock in the blockchain network.
I see two crypto platforms that could survive for different reasons.
The first is BitCoin. I see it as the reserve currency for crime and porn. As long as identity thieves and ransom ware attackers willing to take payment in Bitcoin, it can survive (for the same reason that even a weak currency can survive as long as it’s issuing state takes tax payments in its own currency). As other coins fail, people will move to BitCoin in a flight to relative safety and liquidity.
The second is Ethereum. The reason is totally different. Ethereum has focused on being a distributed computing environment. It has had failures and survived. It’s roadmap focuses on platform efficiency -- first the move to proof of stake and now renewed work on sharding. If Ethereum fails, I suspect it will be because the delay in native sharding led to a non-native roll up layer, and that layer is pretty centralized. So one big failure there could now sink the platform. But if it succeeds, I think it will be on the back of smart contracts being broader than just crypto transactions. If they do succeed at that, then it might eventually replace BitCoin in its dominant space.
I don’t see any other standouts. There are others that seem like they are competing on the same strategies as BitCoin and Ethereum, but don’t have the depth or scale. Sometime a more nimble second-mover can win, but I’d think that the flight to liquidity will make that even more difficult.
Crypto had three eras. The first, romantic stage was driven by libertarians and nerds interested in a new and cool technology. After bitcoin blew up in 2017 started the second era with crypto bros pulling Ponzi scams over get-rich-quick customers. The third era is the rapid death of most of the crypto ecosystem. Final era will be a handful of libertarians and nerds still hodling bitcoins.
Customers have lost any hope of making money and are selling their crypto and are exiting the market. Exchanges can't or don't want to give their USD for sh!tcoins so they are going to pull the rug. Bitfinex/Tether has issued coins worth 66 billion USD but have only about 3% backing in real currency for their stable coins. This was not a problem when money were moving into crypto but it is when money are moving out.
Serious banks will not create crypto exchanges because they can't compete with the Ponzi schemes in attracting clients. FTX was offering sign up bonuses, 8% yield for what are basically saving accounts, allowed users to place margin bets for 95% of their account, allowed traders to place bets 100x the value of their account, spent 1 billion USD on ads, 100 million on charity and 50 millions on democrats. Crypto dot com spent similar money on ads and had amazing card offerings that they had to scale down a bit. A serious business can't offer all these and keep 1:1 matching funds in currency for safety. A Ponzi scheme can because they spend money only on client acquisition.
This is why Coinbase despite being older and having submitted to US regulations and IPO audits was smaller than FTX which was founded in 2019, has the HQ in Bahamas and was opaque to public, investors and regulators. Most crypto investors want to make money fast so they go for the highest yielding offers not the safest ones. Many of those who lost money on FTX could have kept their crypto safe in cold wallets if they wanted but they were chasing yields.
Binance is the biggest crypto exchange but doesn't even has a HQ and is banned in multiple countries. Crypto bros don't care about safety but about going to the moon.
What about the digital currency experiment or pilot project by the NY Fed and several banks? How would that work? Does it rely on blockchain technology?