Understanding Crypto: A Financial Perspective
May 9, 2024
According to Wikipedia, Bitcoin was introduced in 2008 as a retaliation against central authorities. Since then, many other versions have emerged. Initially conceived as a digital currency, it has evolved into a store of value and is now considered digital assets. While I embrace technology, I find numerous holes in their arguments.
We all acknowledge that we can't simply walk into a 7-Eleven and use Bitcoin for payment. Proponents claim that the US Dollar is unstable and loses value. It's true that the Dollar's value fluctuates due to its free float, unlike the Chinese Yuan. When you hold USD, you often invest it in assets like equities, bonds, or savings vehicles, which appreciate over time. However, purchasing anything with Bitcoin is impractical, not to mention the high transaction costs. To illustrate, I personally went onto a reputable Crypto App and purchased $100 worth of BTC, incurring over a 3.8% cost!
Furthermore, there's a maximum number of Bitcoins that can be issued. Let's consider this for a moment. As a nation reliant on debt issuance, our inability to balance the budget results in increasing national debt year by year. While I'd love to live in a society where we live within our means, that's not the reality. Hence, Bitcoin cannot replace the USD as the major currency due to its finite issuance. Another concern is if Bitcoin were to overtake or replace the USD, would the majority Bitcoin holders become the de facto central bank? Do central banks worldwide permit us to print money (by mining Bitcoin), thereby undermining their existence? Additionally, if it's a currency, why is it priced in USD?
Does Bitcoin truly store value? It often moves based on FOMO (fear of missing out). It lacks intrinsic value beyond what someone is willing to pay for it. Yes, some stocks behave similarly, but Bitcoin lacks earnings, doesn't pay dividends, and can't be molded into something like gold or silver. Hence, it's not a commodity either.
While the SEC has approved Bitcoin ETFs, not the coin itself, I believe they did so for two reasons. Firstly, the cryptocurrency market's size has grown significantly, potentially impacting broader financial markets. Secondly, bad actors like FTX take advantage of crypto investors. By allowing companies like Blackrock and Fidelity to act as custodians for investors, the SEC aims to mitigate fraud rather than promote crypto investment as an asset class.
Regarding the launch of BTC ETFs, when people invest in ETFs, ETF sponsors must buy BTC. But who are they buying from? With 19.4 million of 21 million BTCs already mined, unless existing owners sell, new BTC ETFs can't acquire BTC. The ownership of BTC is largely anonymous, identified by cryptographic addresses, not personal information. According to Google, notable individuals and institutions like Satoshi Nakamoto, Microstrategy, Tesla, Grayscale Bitcoin Trust, Winklevoss Twins, Barry Silbert, Tim Draper, Michael Saylor, and Binance own BTC. As of February 27, 2024, 793,034 BTCs are owned across BTC ETFs, implying significant selling by someone or some institutions to these ETFs. Although I couldn't identify major sellers, my guess is that the launch of new cash ETFs created an opportunity for existing large BTC owners to unload without negatively impacting BTC's price, enhancing liquidity.
I am confident that the SEC's primary move to approve Bitcoin ETFs was to safeguard BTC enthusiasts from bad actors, inadvertently providing liquidity to major holders.
Considering these facts, Bitcoin appears to be no more valuable to me than a baseball card.
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