Crypto in the COVID Economy
By Parker on The Capital
Recently, billionaire and fund manager, Paul Tudor Jones declared on live TV that he has nearly 2% of his assets in Bitcoin in response to the Fed’s quantitative easing measures and government stimulus. It is near consensus among financial experts and managers like Jones that a major decline is coming commensurate with unemployment and insolvency among big business. Big names such as AT&T, Ford, Comcast, Verizon, and others are holding massive debts putting America in a situation similar to the panic of the early 1930s. As a reaction to COVID-19, economic activity will slow across the board and take years to recover fully. Companies who saw great success over the last 10 years of booming economic growth in the US may soon be operating in the opposite environment. A “V-shaped” recovery, as the equities market may be implying right now, is a delusionally optimistic notion.
During calls for economic doomsdays, the champion asset class for financial experts is invariably gold and now its digital cousin, Bitcoin. My view on Bitcoin has always been relatively negative since it is, by all technological standards, an inferior cryptocurrency. More recently, I have begun to accept Bitcoin as a valuable addition to the world despite all of its inadequacies as a currency. There is no getting around it now; a deflationary currency at a market cap of $200B (read: adoption) is a good store-of-value. Just how much higher does Bitcoin need to go before institutions are diving head-first into the digital currency world? At some point, Bitcoin becomes too big to ignore. If Bitcoin triples this year it will be nearly the size of Facebook and bigger, in terms of capital, than 99% of US companies.
Amidst all this economic activity in the Bitcoin world “The Halvening” occurred as planned. Historically, the deflationary action of halving events result in a delayed effect on Bitcoin’s price. The previous two halving events suggest that Bitcoin pricing is slowly becoming more efficient. The previous halving was 300% less than the former. Even so, if the recent halving follows suit, Bitcoin’s impending bull run could be in the realm of 1000% over the next three years. It is unclear if “capital flight” will out-weigh diminished speculation while the economy slows for Bitcoin or if the effects are generally neutral in terms of Bitcoin’s price. Independent from the larger economy, Bitcoin is likely to see price increases based on the halved supply over the next few years.
When Bitcoin appreciates as the backbone of the cryptocurrency markets, historically, most of the market seems to come with it. Ethereum is quietly continuing its progress towards scalability with the Ethereum 2.0 protocol, but the real story is in Decentralized Finance (DeFi). Since 2017, the amount of USD stored on the Ethereum blockchain has grown from $0 to $1B. That does not include the $9B worth of Tether stablecoins that run on Ethereum as well. As the dollar amount grows, new financial instruments, loans, and other methods of storing value on Ethereum are growing too. As of this writing, there is currently $38M in Bitcoin stored on the Ethereum blockchain in the form of wBTC (wrapped Bitcoin). You read that right. You can buy, hold, and send Bitcoin on the Ethereum blockchain.
The influx of dollars is good for Ethereum’s ecosystem, but this is only the beginning. When 2.0 scalability arrives, the functionality of the blockchain resembles something like a smartphone instead of a Pentium 4 computer from 2005. The flood gates open when the transaction speed increases to levels that the normal computer user is familiar with. The implications could change the financial system as we know it.
For instance, migrant workers across the world pay around 10% for remittances payments home to their families. 10% is more than a month’s worth of wages over the course of a year. Blockchain changes that game, since they can now send crypto with lower than 1% fees, except the protocols are still clunky and the underlying currencies are volatile. When DeFi becomes more accessible and available on your phone, remittance intermediaries will become irrelevant.
Coin of Coins
Imagine a new type of stablecoin enabled by the future of blockchain scalability. This stablecoin, similar to the model of Facebook’s Libra coin, will be a basket of the world’s most powerful currencies. This will eliminate fiat currency inefficiencies and the unnecessary fiat currency exchange markets. Ultimately such a coin could be somewhat negative for the US dollar, but a net positive for a US economy and particularly the world economy where emerging markets depend on fiat stability.
Bitcoin could see a major increase over the next few years as Ethereum continues to make strides as the most interesting decentralized projects. As Ethereum moves from an inflationary model to a lower inflation or even deflationary model and increases scalability and usability, positive price effects are sure to follow. Phase 0 of Ethereum is expected this year just as historically Bitcoin price increases should begin. As Bitcoin and Ether are relatively correlated in terms of price movement, the facts I have just outlined certainly make Ether seem more lucrative. Some of the biggest players in the industry, the Winklevoss Twins of Gemini Exchange, have apparently already come to this conclusion themselves: