Admittedly, I’m a cryptocurrency enthusiast. I even own a T-Shirt that reads, “Satoshi is Female”. Ridiculous I know, but I can’t help myself; I’m a sucker for crypto. Those of us who believe in the crypto-revolution, think that a currency like bitcoin can do almost everything gold can do, but better. It can be transported more easily, subdivided more easily, authenticated more easily, and transferred between distant parties more easily. The concept is incredibly compelling which is why I believe bitcoin (or one of its cryptocurrency offspring) could replace gold as an international store of value.
True, you can’t make a chandelier out of bitcoin, but the “intrinsic” value of gold represents about 10% of its actual price. If you think about it, gold is just a pretty yellow rock to which some ancient civilization ascribed an arbitrary value. Since then gold has been used as a form of currency for thousands of years, but there’s no real reason for its value. Nonetheless people are loath to give it up a time-tested financial stalwart in favor of something that is inherently abstruse and worse yet, intangible. No doubt, the concept of a decentralized virtual commodity takes some getting used to.
But that’s what’s happening. Millennial’s were the first to grasp the potential of cryptocurrencies, and so they were the early adopters. But even banks are now climbing aboard the cryptocurrency bandwagon. Susquahana, Goldman Sachs, JP Morgan, and Citi Bank are just a few making forays into the crypto market. Silicon Valley Bank (SIVB) was one of the first institutions to start lending to crypto and blockchain companies. As a result, they’ve established an early leadership position in the space, which is partly responsible for the stock’s doubling over the past year.
Since bitcoin reached an all-time high of nearly $20,000 last December, the price has come in considerably and settled in the $6,000 – $7,000 range. While the sell-off has certainly caused a number of observers to proclaim that the bitcoin bubble had popped, and that cryptocurrency was done. However, bitcoin’s price history is nothing but a series of frenetic booms and busts. In other words, those of us who believe in the transformative potential of this technology, aren’t all that concerned. In fact, I’ve been accumulating.
The reason is because with each passing bubble, the currency settles at a higher level. As more people around the world become enchanted with the technology, long term holders of crypto (known as “hodlers”) are born, and so the revolution grows. Of course the bubbles occur, people try to “get rich quick” which results in irrational exuberance. But that doesn’t mean cryptocurrency isn’t a worthwhile invention. After all, the Internet was a bubble too, but it’s now the fulcrum of a global economy. In other words, real things can be born of unstable beginnings.
As illustrated by the chart above, anyone who purchased a lot of bitcoin at the absolute acme of the last two bubbles, would be very wealthy today. Sure you would have looked foolish for a couple of intervening years, but for hodlers like me, this is a long game.
While I was lucky enough to sell out of my bitcoin position at the peak of the last bubble, I started accumulating again particularly in the $7,000 range. My thesis, is that there are a number of catalysts on the horizon that could drive the price of bitcoin higher.
First, Goldman Sachs is establishing a bitcoin trading platform. This tacit stamp of approval from Wall Street’s most revered institution is yet another milestone in bitcoin’s path to widespread acceptance. The net upshot of Goldman’s platform, is that all of Goldman’s clients will be able to trade crypto through a trusted third party. That alone should increase visibility, credibility, and liquidity for bitcoin.
Second, I believe our economy will likely enter into a recession within the next two years. I’ve been beating this war drum since last June, when I tried to make the case that all of the geopolitical uncertainty coupled with rising interest rates (and a flattening yield curve), are a recipe for disaster. But regardless of whether or not I’m right about the timing, the fact is our economy will cycle into a recession again at some point. And when that happens, investors are going to chase returns anywhere they can find them.
Bitcoin seems like a perfect haven. It’s a non-correlated asset, and its price isn’t impacted by interest rates, GDP, trade wars, unemployment numbers, or geopolitical stability. The beauty of bitcoin is that it’s a pure play on supply and demand. And since supply is limited (there will only ever be 21 million bitcoin in existence, 80% of which are already in the float), the only variable is demand.
When the FANG stocks run out of steam, and financial gains are nowhere else to be found, where will investors turn? My bet is crypto.
Third, it appears as if the Securities and Exchange Commission (S.E.C.) may be willing to approve a bitcoin ETF. For years, entrepreneurs like the Winklevoss twins have tried to put together just such a financial instrument, but the S.E.C. has refused to give sanction. Word around the campfire is, that’s all about to change. The S.E.C. could approve a bitcoin ETF this year, which would be yet another watershed event for cryptocurrency.
Finally, and perhaps most importantly, U.S. government may begin to regulate the cryptocurrency markets more vigorously. Typically, more regulation tends to hurt markets, but this is one of those rare instances in which I believe intelligent regulation is desperately needed to sustain long-term health and stability.
The S.E.C. has brought relatively few enforcement actions to date, but Chairman John Clayton has repeatedly stated that he believes many of the cryptoassets currently in circulation are in fact securities. It seems like the S.E.C. is trying to get its arms fully around the cryptocurrency market before diving in with aggressive regulatory action. Chairman Clayton has also said he is not averse to cryptoassets nor is he averse to wealth creation. He just wants to make sure investors are protected which, after all, is the primary responsibility of his organization.
I think over the next 24 months the S.E.C. is going to become far more active in regulating this market, which might actually hurt in the short term. Fear of over-regulation may cause many investors to sell out or wait on the sidelines. But sometimes you’ve got to take a step back to take two steps forward. Over time, a well-regulated market is the best incubator for investor confidence and financial growth. By stepping up enforcement actions, the S.E.C. can clean up a lot of the riff raff that has infiltrated the space. Once the “sh*tcoins” are largely purged from the market, legitimate cryptocurrenceis like bitcoin will have a much smaller cohort of competitors, and greater investor confidence to boot.
If the S.E.C. can get this right, bitcoin is a clear beneficiary.
While there are still innumerable risks associated with investing in the cryptoasset space, I think the hodlers win out over time. We’re still in the early phase of of the adoption curve, and bitcoin is just starting to lose its status as a fringe asset coveted by none but criminals and foolhardy investors. I’m long bitcoin, and I am of the belief that the catalysts above could drive the cryptocurrency to new heights in the coming years.
Greg Harrison owns bitcoin and bitcoin cash. Greg Harrison’s family owns bitcoin and bitcoin cash.
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