Bitcoin’s quest to become the gold standard

Good morning! A big hello to readers who signed up this week. Welcome to The Intersection, The Signal's weekend edition. This weekend we talk about how bitcoin is poised to become the next big thing in 2022. Also in today’s edition: we have handpicked the best of weekend reads for you.

An interesting tussle has been in progress on crypto exchanges. The world’s first digital currency, bitcoin, is under pressure as global economic uncertainties and threats of runaway inflation buffet speculative assets. After plummeting from nearly $67,000 in November, bitcoin hung on above a crucial psychological level of $40,000 for far longer than it had any other time. The digital currency, or asset, depending on which side of the debate you are on, got unprecedented support from buyers despite large-scale liquidations before breaking through the level on Friday.

Lockdowns fast-tracked the adoption of everything digital, including communication, entertainment and commerce. It also changed how surplus capital was deployed. Millions of retail investors and large institutions tested the cryptocurrency market, adding depth and breadth to it.

The tolerance level for losses also rose. A Delphi Digital report said the percentage of bitcoins in profit stood at 68.7% on January 21, 2022, a level revisited only after July 2021. The report added that 30% of bitcoins were exchanged at prices way above the current levels, indicating that those holding loss-making coins were stoic in the slide.

“The crypto investor of 2017 was driven by FOMO,” Sharan Nair, chief business officer of crypto exchange CoinSwitch Kuber, told The Intersection. “Today the investors are digital savvy, spending more time doing their own research before investing,” Nair said. CoinSwitch Kuber, which had a million investors in January 2021, has 15 million registered users today, he said.

Global adoption of cryptocurrency surged 2300% in just eight quarters starting the third quarter of 2019, according to an October 2021 Chainalysis report.

Crypto tribalism is giving way to more organisation, Michael Novogratz, co-founder and CEO of Galaxy Holdings told Goldman Sachs last year. Novogratz said institutional involvement had reached a critical mass as a result of investments in custody and security infrastructure. The digital assets evangelist said a core group dedicated to rebuilding the infrastructure of the financial markets in a more transparent and egalitarian way, and “doesn’t rely on governments who make bad decisions with our finances”, are standing solidly behind crypto. “They will never sell,” he said. That is indeed a solid backstop.

Coin rebellion

It is not an accident that the symbol and representative image of bitcoin incorporate elements of the dollar sign and a gold coin. The digital token’s ambition, as its mysterious inventor Satoshi Nakamoto envisioned, is to overthrow fiat currency and gold as the store of value. In a nutshell, bitcoin, born in the wake of the Global Financial Crisis of 2007-08, is a revolt against the consensual tyranny of central banks.

“The root problem with conventional currency is all the trust that’s required to make it work,” Nakamoto wrote in an essay about his creation. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” That is exactly what happened when Covid-19 gripped the world and central banks began printing money.

The question is whose rebellion is it? Bitcoin is clearly for those who are looking for ways to protect and grow their wealth, unhindered and untracked.

“Interest rates are negative in the West. If I deposit $100 in a bank in Europe, I get back only $99,” says a keen India-based bitcoin investor. “I like the fact that I can transfer money to anyone anywhere in the world without anyone else knowing about it,” he adds, on condition of anonymity.

Fear of not having a finger on financial flows and losing control over monetary systems is the reason many governments and central banks are wary of cryptocurrencies. China has banned it outright, and Russia is on the verge of doing so. India is yet to take a decision. Those that embraced it early are countries such as Switzerland, a country that pioneered discreet banking. Dubai, which is an international financial centre, has gone head over heels. At the other end of the spectrum is El Salvador, a poor country whose young president appears to be looking at crypto as a get-rich-quick scheme. Europe has taken a different view, willy nilly accepting it as long as environmental damage from coin-mining is limited.

The Big Tech’s adoption is likely to drive crypto acceptance, a blockchain research scientist, who doesn’t want to be named because his institution does not allow him to comment on cryptocurrency, told The Intersection.

Google, which revealed plans for a massive finance play that includes crypto, has the reach, resources and technology to take it to consumers at the lowest level. Away from the public gaze, Google has been beefing up its blockchain expertise for years. Microsoft began accepting bitcoins in 2014. Others such as PayPal, Etsy and Starbucks too accept bitcoins.

Nakamoto’s ambition of creating a digital currency that is not based on trust but immutability ironically depends on the faith of private institutions and customers in technology apart from regulatory forbearance. However, that may not be the case with bitcoin as a store of value.

Gold standard

Bitcoin cannot be debased because there are only 21 million of them, and hence, is an inflation hedge. But economists such as Nouriel Roubini say artificial scarcity is not valuable in itself. Roubini dismisses cryptocurrencies, saying they do not have any income or utility for them to be stores of value.

Yet, in a research note to clients, Goldman Sachs predicted that bitcoin would eat into gold’s market share in 2022 and perhaps capture more than half in five years.

A year ago, large institutions and individuals known as whales controlled 31% of the bitcoin supply and retail investors held 23%. The whales might have also been accumulating coins, which could explain bitcoin’s resistance at crucial levels.

Interestingly, retail users in emerging markets appear to be using the digital coins more as a shield against the weakening of their own local currency and for speculative gains. Institutional investors in developed markets seem to be approaching them as stores of value or for asset diversification. Hedge funds are tanking up. The world’s largest asset manager BlackRock is about to float a blockchain fund. Defence analytics company Palantir is investing both in gold bars and bitcoins. Even Apple CEO Tim Cook sees crypto as a way of diversifying his personal investment portfolio.

Chances are improving that 2022 could very well be remembered as the year when gold lost its lustre to a software.

ICYMI

Content Family: For the Singhs, everything is content. The social-media influencer family produces full-length and short videos for Instagram, YouTube featuring challenges, vlogs and even dance videos. Brand promotions are flowing in for Ramneek Singh and his family. But behind the scenes, the content-creation pressure can be particularly challenging, especially for children. This feature looks at the new family-influencer trend sprouting in India and its long-term psychological effects.

XXX Blaze: There were allegations of revenge porn, child pornography and even rape videos being uploaded on Pornhub. The company fought a slew of court battles while facing continuous shutdown requests from religious groups. Along the way, it made a lot of enemies, a fact visible from Pornhub co-owner Feras Antoon’s unfinished mansion being burned down. This story looks at all the controversies leading up to the final destruction of Antoon’s dream home.

Informant Gang: For Jordan Thomas it is integrity that matters, not money. Or so he claims. In his years of sending petitions on behalf of whistleblower clients to the US SEC, Thomas has seen everything from stock-price rigging and insider trading to tax frauds. In fact, he even faced death threats after filing an SEC petition against alleged malpractices of Cassava Sciences. This article details Thomas’ legal journey and how this mission motivated him to set up a whistleblower-focussed independent law firm.

Swipe Left: Tinder co-founder Sean Rad felt that everyone was making money off the dating app’s success except him. First, he tried talking to IAC’s Barry Diller whose firm then owned Tinder. That didn’t work so he decided to seek an independent valuation to get a better payout. The number didn’t look appealing enough so he finally decided to sue. This deep-dive by The New York Magazine looks at the relentless pursuit of Rad to get a fair share for the idea he created and the eventual out-of-court settlement.

The QAnon Uprising: ‘Q Shaman’ simply looked like an innocuous character who believed in conspiracies during a November 2020 Trump rally. When he resurfaced in his horned attire during the Capitol Attack on January 6, the world realised that the rot was far deeper. BBC’s Gabriel Gatehouse attempts to break down the origins of the American far-right conspiracy theory group QAnon in this special podcast series.

Opioid Saga: When the world was glued to the trial of Theranos’ Elizabeth Holmes, a mega pharma scandal was brewing. Doctors in the US were prescribing a brand of fentanyl called Subsys in exchange for kickbacks from its maker Insys Therapeutics, despite its extreme side effects. This piece points out how a crime far more devastating than Theranos was ignored by the media despite Subsys eventually being linked to hundreds of deaths.

— By M Saraswathy

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