The price of ether (ETH), the native cryptocurrency of the Ethereum blockchain network, soared to record levels on Sunday.
Maybe it’s just that winter is dragging on, but I find myself getting increasingly irritated with mainstream reports about Bitcoin that say it was a result of the financial crisis.
It wasn’t, and that matters.
First, let’s look at why it wasn’t, and then I’ll explain why this misunderstanding bothers me.
Bitcoin’s pseudonymous creator Satoshi Nakamoto started working on the Bitcoin white paper in early 2007, over a year before the financial crisis hit mainstream markets.
In early 2007, the subprime mortgage industry was collapsing, but even lifelong finance insiders didn’t foresee the scale of what was to unfold. As Satoshi worked, bankruptcies and bank tremors would have been making the headlines, but there is no indication this added to his* urgency.
(*We don’t know that Satoshi was a “he,” but to avoid linguistic clutter I’ll use that pronoun throughout.)
By the time Satoshi uploaded the white paper to a cryptography mailing list in October 2008, the markets were in full meltdown, the U.S. government was taking over parts of the financial ecosystem, and central banks around the world were dropping interest rates and printing money.
The genesis block, mined by Satoshi in early January 2009, included the text of a headline from that day: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Many have taken this as proof that Bitcoin was created in reaction to the crisis. This reveals a lack of understanding of how much work went into the design of Bitcoin, as well as the long history behind the idea of peer-to-peer finance.
The confusion is also potentially damaging to the Bitcoin narrative.
Why? Because it misrepresents the intentions of the army of cryptographers that had been working on a decentralized electronic cash solution for decades. It diminishes the bigger picture.
Satoshi was not reacting to an event, just as those on whose shoulders he stood weren’t planning for a specific circumstance. They were all trying to solve the fundamental issue of financial sovereignty.
While we do not have (that I’m aware of) evidence of Satoshi’s thoughts on the financial system from before the publication of the Bitcoin white paper, shortly after the genesis block was mined, Satoshi wrote:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
Satoshi was not referencing the financial mess at the time, even though its fallout was loud and hard to ignore. He showed signs of bigger thinking.
And as for the genesis block itself, maybe the timing and choice of embedded text was intentional, or maybe it was a coincidence – we’ll never know for sure. Either way, a point was made.
That point was a dig at how politically beholden the banking system had become. It highlighted the lack of solid financial structure and the diminishing trust in institutional solvency. It essentially represented the financial crisis that was unfolding. But it was an example rather than a smoking gun.
The financial crisis was not the reason for Bitcoin. It was a symptom of the reason for Bitcoin. And if we continue to hear claims that the crisis was the cause, we will start to believe that Bitcoin is a new solution to a relatively new problem.
It isn’t. It’s a long-awaited solution to a long-standing problem.
If we continue to think of Bitcoin solely in the context of financial crises, we could start to believe that the need for it will diminish as the painful adjustments recede into the mists of time.
It won’t – the technology can’t be put back into its bottle. Nor can the growing awareness of the vulnerabilities inherent in the financial system on which we all rely.
Bitcoin has managed to spread ideas that were previously the purview of an arcane mailing list, and in so doing, has changed the way we look at our financial rights, our data, even our identity. True, the timing of Bitcoin’s emergence helped with that spread, and the recent departure from traditional monetary policy has accelerated it. Financial privacy, seizure resistance and fiat debasement are just some of the concepts that the crypto market price swings have pushed into conversations that now reach even the hallowed halls of traditional finance.
But Bitcoin was not created to fix crises. It was created to give people a choice.
Let’s stop treating it as a reaction to a specific situation, and recognize that Bitcoin is a technological evolution of a process that started decades ago.
Let’s also give credit to a group of thinkers who realized from way back where centralization of finance and our economy could eventually lead.
After a momentous week in which COVID-19 briefly stepped back from the headlines to give space for us spectators to appreciate hope, rhetoric and a peaceful transfer of power, it feels good to take a breather and contemplate the scope of potential change ahead.
It’s not just that market infrastructure and institutional interest are growing in leaps and bounds (more on that below). It’s also that many of the regulatory authorities that determine the framework of financial markets, custody and value transfer are changing guard.
Gary Gensler will be the next chairman of the U.S. Securities and Exchange Commission (SEC). This possibility was reported last week, and was flagged as potentially very good news for the crypto industry, as Gensler has not only researched and often spoken in public about crypto assets and blockchain technology – he also has taught a course on the subject at MIT.
Chris Brummer, a Georgetown University law professor who runs the annual D.C. Fintech Week conference, edited a book on crypto assets and hosts the excellent Fintech Beat podcast, which often features compelling crypto content, may be the next chair of the Commodity Futures Trading Commission (CFTC), according to Reuters.
According to the Wall Street Journal, Michael S. Barr, a former U.S. Treasury Department official and onetime member of Ripple’s board of advisers, is likely to become the next Comptroller of the Currency.
This almost seems like a crypto-savvy trifecta of financial regulators which, as my colleague Nik De hinted at in his new crypto regulation newsletter The State of Crypto, is almost too much to ask for. It doesn’t guarantee crypto-friendly legislation, but at least it means the discourse will be relatively well informed.
· “While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost ‘uninvestable’ from a portfolio perspective.” – Barclays Private Bank chief market strategist Gerald Moser, talking to Financial News. He goes on to claim that the current bull run has been driven by retail investors rather than institutional money, which is a bewildering interpretation of the data.
· Guggenheim Partners Chief Investment Officer Scott Minerd, who recently said that he thought bitcoin’s fair value could reach $400,000, has been looking at the BTC charts and now believes that the cryptocurrency could be in for a sell-off down to $20,000.
· Bill Miller featured bitcoin in his Q4 income strategy letter, and talks about his fund’s investment in the MicroStrategy convertible security. “The world is ruled by fat-tail events, or seemingly improbable occurrences that have an outsized impact, and all indicators so far point to Bitcoin being one.”
· “You know what, if you won the lottery – Yes, I’m gonna say it: 5% in bitcoin.” – Jim Cramer, host of the Mad Money program. Cramer apparently sees bitcoin as an “important new store of value.”
BlackRock, the world’s largest asset manager with $7.81 trillion under management, appears to have granted at least two of its funds (BlackRock Global Allocation Fund Inc. and BlackRock Funds V) the ability to invest in bitcoin futures, according to prospectus documents filed with the U.S. Securities and Exchange Commission. TAKEAWAY: For now, the funds will only be able to invest in cash-settled bitcoin futures, not actually hold bitcoin. And we shouldn’t assume that BlackRock will be betting on upside – it could use bitcoin futures to express bearish positions. But this move does echo comments made last month by CEO Larry Fink, when he said bitcoin could possibly “evolve” into a global market asset. And it is encouraging to see official acknowledgement that the world’s largest asset manager has invested resources in understanding the market.
If any of you heard some alarming chatter about a double-spend on the Bitcoin network (when a certain amount of BTC is spent twice, which in theory is impossible), here is an explanation of what really happened and how it’s nothing to worry about.
While bitcoin is still usually the first crypto investment for professional investors, due largely to its relative liquidity and range of onramps and services, Ethereum’s native token ether is starting to attract more institutional attention. A report from Fundstrat Global Advisors posits that the wide array of potential use cases for Ethereum gives ETH the best risk/reward scenario in the market, and believes that the asset could rally up to $10,500. TAKEAWAY: ETH has outperformed BTC for 8 of the past 12 months (and looks set to do the same for this one), yet it is currently below its all-time high (ATH), while BTC left its ATH in the dust three months and 52% ago (at time of writing). It is not easy to directly compare the two, however, since the underlying technology, use case outlook and risk profile are very different. We’ll be following this closely, so watch this space. (See our report on Eth 2.0 for more detail on its upcoming protocol shift.)
New U.S. Treasury secretary Janet Yellen got off on the wrong foot with the cryptocurrency community by claiming that bitcoin was mainly used for illicit financing. This happened on the same day that blockchain forensics firm Chainalysis published a report that shows that cryptocurrency-based criminal activity fell to 0.34% of total transaction volume, down from 2.1% in 2019. TAKEAWAY: That doesn’t look like “mainly” to me. Thankfully, she rectified shortly after in a written response to the Senate Finance Committee, stressing the need to “encourage their use for legitimate activities while curtailing their use for malign and illegal activities.” That sounds more reasonable.
London-based crypto liquidity provider Wintermute has raised $20 million in a Series B funding round, led by Lightspeed Venture Partners, with participation from Pantera Capital, Sino Global Capital, Kenetic Capital, Rockaway Blockchain Fund, Hack VC, DeFi Alliance and Fidelity-affiliated Avon Ventures. TAKEAWAY: Most of the meaningful raises we’ve seen recently have been for market infrastructure firms, which points to strong under-the-surface development and increasing sophistication from crypto markets, and expectations of significant growth in service demand.
Sen. Mike Flood (R) of Nebraska has introduced two bills that would allow the state’s banks to offer custodial services for digital assets. TAKEAWAY: Several states are likely to follow Wyoming’s lead in making their jurisdictions crypto asset-friendly. This will not just attract new businesses or retain existing ones in an industry with growth potential. It could also serve to attract investment funds, and enhance the opportunities for interstate crypto commerce and business deals.
Market research commissioned by trading platform eToro, which surveyed 25 large institutions in Q3, revealed that interest in crypto markets from pensions and endowments is increasing. TAKEAWAY: This would be a big shift if it materializes, as pensions and endowments are traditionally risk-averse investors. Crypto markets, as we were reminded this week, are not for the risk-averse. It’s a relatively small sample, and so can’t be taken as indicative of pending inflows, but it does hint at a shift in market perception.
According to a Deutsche Bank survey of market professionals, over 50% believe that BTC is at a 10 on a 1-10 “bubble scale”, and is likely to halve in value over the next 12 months. TAKEAWAY: Is this a sign of the market getting tired? Or, a sign of growing awareness amongst people who have yet to do research?
JPMorgan strategists have said in a report that a bitcoin price breakout over $40,000 would require daily inflows into the Grayscale Bitcoin Trust (GBTC; Grayscale is owned by DCG, also parent of CoinDesk) of approximately $100 million. TAKEAWAY: So far, that does not look too farfetched: On Monday, the firm had its largest daily inflow ever, almost $700 million, bringing the daily average since it reopened for new investment last week to approximately $200 million.
Digital asset management firm CoinShares has launched an exchange-traded bitcoin product (ETP) on Swiss stock exchange SIX. TAKEAWAY: It is becoming increasingly obvious how much livelier in terms of variety the listed crypto product landscape is in Europe vs the US.
Valkyrie Digital Assets filed an application this week for a bitcoin exchange-traded fund (ETF), the Valkyrie Bitcoin Fund, which would be listed on the New York Stock Exchange. TAKEAWAY: This is the second bitcoin ETF filing we’ve seen in the past three weeks, and is probably the first of many in 2021. With Gary Gensler as nominated head of the U.S. Securities and Exchange Commission, expectations are rising that the industry will see a bitcoin ETF approved this year.
Wall Street CFOs are more wary of putting company funds into bitcoin after last week’s 30% price plunge, according to Bloomberg. TAKEAWAY: As they should be. CFOs putting company reserves into BTC just for the headlines and possible share price bump are being irresponsible. BTC has a place on balance sheets, but it should be a cautious one. Microstrategy, the software company that kicked off this trend in August of last year, is placing conviction above caution, however, and revealed this week that it has added another $10 million worth of bitcoin during the dip.
The session will focus on the diminishing role of cash and the emergence of central bank digital currencies, moves accelerated by the pandemic.
“Not owning any Bitcoin has been a massive mistake, and we expect that will continue to be true,” the famed value investor wrote to clients.
This episode is sponsored by Nexo.io.
For this week’s Long Reads Sunday, NLW reads the document that started it all – the Bitcoin White Paper. Interestingly, this document was released under an MIT open-source license, available free to all.
Image credit: Emir Hoyman/Getty Images Plus
The cryptocurrency is now up 105% since Jan. 1, 2021.
The wider effort to promote the digital currency precedes a launch in the “near future,” per a state media report.
Some rudimentary pixel art just sold for 605 ETH, or $761,889 at purchase.
FlamingoDAO, a decentralized autonomous organization (DAO) for investing in digital collectibles, is behind Saturday’s eye-popping CryptoPunk sale. Only nine such “Aliens” exist in the CryptoPunk universe, which pioneered non-fungible tokens (NFTs) in 2017 and are the “Holy Grail” for an emerging class of Ethereum-based art collectors.
FlamingoDAO community representative Priyanka Desai told CoinDesk it was by far the collective’s most expensive piece to date.
“I showed my mom and she was like, ‘What???’” Desai said in a phone interview.
Flamingo is a fund with roughly 40 members and 4,800 ETH in pooled capital, Desai said. It has “hundreds” of NFTs in its growing collection including rare Autoglyphs, NBA Top Shot cards and land plots in various metaverses.
Flamingo’s decision to act on this rare opportunity “was whipped together within 25 minutes,” mostly via Discord, Desai said.
“It’s understandable for folks to be skeptical about NFTs, but in our view, NFTs are the future of not just digital art, but all digital property,” FlamingoDAO said in a statement. “It’s the tip of a very large spear.”
A prominent decentralized finance (DeFi) personality, @0x_b1, was one of the counterbidders who lost out on CryptoPunk 2890. In a tweet, @0x_b1 said they had valued the CryptoPunk at roughly $1 million.
The CryptoPunk in question last sold in July 2017 for 8 ETH, or $2,127 at the time. That represents a 75x return on investment in ETH terms (and even greater in USD).
“People see it as a collectible that is pretty significant in the history of NFTs,” said Desai.
Options for realizing a return on the investment are still to be determined by DAO members, Desai said. Aside from future appreciation or its possible financialization, “There’s also this notion of Flamingo wanting to build galleries in different metaverses for putting this and other pieces on display,” she said.
Valkyrie Digital Assets filed an application on Friday for a bitcoin exchange-traded fund (ETF), becoming the second company to do so in a month.
According to Dallas-registered Valkyrie Digital Assets, the Valkyrie Bitcoin Trust would be listed on the New York Stock Exchange and Coinbase Custody Trust Company, LLC would serve as the custodian for the proposed ETF.
Leah Wald, CEO of Valkyrie Digital Assets, told CoinDesk, “Our executive team has previously launched multiple ETFs, publicly traded funds, and ETPs, including bitcoin funds.”
Wald explains the team behind the ETF includes, “Steven McClurg and John Key who have collectively worked on over 100 esoteric and novel deals that have passed regulatory scrutiny.”
At the end of December, VanEck re-submitted an application to the SEC for a VanEck Bitcoin Trust ETF.
While an ETF is seen as advantageous because it trades on the stock market in much the same way as shares in popular companies such as Apple and Microsoft, over the years the U.S. Securities and Exchange Commission has rejected bitcoin ETF proposals due to concerns about market volatility and industry manipulation.
In August 2018, it rejected nine such proposals on the same day.
Still, there’ve been signs the SEC is warming to the idea. In October 2020, then-Chairman Jay Clayton, who many saw as lukewarm toward crypto, said the agency was still open to considering ETF proposals.
Now, with a new administration causing a changing of the guard at the SEC, it is widely hoped by crypto advocates that such an ETF will be approved in 2021. Clayton stepped down officially last month and was replaced by Gary Gensler, who is widely seen as being more pro-crypto than is his predecessor.
Also adding to optimism is this month’s departure of Dalia Blass, the director of the SEC’s division of investment management. Blass was the author of a 2018 letter within the SEC expressing concerns that the bitcoin market was not large enough or liquid enough to be ready for an exchange-traded product.
This episode is sponsored by Nexo.io.
On this edition of the Weekly Recap, NLW argues that while bitcoin’s price was the short-term story of the week, the medium-term story was all about the transition of power in the U.S. to the new Biden Administration. In it, he discusses what the appointments (reported or confirmed) of Janet Yellen, Gary Gensler, Michael Barr and Chris Brummer suggest about the future of crypto policy.
Image credit: Chip Somodevilla/Getty Images News