On Tuesday, February 21, Bitcoin’s (BTC) value reached $58,000. This is an astonishing deviation from just a few months ago. On Dec. 11 2020, BTC was worth only $18,000. For many investors, crypto currencies are risky at best; their volatile nature can frighten even the most bullish buyers. Not to mention the fact that one of its earliest exchangers, Mt. Gox, filed for liquidation in 2014, citing several roadblocks. But BTC has become more mainstream in recent years, and with over $1 trillion in market circulation (as of February 19, 2021), it cannot be considered fictitious anymore. So, the question remains: To buy, or not to buy?
The Weakening Dollar
In 1971, President Richard Nixon was faced with a dire economic crisis. The United States had an inflation rate of 5.85% and an unemployment rate of 6.1%. Under the Bretton Woods system, the US dollar’s value was expressed in gold—$35 per ounce, to be exact. However, because of foreign investment and military spending during the 1960s, the US didn’t have enough gold to cover the dollar’s worldwide volume, leading to its overvaluation. On Aug. 15, 1971, Nixon cancelled the dollar’s convertibility into gold, leading to the creation of FIAT currencies. Fast forward to 2021, and the consequences of Nixon’s policies have become clear. Last year, the Federal Reserve printed $9 trillion dollars in bailouts, or 22% of all USDs issued since 1776. This has caused the dollar to become incredibly devalued. As of right now, its Euro exchange rate is €0.82 per $1.
Like gold, BTC is (sort of) a fixed asset; only 21 million BTC can be created, but they can be divided into the hundred millionths. BTC is “mined” when someone verifies one megabyte or “block” of BTC transactions, adding it to the blockchain. Every 210,000 blocks, or roughly every four years, the miners' reward is halved. In 2012, the reward was 25 BTC per block. In 2020, it decreased to 6.25. In theory, miners should make less money per every block they verify. But there’s an important caveat; blocks are limited in size, and miners will earn whatever transaction fees are attached to that block. The more fees inside, the more revenue miners make per block. Because BTC is a decentralized asset, anyone that wants to participate in the verification process can do so. This ensures inflation is kept in check and a steady stream of BTC continues entering the market.
The Big Dogs Join the Party
On Feb. 11, 2021, The Wall Street Journal reported that BNY Mellon, America’s oldest bank, would hold, transfer and issue BTC like any other asset. This announcement came after the Office of the Comptroller of Currency stated that federally chartered banks could “use stablecoins to conduct payment activities and other bank-permissible functions.” Hedge funds are joining them, too; Skybridge Capital launched the SkyBridge Bitcoin Fund LP on Jan. 4, 2021, with an initial investment of $25 million. In a press release, SkyBridge founder Anthony Saramucci stated “with the institutional quality custody solutions available today, we believe the time is right to allocate capital and provide our clients access to the digital assets space.” Tesla announced in their latest annual report that it bought $1.5 billion in BTC, and would soon begin accepting them as payment. These institutions are legitimizing this space; they see it as an opportunity to make lots of money. Individual investors should too.
Janet Yellen the Party Pooper
US Secretary of the Treasury Janet Yellen isn’t as ecstatic as Wall St. about cryptocurrency. On February 9 and 10, the Treasury held its Financial Sector Innovation Policy Roundtable. In her opening remarks, Yellen stated cyrptocurrency’s exploitation has dangerous consequences. “I see the promise of these new technologies, but I also see the reality,” she stated. “Cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.” She’s right; in 2015, ISIS allegedly created a funding page on the dark web with a BTC address. On Aug. 13, 2020, The New York Times reported the US seized $2 million in cryptocurrency from ISIS, Al Qaeda, and Hamas. However, despite her tangible concern, the issue is hotly contested.
David Carlisle, an expert on the intersection of cryptocurrencies and financial crime, said too much interference could harm the emerging FinTech. In a RUSI commentary, he argued that
cryptocurrencies are equally as vulnerable to terrorist exploitation as other financial products. “It is not yet clear whether cryptocurrencies will become a major terrorist funding tool, at least in the near-term, and the longer-term picture remains uncertain.” He added that governments should equip their law enforcement with the tools to find illegal activity.
Tell me What to Do Already!
If you’re the type of person who doesn’t mind riding financial rollercoasters, BTC may be right for you. They have enjoyed enormous growth the past few months, which may continue, but expect interruptions. BTC has lost 90% of its value several times the past few years. On the other hand, if you plan on using Crypto as a currency, there are less expensive alternatives like Litecoin or Ethereum. They’re much less expensive, offer faster transfers, and have lower transaction fees.
If you liked this (newsletter/blog post) and want to hear more, check out my podcast The Whiskey Hue. We discuss big trends like where fitness technology is headed and if Kanye West really could’ve been the 46th US president (hint: NOPE). You can learn more about my professional experience on my website. Sava360 Ventures colleague Harry Ortof | LinkedIn contributed to this article.