By Jan van Eck, VanEck CEO
I personally did a deep dive on bitcoin in early 2017, determined it was “real” and then stopped paying close attention to the industry until two weeks ago—a little bit of a Rip van Winkle situation. I can’t believe how much has changed in the past three years! I tried to communicate this to a friend a couple weeks ago and recommended a bitcoin podcast to him that I thought was easy to understand. But to him it was Ancient Greek. So here’s a jargon-free update about recent developments to the best of my abilities.
Why Has Bitcoin Been Rallying to All-Time Highs?
The first answer is that more and more investors are buying bitcoin. Even if you haven’t opened an account at a crypto exchange, you can increasingly buy bitcoin on apps that you already have on your phone. The Cash app from Square has 30 million users1, PayPal has 325 million active users2, and Blockfi plans on launching a credit card that will give rewards in bitcoin for every purchase. This has broadened access beyond the large crypto exchanges such as Coinbase with 35 million users globally.3
Second, institutional investors have been buying bitcoin. A U.S. public company (MicroStrategy) put half its cash in bitcoin, and a major U.S. insurance company (MassMutual) bought $100 million of bitcoin.4 Well-known investors are speaking in its favor, which facilitates bitcoin’s legitimacy.
And if one wants to be bullish, bitcoin’s total market value is about $520 billion (almost $28,000 per coin as of December 30, 2020)5, compared to Tesla at $650 billion6 and gold outstanding at $12 trillion.7
Many of the millions of individual and institutional investors that own bitcoin probably own it mainly as a store of value, or a form of digital gold. They want to own it as a currency that has limited supply, not “paper” money, whose supply governments are increasing without limit.
But What Has Changed Since 2017?
The first thing worth mentioning is that you can now earn interest on bitcoin and other cryptocurrencies. People are willing to borrow your bitcoin and pay you for that at interest rates of 6% or more, annually. Those rates will attract many people to the crypto world, as they are higher than most government bonds, bank deposits and gold. Accessing this income stream is technically difficult and not without risks, but it is clear how this can and probably will become available to more investors.
Furthermore, from its early days, crypto enthusiasts believed that Wall Street could be re-built better and cheaper using a completely secure technology that wasn’t controlled by a single party.
The conceptual building block that would enable the building of a new Wall Street is the ability to build logic into software—the “smart contract.” Something like, “pay Jane X if Jane delivers Y to Jack.” The delivery of Y would have to be verified independently. “If” is the key word in that sentence because it means there are several moving parts. “If” logic has been around since probably the first lines of software—but making it unhackable and reliable is another thing entirely.
Three years ago, there wasn’t much built using this concept. In 2017, the concept of a smart contract was widely celebrated, but no one knew whether it would be actually applied. The only thing happening was people trading bitcoin and other coins on unregulated exchanges, just like one could trade sneakers on eBay, but that activity didn’t require smart contracts.
Now there has been progress in the build-out of an independent, reliable data infrastructure to support smart contracts. Remember, using the “if” logic in finance usually refers to a price. Well, that price better be reliable! And data problems are rife on Wall Street. This data infrastructure isn’t fully proven, but a lot of important progress has been made. Firms valued in the billions of dollars are directly addressing this problem.
In sum, I believe the emergence of a bitcoin interest rate and data infrastructure suggest that the chances are growing that a new digital asset Wall Street is being built—and that we are still in the early days of that.
1 Source: Business of Apps.
2 Source: SpendMeNot.
3 Source: Coinbase.
4 Source: Wall Street Journal.
5 Source: CryptoCompare.
6 Source: Bloomberg.
7 Source: World Gold Council.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results