Hate it, love it or profit from it, technology is rapidly changing the way we live our lives.
From communications to means of exchange to artificial intelligence, everything we know is changing and its changing fast.
As your guide in the new digital economy, its my intention to breakdown what’s going on here, close to home and around the world.
This week I’m discussing Bitcoin – a global singular monetary protocol designed to change the way we think about money and investing.
This digital technology has recently captured headlines, mostly in a negative narrative and once again the focus is on volatility, regulatory approval and the perception of never reaching mass adoption and practical use cases.
In the investment community, my professional community, Bitcoin for the most part, continues to be a dirty word and for a small group of individuals, including myself who understand the technology, view Bitcoin as inevitable.
Compare that to John Paulson, president, and portfolio manager of U.S. investment firm Paulson & Co., who told Bloomberg Wealth in an interview that cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless.
If you ask me, I believe the consumer will determine if and what cryptocurrency will thrive and fate of Bitcoin or any other cryptocurrency, will not come down to a few opinions.
For years, many on Wall Street have thought of cryptocurrencies as a fringe asset class. Yet a recent survey from Fidelity found that more than half of institutional investors in Asia, Europe and the U.S. currently invest in digital assets — and a majority also expect they will in the future.
It seems Fidelity’s research is proving to be accurate these days.
Last year we witnessed publicly traded companies like Tesla, MicroStrategy, Coinbase and Square buy and hold billions of dollars in cryptocurrency on their own balance sheet.
The Ontario Teachers Pension participated in a funding round on a company called FTX Trading which is a cryptocurrency exchange. Harvard and Yale Endowment are also among institutional investors in crypto according to Bloomberg.
Again, happening all in 2021, regulatory approval in Canada provided Fidelity Investments, Purpose Investments, Evolve, CI and 3iQ – Coinshares the green light to go ahead and launch financial instruments backed by cryptocurrency so that Canadian investors could purchase Bitcoin and Ethereum in their RRSP and TFSA accounts.
Countries like El Salvador even made Bitcoin a legal tender alongside the U.S. dollar and is currently building a bitcoin city to further adopt the technology. How will they power the mining process? By volcanos – incredible.
Certainly, institutional involvement is a good sign for the crypto market but what exactly is the appeal in cryptocurrency specifically Bitcoin and why should we care?
Is it a medium of exchange designed to digitalized money? A technology built to compliment our existing financial infrastructure or is its creation designed to completely conquer and operate free of any central control or the oversight of banks or governments?
To fully appreciate Bitcoin, you first need to understand the software. Bitcoin is a singular monetary protocol with peer-to-peer software and cryptography. The software is open source, meaning that anyone can view, use or contribute to the code for free. Many companies and organizations work to improve the software, including MIT.
The internet is also a protocol called TCP/IP.
Take for example this video I uploaded to a server somewhere in the world. Likely a server in Canada. No matter where you are, if you have an internet connection theoretically, you can watch this video. The same can be said about e-mail. Once you press send, your message is instantly delivered to the receiving party on the other side regardless of where that person is situated. Besides, the cost of shelter, electricity, and your internet connection which you were already paying, the cost to send that e-mail was nearly free, secure and instantaneous.
Bitcoin was created as a way for people, countries, and companies to send money over the internet with low fees, secure and instantaneously. The digital currency was intended to provide an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies.
The creation of the internet has been a win for society and the world seems closer today because of it but let us not forget the internet does include less democratic characteristics. For example, a country may decide to restrict access to the internet for its citizens.
While some countries have moderate internet censorship, other countries go as far as limit the access of information such as news and suppress and silence discussion among citizens. Internet censorship also occurs in response to or in anticipation of events such as elections, protests, and riots. In this example, the internet is accessible by everyone with an internet connect but accessible with possible restrictions deemed by a government.
Google, the world’s most popular search engine in the world is another example. Google search algorithm, a closed source platform designed to enhance user experience by tailoring search requirements, is influenced by past inquires. Closed source means only Google can pop open the hood and access the data, make or suggest upgrades. People who use Google are provided with bias and selective information based on what the algorithm thinks you want to see. That’s why if I search for vacation destinations, my search results will be different than yours. Having one company censorship and control that much data, specifically one that is publicly traded and is financially motivated seems questionable.
When it comes to the money supply, fiat currency that is not backed by an asset such as gold or other securities but rather based on the word of the country, the money supply can be adjustable. A concerning statistic from the federal reserve shows that since January 2020, the US has printed nearly 80% of all US dollars in existence.
To understand the magnitude of the Federal reserves ability to print more money in circulation, we need to go back 22 months ago. At the start of 2020, there was $4 trillion in circulation. On January 4, 2021, the number increased to $6.7 trillion dollars. By October 2021, that number climbed to $20 trillion dollars in circulation. If a government prints money faster than the growth of real output, it reduces the value of money and this invariably causes inflation. Governments often resort to printing money when they cannot finance their borrowing by selling bonds. This hyperinflation can be extremely damaging to an economy.
Just look at inflation rates with the Argentina Peso which is over 50% or the Turkish Lira at 36% inflation or Iranian rial at 22%.
At this point you’re starting to see some of the cracks in the foundation of our society. The singular protocol of the internet can experience censorship, data can be bias and controlled by one entity, currencies can be debased by manipulating the money supply, and corruptive behaviors can occur when too much power is given to one entity.
As for Bitcoin, it is incorruptible and cannot be manipulated in anyway yet what truly makes this digital currency even more attractive is the untapped market that could be realized for mass adoption purposes. There are over 2.5 billion people in the world that are unbanked yet 91% or people on the planet has a smart phone. With the buying momentum already in motion by retail clients, institutional investors, companies, and countries, providing decentralized financial products to this untapped market is an opportunity. To go one step further, Elon Musk and his company Starlink is working to provide everyone on the planet access to high-speed internet using advanced satellites in a low orbit approach. It’s difficult to say if Elon Musk is doing this for the sake of cryptocurrency but low orbiting satellites providing internet access to entire world is certainly a compliment to the advancement of this digital monetary technology.
From an investment perspective, Mathew McDermott, Goldman Sachs’ global head of digital assets believes Bitcoin is now considered an investable asset and I believe he is right.
Bitcoin has attractive investing features including a limited supply combined with the potential of unlimited global demand. There will never be more than 21 million bitcoin. This limit, known as the hard cap, is encoded in Bitcoin’s source code and enforced by nodes on the network. Bitcoin’s hard cap is central to its value proposition, both as a money and an investment.
Very different compared to fiat currencies and even stocks where the supply side can be manipulated.
This leads up to scalability. If Bitcoin is going to be adopted by the world and compete with Visa, Mastercard and other payment solutions, the ability to process transactions quickly is going to be a considerable factor. Scalability is a significant barrier that restricts the widespread adoption of crypto currencies. If scaled properly a blockchain network could handle billions to billions of transactions per second. In the case of Bitcoin, the lightning network allows off chain settled transactions for instant micropayments with ultra low fees so the day of buying a coffee with Bitcoin may not be as far as you might think. And even if you could buy coffee with Bitcoin, you might not want to because you rather participate in the asset appreciation instead.
Here’s my final thought on Bitcoin. Don’t pay too much attention to the volatility focused headlines and instead do your own research. This article is a great start and if you’re thinking about investing in Bitcoin, continue to do your research. You need to understand the risks involved before you purchase crypto or bitcoin or anything other investment. Never let fear or greed drive your investment decisions.
Have a great weekend!
Michael
Disclaimer:
Article written on February 4th, 2021.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. The information is for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.
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