Bitcoin and the 99 other coins
So far Bitcoin is having a decent 2021. It hit a record high of more than $41.5K last week, continuing the upward trajectory it has been on since April of last year, when a single Bitcoin cost less than $5K. That rise now means that the sum of all Bitcoins in existence is worth more than $700B.
Because Bitcoin dominates much of the media's attention, it can be easy to forget just how many other cryptocurrencies there are. A quick look through the full list from coinmarketcap reveals over 100 alternative cryptocurrencies with a "market cap" of more than $100M. Each hoping that their unique take on the core blockchain technology will be enough to propel them out of obscurity, to where Bitcoin is today. With some of the names on the list you can't help but think someone is having a joke, or planning something nefarious - there is a "dogecoin", "YEP COIN", "OMG" and even "SushiSwap" (???).
The long-term upside case for Bitcoin also remains, at the very least, somewhat anarchic. If the end goal is to become the currency of use for the entire planet then something probably has to go disastrously wrong with the institutions behind our current system — government backed fiat currency. That's a bold bet to make and I don't believe it will happen. I find it hard to believe it will replace even weaker currencies for two main reasons.
Because Bitcoin dominates much of the media's attention, it can be easy to forget just how many other cryptocurrencies there are. A quick look through the full list from coinmarketcap reveals over 100 alternative cryptocurrencies with a "market cap" of more than $100M. Each hoping that their unique take on the core blockchain technology will be enough to propel them out of obscurity, to where Bitcoin is today. With some of the names on the list you can't help but think someone is having a joke, or planning something nefarious - there is a "dogecoin", "YEP COIN", "OMG" and even "SushiSwap" (???).
This time it's... different?
Some of the most dangerous words for any investor to believe wholeheartedly. Whether this latest Bitcoin rally proves more resilient than the previous highs is yet to be seen. Even in the last few days Bitcoin has shed ~15% of its value, reminding people that it is certainly still very volatile and not yet a reliable store of value.The long-term upside case for Bitcoin also remains, at the very least, somewhat anarchic. If the end goal is to become the currency of use for the entire planet then something probably has to go disastrously wrong with the institutions behind our current system — government backed fiat currency. That's a bold bet to make and I don't believe it will happen. I find it hard to believe it will replace even weaker currencies for two main reasons.
First, I am not convinced that Bitcoin and other cryptocurrencies are inherently trustless systems - that is, they’re not directly tied to any nation-state, government, or body. They are still reliant on the underlying infrastructure powering cryptocurrencies, much of which is located in China. The Chinese government could theoretically make changes to cryptocurrencies at a fundamental level by imposing its will on the data miners who keep them running. So in that sense, cryptocurrencies -at least Chinese ones- won't be any better than Chinese Yuan. The same applies to Diem (cryptocurrency founded by Facebook and rebranded from Libra), it's at the will of Facebook and the other founding institutions.
The second and more fundamental problem for Bitcoin as a currency has to do with the very thing lots of people like about it—namely that the supply of Bitcoin is controlled and limited. Because the supply is limited, when demand for Bitcoin rises (because, say, people are convinced they can get rich quick by buying it), then the value of Bitcoin is going to rise as well. So, if you believe your Bitcoin is going to become more popular, then it’s foolish to spend it on a pizza: You should hoard it and then sell it once its price rises. And since you can get along perfectly well without spending Bitcoin, there’s never been anything pushing people to stop hoarding. The more people hoard Bitcoin, treating it as a speculative asset, the less appealing it seems as a currency.
The second and more fundamental problem for Bitcoin as a currency has to do with the very thing lots of people like about it—namely that the supply of Bitcoin is controlled and limited. Because the supply is limited, when demand for Bitcoin rises (because, say, people are convinced they can get rich quick by buying it), then the value of Bitcoin is going to rise as well. So, if you believe your Bitcoin is going to become more popular, then it’s foolish to spend it on a pizza: You should hoard it and then sell it once its price rises. And since you can get along perfectly well without spending Bitcoin, there’s never been anything pushing people to stop hoarding. The more people hoard Bitcoin, treating it as a speculative asset, the less appealing it seems as a currency.
Takeaway
While proponents of Bitcoin see limitless potential and critics see nothing but risk, I'm still on the fence. I do see strong applications for Bitcoin as a crypto-asset (store of value) and not as a currency. For instance, people living in countries with weak currencies are better off investing in Bitcoin than buying local stocks and bonds.
I haven't bought any Bitcoins yet, but I did get indirect exposure to Bitcoin through Silvergate Capital Group (SI)- a bank in California. SI provides a lot of exposure because many of the crypto-trading platforms and institutional investors are its clients. SI does not trade cryptocurrencies itself; it just facilitates the exchange of dollars among the companies and institutions that do. The dollars that sit in these trading accounts at the bank are non-interest-bearing accounts, which means it's effectively free money for SI.
SI's growth has been so spectacular in 2019 and 2020 that it has phased out all of the ordinary banking activities it used to do in order to focus completely on its digital currency exchanges. It will continue to grow in 2021 because it already has the major crypto exchanges and institutions as its clients. As more join the network, it becomes more and more valuable, which causes more clients and institutions to want to join the network.
I haven't bought any Bitcoins yet, but I did get indirect exposure to Bitcoin through Silvergate Capital Group (SI)- a bank in California. SI provides a lot of exposure because many of the crypto-trading platforms and institutional investors are its clients. SI does not trade cryptocurrencies itself; it just facilitates the exchange of dollars among the companies and institutions that do. The dollars that sit in these trading accounts at the bank are non-interest-bearing accounts, which means it's effectively free money for SI.
SI's growth has been so spectacular in 2019 and 2020 that it has phased out all of the ordinary banking activities it used to do in order to focus completely on its digital currency exchanges. It will continue to grow in 2021 because it already has the major crypto exchanges and institutions as its clients. As more join the network, it becomes more and more valuable, which causes more clients and institutions to want to join the network.
Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.
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