The Bitcoin maximalists are not going to like this.
Before going any further, we have to do the proverbial disclaimer. This article is not referring to the future price prospects of Bitcoin nor its viability as an investment. Instead, we are focusing upon the network along with adoption for payments. None of this should be taken as financial advice.
Former Bitmex CEO Arthur Hayes made some waves by affirming what we have discussed for a long time.
Bitcoin is in the process of being hijacked by Wall Street. This is something I received blowback on yet it is happening before our eyes.
In this article we will discuss what is taking place along with Hayes' comments. We will move onto the next stage of crypto evolution.
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Wall Street Hijacking
The Bitcoin world is watching Gary Gensler and the Securities and Exchange Commission (SEC). Many are anxiously awaiting the approval of a Bitcoin ETF based upon the spot price. This is viewed as a windfall for cryptocurrency. Of course, many are expecting the price to skyrocket.
Whatever the market reaction is, there is something these people are overlooking. How are the tenets of Satoshi Nakamoto being upheld if Wall Street is in control of large amounts of BTC? In fact, how can there be any prospect of a new financial or monetary system if the same institutions are in control?
The answer is obvious.
It is rapidly becoming a reality that maxis, led by Michael Saylor, are cheering on Bitcoin's demise. Saylor's firm is holding a ton of the coin, providing the path for other firms. With the recent change in accounting standards that corporations follow, the likelihood that more companies put it on their balance sheets increases.
Naturally, we still have central banks and sovereign wealth funds to content with. These both have treasuries that are in the trillions.
That is a lot of money to be buying Bitcoin. While it might be good for the price, it makes it a crappy medium of exchange. When the money stops moving, it is game over in that regard.
What is going to happen if hundreds of billions flow into the ETFs on application? Who is going to hold that Bitcoin? Certainly not the buyers since they are getting a derivative. It will be in the hands of Wall Street institutions.
This is a problem most are not talking about.
Hayes: Threat To Bitcoin Network
Hayes looks at the situation a bit different.
He focused upon the network itself and ponders what happens as this Bitcoin is locked up. How does this change things?
The price watchers will get excited since it will likely go up. The effective circulating supply will diminish as people hold the coin on their balance sheets. Unless people start unloading the ETFs, the custodian simply will keep the BTC off the market.
It is not the perspective of Hayes. Here is what he said:
Bitcoin is the first monetary asset in human history that exists only if it moves. But if there was never another Bitcoin transaction between two entities, miners would be unable to afford the energy it costs to secure the network.
This brings up a valid point. How is the network sustainable after the inflation goes away. Of course, people today are not really concerned about 2140 since none of us will be here. However, with each halving, the dependence upon inflation can be viewed as being reduced.
Even without looking at the network, how can something serve as a medium of exchange if everyone is hodling? To full that role, transactions are required. Getting to the point where central banks, as an example, are getting involved, they are long term holders. The velocity of money with them becomes basically zero.
We already see this with the likes of Saylor.
This gets compounded by the millions of BTC wallets owned by people who believe the price will be much higher in the future. Why spend now if the value of BTC will be 4x or more down the road?
Even without the network situation, this is a major challenge.
Stablecoins
The solution to this problem is already being provided by the market.
Stablecoins will end up being the medium of exchange. Having it tied to the USD as the unit of account is where medium term price stability comes from.
That said, notall stablecoins are alike. My view is the real game changer is algorithmic stablecoins like the Hive Backed Dollar (HBD). Unlike asset backed coins such as Tether or USDC, these operate completely outside the established banking system. That means any expansion increases the money supply yet does so outside the realm of entities such as the Federal Reserve.
Since the base concept of a stablecoin is not price appreciation, we can see how this offers more functionality for trade. Volatility is the enemy, something that is (and will be) a constant with Bitcoin. In fact, this applies to all value capture coins although the cap in number of BTC means it will always have more volatility.
Going back to Hayes, he mentions this:
Hayes adds that this could happen if users come to value bitcoin as a financial asset more than a store of value, favoring the purchase of derivatives instead of the cryptocurrency. However, if bitcoin suffers this fate, Hayes anticipates the birth of a similar asset to allow people to transact in a non-state-owned financial system.
“Hopefully, the second time around, we will learn not to hand our private keys to the baldies,” he concluded.
To me, there is no if with Bitcoin. Again, the network doesn't need to suffer for HODLers to completely destroy the utility. They can simply opt to keep their BTC in storage, not spending it. As this happens, volatility will remain (if not increase), killing it as a medium of exchange.
In other words, it does not take Wall Street entering to provide this outcome. The addition of those sharks along with other aspects of the existing system only enhances this fate.
Therefore, we are looking at the second time around already. Here is where HBD and other algorithmic stablecoins can step up. It not only provides the price stability required to be a medium of exchange, the market is driving it. We are not capped to what stablecoins can be created. They piggy back off the value of the asset they are tied to, both of which are not part of the present financial system.
Here is where the asset backed stablecoins fall short. Who controls them? Leaving aside the fact they have centralized entities such as Circle, where are the assets backing the coins?
Fortunately, it is on the Circle website:
Cash is held at regulated financial institutions. The portfolio of the Circle Reserve fund, which can contain short-dated US Treasuries, overnight US Treasury repurchase agreements, and cash, is custodied at The Bank of New York Mellon and is managed by BlackRock.
The solution should be clear.
If we are going to create a new financial system, complete with a decentralized medium of exchange, it is not going to be with something that can be completely controlled by Wall Street. This is exactly what is taking place.
Hayes is spot on with his analysis. However, the view it might happen in the future is mistaken in my view. As we can see, it is already taking place simply through the way these financial institutions are involving themselves.
The first phase of cryptocurrency as a replacement system is over. That path failed. We are already into round 2.