VI Company is not your run-of-the-mill kind of company. We are a bunch of smart, independent go-getters who are always on the lookout for opportunities to grow and learn. We do things differently and aspire to simplify financial markets together with our clients and partners. Therefore, we also take great interest in mind-blowing (and sometimes mind-numbing) developments, such as Bitcoin and other cryptocurrencies. Even though topics such as these might stir controversy amongst some of our clients.
Let’s be honest: you don’t have to be in love with all of the crazy-fast stuff that’s happening around cryptocurrencies to want to understand it. After all, it is a new form of, currency… or is it a store of value? Perhaps digital gold? Maybe it's just an abstract concept, without any real value? Hmmm, defining a cryptocurrency doesn’t seem so simple at second thought.
And for that matter, what if you decide to invest in Bitcoin at this very moment? Currently, the crypto is pretty much at an ATH (All-Time High). Did the party just start? Or is it about time to call it a night? Only time will tell...
Meanwhile… in the office slack
Okay, before we get to that, let us first take a moment to sum up what is said in VI Company's office slack (i.e. chat). It is not so very different from what one would expect, nor the discussion that is currently going on in the media. On one side there are the ‘fanboys’ (and girls) and on the other side, there are the ‘haters’. Both of them have very strong opinions. Some of these are objective facts, but much is based on a subjective interpretation. Therefore we try to not pick sides.
Fanboys make these kinds of claims:
“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”
Eric Schmidt, Google CEO.
- Bitcoin is a decentralized alternative for ‘fiat’ currencies. It cannot be controlled by central banks.
- Because of its limited amount Bitcoin is scarce and disinflationary by nature.
- Haven’t you listened to ‘Plan B’? The Stock-to-flow model serves as a reliable indicator of Bitcoin’s value, now and in the ‘long’ term. And yes, the only way is up.
- Bitcoin solves problems, such as limitations in money outflow or even hyperinflation.
- It is democratic, and at the same time anarchistic (yeah, yeah!).
“Cryptocurrencies basically have no value and they don’t produce anything.”
Warren Buffet, CEO of Berkshire Hathaway.
- It’s almost impossible to store Bitcoin safely, let alone pay for your groceries with it.
- Why would I accept payments in Bitcoin? We have a perfectly working payment system in The Netherlands.
- What if I make a mistake and I lose my crypto-assets? What if my wallet or exchange gets hacked?
- The price fluctuates like crazy, why would I trust my savings to such a financial rodeo.
- 95% of the trading volume in bitcoin on unregulated exchanges is fake.
- Ask Warren Buffett: There is no underlying value.
- Bitcoin will probably never become an asset class.
- I don’t need it, don’t trust it, and don’t want to know about it.
Wow... well, neither side of the argument can be both right and wrong at the same time. Now, who do you think is right? We should try to stay somewhat neutral.
Like many wise men once said: ‘Opinions are like buttholes. Everybody’s got one and everyone thinks everyone else's stinks’. So, let’s stick with the facts for now:
- M0 (the most liquid form of money: cash. Which includes coins and central bank notes) is issued and controlled by a centralized authority.
- Bitcoin is produced and controlled through a process called mining and is not controlled by a central bank or government. Everybody controls its supply and transactions, collectively.
- Both M0 and Bitcoin rely heavily on trust by consumers for them to be accepted as currency and store of value.
- Because of blockchain technology, Bitcoins cannot be created out of thin air or be ‘double-spent’.
- In total, the maximum number of Bitcoins that can be in existence is 21 million. Currently, around 18.5 million bitcoins have been mined.
- The Circulating supply of Bitcoin is much lower than the maximum number. An estimated 20% of Bitcoins are lost, inaccessible, or simply forgotten about.
- The reward for Bitcoin miners halves every four years, effectively lowering Bitcoin's inflation rate.
- Ever since the gold standard was dropped in the ’70s, governments can control the money supply.
- Some 20% of all dollars ever created, were created in 2020.
Now, why is this important?
Because money is printed, investors are looking for ways to protect their future spending power. Gold is the most common hedge against inflation. You can buy just as much wine for an ounce of gold now, as you could in the times of the roman empire. A good suit cost you the dollar equivalent of an ounce in 1900, and it still does. So, depending on your definition of a good suit or wine, gold is an extremely stable asset.
However, more gold can be ‘produced’ by mining it. Hence, gold production tends to rise when the price of gold increases. Inevitably an excessive amount of gold is mined, which in turn decreases the price of gold again. There is no fixed maximum amount of gold bars. Gold was once used as a currency, but today it is mostly used as a store of value (i.e. investment). There is also a gold futures market, which is a lot bigger than the total supply of physical gold.
Then there is Bitcoin. Bitcoins can still be created but to a finite extent. Therefore, as the demand for Bitcoin rises, so does the price. Nevertheless, there is a need for trust in currencies, and at this moment we have plenty of reasons to distrust Bitcoin and other cryptocurrencies. For instance, the use of Bitcoin as a currency is still meager. Although many people have traded their Bitcoins for M0 (such as the U.S. dollar or the euro), few people have ever made or received payments in Bitcoin. Furthermore, Bitcoin is not considered an asset class. Additionally, there is still not one ETF for Bitcoin approved by the SEC.
All of this might change in the (near) future, but until then it is understandable that people do not convert their life-savings to Bitcoin just yet. The fluctuations in price are simply too volatile and unpredictable. Just look at last year: the value of Bitcoin had quadrupled at the end of the year, after having been halved in March earlier in the same year.
Is Bitcoin an asset class?
No, Bitcoin is not an asset class yet. For some of the above-mentioned reasons, it is not. However, Bitcoin is slowly being adopted as an investment to diversify your portfolio. Additionally, large (private) investors’ willingness to invest in Bitcoin is on the rise. This explains some of the money flowing into the cryptocurrency spectrum.
Putting things in perspective: throughout 2020, the traditional Tesla share performed better than Bitcoin.
For Bitcoin to be accepted as a real asset class, there are some steps that still need to be taken. ‘Real money’ is -understandably- conservative. SEC’s approval for investment products such as trackers might pave the way a little more, but price stability, actual use-cases, and custodian services are also a factor. To make this quantifiable, an asset class (such as gold, commodities, or real estate) is considered to be at least 1 trillion dollars. Bitcoin has a market cap of 700 billion (14 Jan 2021).
What? The abbreviation CBDC stands for Central Bank Digital Currency. As the name implies, this form of digital currency is centralized instead of decentralized. In a nutshell, a CBDC is nearly identical to fiat-currency but exists entirely in the digital space. In doing so it combines some of the perks of fiat money with some that cryptos have. Currently, 86% of all central banks in the world are either studying, developing, or (in some nations) running trials with CBDCs. It is seen as a way to democratize central banks’ money and reduce the risk of cryptocurrencies replacing government tender.
So why would the public trust a CBDC over a (decentralized) cryptocurrency? There are numerous reasons to do so, these include:
- It has the same legal status as M0. Therefore you can use a CBDC to pay for your groceries as well as online shopping.
- Because CBDCs have the same legal status as M0 you can go fully cashless. All shops and businesses in your nation are required by law to accept payments in CBDC.
- Unlike most cryptocurrencies, CBDCs cannot be speculated on. Therefore you don’t have to worry about huge fluctuations in its value. In fact, CBDCs are generally pegged 1:1 to the nation's M0 supply.
- It’s programmable money. CBDCs enable a lot of nifty possibilities such as: biometric payments, not having to own a bank account to use it, and (theoretically) no FX rates when exchanging currencies.
- CBDCs enable central banks to track and monitor the flow of money. Although there are many privacy concerns involved, it also enables the government to tackle corruption, terrorist funding, tax evasion, and money laundering.
- Increasing the financial inclusion of the under- and unbanked. This might not be a big deal in Western-Europe as 98% of the population is fully banked. However, in many other parts of the world, it’s difficult for people to access or afford modern banking services.
Current status of CBDCs
Currently, the only CBDC in circulation is the 'Sand Dollar' found only on the Marshall Islands. Though in practice this is a very small, easily controllable financial ecosystem that has little impact on the world.
If we talk about impact, China’s CBDC named e-CNY or Digital CNY (previously known as DCEP: Digital Payment Electronic Money) is many years ahead of everybody else. It’s already running trials involving millions of its citizens in the nation’s major cities.
As the digital CNY nears its imminent launch (estimated to take place before the Beijing Olympics in 2022) Europe and the U.S. still have to make a final decision on whether or not they will start the development of their own CBDCs. Unlike China whose advanced digital payment economy allowed it to transition into a cashless society from 2014 onwards, Europe and the United States still predominantly rely on cash and cards. This brings into question what's the point of developing a CBDC when neither your digital infrastructure is up for the task, nor your society is willing to fully embrace it?
As of yet, Bitcoin is not an accepted form of currency, though Tesla is eager to start accepting it as such. But as Bitcoin is increasingly mentioned by mainstream media and Twitter influencers its value and reputation grow ever more volatile. Will we see Bitcoin become a widely used payment currency in everyday life?... It's difficult to tell. Bitcoin has proven to write its own rules, but the versatility, trustworthiness, and convenience of CBDCs will be tough to beat.
However, there is a good case to be made for Bitcoin becoming an asset in the future. Considering the intrinsic scarcity of Bitcoin, it’s understandable that some investors are willing to take a shot. They understand the difference between risk and uncertainty. Why not risk a very small percentage of capital, if you know there is a wide range of probable outcomes? For these kinds of investors investing in Bitcoin and other cryptos is nothing more than a calculated risk. Others, including big banks and investment firms, choose to stay on the sidelines for a variety of good reasons, including regulatory pressures to do so.
Whatever your view on the matter might be, you should always keep an open mind. Even if you dislike what is happening, try to stay neutral. Get yourself educated enough to make well-informed decisions. You already took a first step in doing so by reading this article, and for that, we give you kudos.