Why I'm Stacking Satoshis
June 18, 2020
Lead Tech Analyst
Last July, I began covering bitcoin. The premise was based on three phases for widespread adoption: institutional adoption, global economic uncertainty, and mobile payments.
With Square’s cash app reporting fifty percent of its payments being made in bitcoin, or $178 million, it’s time to revisit why bitcoin is a transformative technology that is often misunderstood. Square’s report was for the period between October 1st and December 31st, which represented an increase of 50 percent over the prior two quarters.
Perhaps the more critical point to understand about bitcoin is that its purpose is not to polarize opinions on fiat currency. This is not a political election where you must choose a side. Rather bitcoin solves critical issues with digital trust and the fees associated with financial transactions. Therefore, it can coexist with fiat currency while having a unique purpose.
In January, I covered a string of mergers and acquisitions across fintech, such as Visa-Plaid, Mastercard-Nets & Vocalink, Fidelity-Worldpay and Fiserv-First Data. The problem with these acquisitions is there’s little benefit to customers and merchants. Digitization in finance is built atop age-old infrastructure and ignores the most obvious area in need of disruption: transaction fees.
Peer-to-peer payment apps on the market, such as Venmo, continue to charge merchants 2.9% plus a 30-cent transaction fee. Square charges 2.6% plus 10 cents per transaction. Therefore, the real value to consumers and merchants from fintech has yet to be seen. Last year alone, retailers paid $108 billion in electronic-payment costs — fiat currency can’t solve this issue.
Fiat currency also does not solve security issues as centralized systems do not inherently ensure digital trust. The Association of Certified Fraud Examiners reported a 42% frequency of fraud across small businesses costing an average of 5% of gross revenues. Credit card fraud is at $30 billion per year. Although Mastercard and Visa invest heavily in artificial intelligence for fraud detection, this is not necessary with a decentralized system that uses the network to verify identity.
Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience.
At its current price of $10,000, the market cap of bitcoin is at $250 billion. Meanwhile, Bitcoin offers the most secure network in the world and is capable of reducing fees of $100 billion annually. This is in addition to automating our financial system, which can’t be done without a decentralized blockchain solution. The fact bitcoin hedges against inflation is a bonus, but is not the primary benefit of bitcoin.
Bitcoin V. Baby Boomers
Bitcoin is supported by some of the brightest minds in technology. By far, the most successful investors in technology believe bitcoin is a viable form of currency. Venture capital firms such as Khosla Ventures, Union Square Ventures, Lightspeed, and A16Z have been funding bitcoin projects for some time (circa 2013 and 2014). In an editorial written in 2014, Marc Andreessen put it aptly that there could not be a bigger divide between how technologists feel about bitcoin and how the rest of the world sees bitcoin. He argued that the ongoing movement by researchers and developers to bring this technology to the market will eventually win out over the public’s unwarranted bias.
One of bitcoin’s hurdles is multigenerational adoption. To date, bitcoin is predominantly a retail dominated asset. Charlie Munger and Warren Buffett both criticized bitcoin as worthless. In fact, Buffett went so far as to claim bitcoin is “probably rat poison squared.”
Furthermore, in 2018, Bill Gates spoke about how the anonymity of bitcoin will be used to promote terrorism. This became a reality in 2019 when it was discovered that North Korea partially funded their missile programs by acquiring bitcoins from cyber-attacks they enacted on crypto exchanges.
The issue with listening to Warren Buffet, Charlie Munger and Bill Gates is they are not legendary tech investors. For the most part, Buffet and Munger invest in very large cap tech companies who are well past the stage of incubation. They are looking for safe, value bets with consistent cash flows. Early stage and disruptive tech could not be further from their investment goals.
Despite being a famous tech CEO, Bill Gates is a conservative investor who has done very little in the tech startup world. His top holdings are Berkshire Hathaway, Waste Management, Canadian National Railway Company, Caterpillar and Wal-mart.
Point being, the aforementioned venture capitalists have strong track records in identifying seed stage technology that disrupts industries.
There are a few traditional investors who have begun to embrace bitcoin. Paul Tudor Jones recently announced he has 1% of his fund in bitcoin and will grow to be 2% of his fund. He recently stated bitcoin may be the best performer: “When I think of bitcoin, look at it as one tiny part of a portfolio. It may end up being the best performer of all of them, I kind of think it might be,” he said. “But I’m very conservative. I’m going to keep a tiny percent of my assets in it and that’s it. It has not stood the test of time, for instance, the way gold has.”
Jaimie Dimon of JP Morgan has stated bitcoin “could be internal, could be commercial, it could one day be consumer.” In May, JP Morgan signed its first cryptocurrency exchange customers, Coinbase and Gemini. The bank will provide U.S. users with deposits and withdrawals via wire transfer.
To help institutional adoption, many custody solutions were introduced to the market recently. The word “custody” refers to a third-party provider of storage and security services for cryptocurrencies. In the first five months, six new custodians entered the market while a number of existing crypto custody providers have announced new features.
Vault storage is a popular method which keeps the majority of the crypto in offline storage with a minority in online storage. Custody solutions safeguard cryptocurrency, and go beyond private keys or wallets, which are subject to hacks or the misplacement of hard disk storage. These services are aimed at institutions and hedge funds, and incorporate a combination of storage online for liquidity and storage that is disconnected from the internet.
There has been some M&A in the crypto custodian market, as well, and exchanges such as Coinbase, Gemini and itBit have launched custody solutions. Upcoming modifications to the Glacier Protocol will also strengthen high-security offline storage for bitcoin for storage of over $100,000 (although notably is not for institutional use at this time).
You can read more here: Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption
Economic Uncertainty: Look Beyond the United States
In addition to the benefits of decentralization for security purposes and to reduce the intermediary fees involved with transfers, bitcoin is also more attractive than many foreign currencies. For instance, even when Bitcoin lost value from $19,000 to $3,000, it still out-performed the inflation of Venezuela’s currency. On the flip side, when bitcoin rises in value from $5,000 to $11,000, it allows global populations to hold an appreciating asset.
Japan is an excellent case study for an economy that has struggled due to quantitative easing. As of 2018, the Japanese debt-to-GDP ratio is at an all-time high at 254% due to nearly 15 years of quantitative easing. Government debt to GDP in Japan averaged 137.4% from 1980 to 2017. Consequently, Japan is a thriving bitcoin market.
Over 3.5 million people in Japan trade cryptocurrency with the vast majority (84%) between the ages of 20 and 40. The trading volume in Japan rose from $22 million in March of 2014 to $97 billion in March of 2017.
Perhaps more important than any specific geography supporting bitcoin adoption is to consider the Millennial demographic. Bitcoin and cryptocurrencies have been in existence for most of the Millennial generation’s adult life, having launched in 2008, and when this generation ages another decade, crypto and crypto wallets will be frictionless. Edelman Research published a study of 1,000 millennials with over $100,000 in income and found 25% own cryptocurrency.
You can read more here: Will Bitcoin Make a Good Investment? Phase 2: Economic Uncertainty
Retailers on Board
Paying for daily goods with a mobile wallet, tied to crypto, will become effortless in the years to come. One of the leading startups right now is Flexa’s SPEDN, which is linked to fifteen retailers, such as Whole Foods, Barnes and Noble, Nordstrom, Petco, Ulta Beauty, Lowe’s and Bed, Bath and Beyond. Several other online retailers accept bitcoin, as well, including brands such as Expedia, Hotels.com, Virgin Mobile, AT&T, etcetera.
JP Morgan has also built out its own blockchain settlement service with the dollar-backed JPM Coin. Centralized coins, such as Facebook’s Libra and JPM Coin, sound good in theory but coins do not hedge against inflation and are not scarce assets. They function like cashless digital transactions made through online platforms. AliPay functions similarly (although not encrypted) and was launched in 2004 and now serves 5% of the world’s population.
Starbucks, Apple and Google also allow digital transactions without the need for cash or credit cards. Centralized crypto coins have little benefit over a mobile app payment, and may be more cumbersome as the fiat currencies the crypto is based on will have to be exchanged, whereas with Starbucks, Apple Pay and Google Pay, no conversion to a “crypto coin” has to occur.
You can read more here: Is Bitcoin a Good Investment? Phase 3: Bitcoin Mobile Payments
Too many critics misunderstand how development around Bitcoin, Ethereum and blockchain protocols improves the fiat system by removing unnecessary costs. Most recently, the Lightning Network has helped mobile payments.
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