In 2009, I came across the white paper written by Satoshi Nakamoto describing a digital currency based on a peer-to-peer network, completely independent of central banks, autonomous, decentralized, digital, and would give access to finance and banking to the masses.
This “magical internet money,” as it was described at the time, would come to be known as Bitcoin.
The reason that this paper was so revolutionary was that it was prescient of what the internet did for information in the early 1990s.
First, Yahoo organized information, then companies such as Google revolutionized “search,” followed by e-commerce (Amazon), social media, and the cloud. Multiple applications were developed on the internet. Plus, the smartphone allowed instant, easy access to information to anyone, anywhere, at any moment.
So this is what I believe that Bitcoin and the crypto space will do in the finance space. To democratize financial access to economic freedom to parts of the world previously unable to participate.
Bitcoin, conceived in October 2008, is one of the first applications of the blockchain. It was designed to address the shortcomings of our current financial system. It’s the digital currency that has sparked so much controversy among the financial, technological and physician community 12 years since its inception.
Current issues around Bitcoin involve the following questions:
Is it a bubble?
Is it a scam?
Is it a fraud?
Is it used for illegal activities?
Is it just a fad going to zero?
Why am I a physician long in the crypto space?
Bitcoin is a very exciting technology with huge asymmetric risk-reward potential. I have bought and held crypto since 2012, and I believe that crypto is the next “internet-like” opportunity. Still, the bigger question is: “Should physicians be considering cryptocurrencies as investments, and if so, how much of their portfolio should be composed of this new asset class?”
This article will give some background into the economic theory that our current financial system is based upon, its shortcomings, the role of Bitcoin, and implications for a new financial system.
The current financial crisis
Financial crises are not new to society. Recessions, depressions have plagued societies since the dawn of civilization. Countries, including Europe, South America and Asia, have experienced unstable currencies over the last century. Many of its citizens have experienced wealth confiscation through taxes and hyperinflation caused by central bank manipulation.
As a result of this, in June 2021, El Salvador became one of the first Latin American countries to adopt Bitcoin as legal tender to combat the inherently unstable currencies issued by their central banks. And many countries, such as Argentina, Panama and Paraguay, are following suit.
The challenge with central bank-controlled currencies is that these financial crises are happening more frequently, with more severity, more unpredictability, resulting in disproportionate wealth gaps between the rich and poor, as the recent COVID-19 pandemic demonstrated.
At the heart of it is a sound financial system. A system that allows for the efficient and effective exchange of goods, products, and services. In order for a financial system to function, the currency must be inherently stable. Therefore, currency (money), in order to function properly, has to have several characteristics:
primarily functions as a medium of exchange
a unit of account
a store of value
a standard of deferred payment
The Federal Reserve Act of 1913 was passed to establish the Federal Reserve as the central authority to oversee monetary policy to establish economic stability.
This act gave rise to central banking authority, allowing manipulation of interest rates and the money supply. Through the Mandrake mechanism, central banks are allowed to print and lend money that is not backed by anything except the credit of the government (fiat), all at the taxpayer’s expense.
This setup inherently favors:
business owners and investors over wage workers
knowledge of the proper use of capital and debt
knowledge of the tax code
wealthy with greater and greater access and ease to access of capital
inflation over deflation
When Nixon removed the dollar off of the gold standard in 1971, this changed the U.S. dollar from an asset (backed by gold) to a credit instrument (an IOU backed by debt). As a result, wage earners and savers lose out in the form of higher taxes, trading their time for depreciating currency, and inflation.
As a result of this current financial system, we see more and more financial crises and a widening wealth gap.
Additionally, our school system prepares us to take “jobs” in the working world, when all of the jobs are being exported overseas, being automated, and being replaced by artificial intelligence. A lack of financial literacy along with obsolete paradigms is a cause for the widening wealth gap, which we see today.
The role of Bitcoin and cryptocurrency
The aim of Bitcoin was to address all of these shortcomings of our current financial system. It was to create a society based on sound money and finances.
In order for Bitcoin to be fully functional and usable in society, we need to address the following questions:
Is it a security?
Is it an asset?
It is a unit of account?
Is it a store of value?
Is it a medium of exchange?
How can Bitcoin be used if it is extremely volatile?
How can we curb on illicit activities?
Some of these and other questions are being addressed by individuals such as Gary Gensler of the SEC and policymakers worldwide. Still, we have to clearly define the answers to these questions in order for this technology to have utility in our society.
As an investor since 2012, I’ve seen Bitcoin evolve from a pure speculative play to one where Bitcoin is being seen as a store of value.
Some of the exciting trends that are lending credibility to the space:
1. Venture capital fundraising has increased significantly. We’ve seen tremendous institutional adoption of Bitcoin since 2017, which is partly responsible for its meteoric rise to 60k in early 2021.
2. Many companies such as Tesla, Microstrategy have added Bitcoin to their balance sheets, and many companies are following suit.
3. Apart from huge interest from venture capital and hedge funds, a recent development is that pensions and colleges are considering adding Bitcoin to their balance sheets for growth as well as hedging against future economic uncertainty.
4. Many high net-worth and accredited investors are starting to add this new “asset class” to their personal portfolios.
5. Bitcoin has given rise to decentralized finance, where anyone in the world with a smartphone and internet connection can participate in the global world without needing a standard bank. You can lend your own cryptocurrency, stake your crypto for yields >5%, farm, and mine cryptocurrencies at far greater returns compared to the current nominal yields of <1% seen in traditional banking.
6. The next evolution and development has been in the field of non-fungible tokens (NFTs). Developers and programmers are using NFT’s to develop the next phase of the internet using the Ethereum blockchain ecosystem. NFTs are currently being used in music, gaming, sports, social media and entertainment. But the future holds exciting promise when mixed with wearables, artificial intelligence, and VR-AR-MR come into the picture.
7. The recent IPO of Coinbase in April of 2021, and pending Bitcoin ETF approval will give more credibility to the space.
Bitcoin will have to compete with current political and financial incumbents bent on keeping the status quo, as well as compete with central bank-issued digital currencies (CBDC). Bitcoin and other cryptocurrencies will also have to contend with extreme volatility in the future in order for it to have any utility as a medium of exchange.
Even though we are 12 years since the inception of Bitcoin, I believe that we are still very early in the game. As with any nascent technology, we will continue to experience extreme volatility, and just as with the internet, there will be winners, and there will be losers. However, the underlying blockchain technology is at the heart of its tremendous potential, and regardless of who wins, the ecosystem is here to stay, will continue to grow and evolve, and will change industries at a magnitude and scale faster and greater than what the internet did.
Note: These are my personal views and opinions and should not be construed as investment advice. Original article published on KevinMD on 8-23-2021