The Challenge to Bitcoin Dominance
Posted October 07, 2021
Well, heck, that was some 24 hours in crypto-land!
Bitcoin didn’t die again. It is reaching for new highs, maybe with the realization that 1) it has never been hacked, unlike everything else, 2) it has never gone dark unlike Facebook, 3) it keeps being worth more, unlike the dollar, 4) states can’t seem finally to abolish it, and 5) it thrives in a world that seems otherwise to be falling apart.
Those are all good reasons why Bitcoin took off so dramatically after months of being boring.
But the best reason of all is a report released by the Bank of America. It is actually startling for anyone in the industry, not because of what it said, but that BoA is the one saying it. Let’s examine some choice quotes. What this illustrates is a kind of fissure within the establishment of high-end financial and regulatory circles. In short, the innovators who have to make profits like this stuff; the old guard trying to save its monopoly is terrified of it.
Bank of America says here essentially what we’ve been saying for years. This is NOT what Jerome Powell of The Fed wanted them to say:
With a $2tn+ market value and 200mn+ users, the digital asset universe is too large to ignore. We believe crypto-based digital assets could form an entirely new asset class. Bitcoin is important with a market value of ~$900bn, but the digital asset ecosystem is so much more: tokens that act like operating systems, decentralized applications (DApps) without middlemen, stablecoins pegged to fiat currencies, central bank digital currencies (CBDCs) to replace national currencies, and non-fungible tokens (NFTs) enabling connections between creators and fans. Venture Capital digital asset/blockchain investments were $17bn+ in 1H/2021, dwarfing last year's $5.5bn. This creates a new generation of companies for digital assets trading, offerings and new applications across industries, including finance, supply chain, gaming and social media.
Bitcoin was designed as money, but is increasingly viewed as "digital gold." Ethereum created a generalized platform powered by smart contracts, enabling the development of hundreds of applications that could transform finance, insurance, legal, real estate and many other industries. Digital assets that enable applications to be built, like the Apple iPhone did with its App Store, are gaining the most value. Our view is that there could be more opportunity than skeptics expect. In the near future, you may use blockchain technology to unlock your phone; buy a stock, house or fraction of a Ferrari; receive a dividend; borrow, loan or save money; or even pay for gas or pizza.
Decentralized Finance (DeFi) is an ecosystem that allows users to utilize financial products and services, such as lending, borrowing, insurance and trading, without relying on a traditional financial institution. DApps may bring financial services to many of the 1.7bn unbanked globally through a simple smartphone app. NFTs are changing the way creators connect with fans and receive compensation (and Gen Y & Z along with a few boomers are snapping them up). NFT sales were $3bn+ in August, up from $250mn in all of 2020, led by demand from celebrities, corporations and individuals (Beeple's digital artwork NFT sale at Christie's for $69mn was certainly a catalyst, for example).
Despite potential regulatory headwinds (maybe tailwinds ultimately), we are bullish on the long-term prospects for the digital asset ecosystem as it enters the mainstream. We anticipate significant growth as digital asset use cases move beyond bitcoin's store of value thesis to an industry characterized by product innovation, regulatory clarity, increased institutional participation and mainstream adoption.
Let’s look at a key metric to examine whether, and to what extent the crypto-market can break out of its long-time belief that Bitcoin alone is where the action is. What are the long term trends of the market cap of crypto relative to other tokens and assets? You can see where this is headed. The chart takes us from 2013 to the present, with the biggest, but declining share held by Bitcoin.
Previously we’ve discussed Cardano and the stable coins, plus Ether and its many uses. Another token to watch here is the coin that was the first major fork of Bitcoin, namely Bitcoin Cash. It is exactly what the name says: it is designed for device-to-device spending. It has large blocks so that the transactions are fast and cheap, just the way Bitcoin operated in the early days before its scalability was throttled, and thus required second-layer solutions to make it operational for common use.
Bitcoin Cash made some big moves in the last 24 hours, perhaps in response to the BoA report, but also due to the perception that it is undervalued relative to its prominence in the sector more generally. You can buy it and use it through all exchanges, and it is effortlessly fungible with original Bitcoin.
Now, if all of this you find confusing, you are hardly alone. I was at a garage sale the other day when a fellow asked me — I think he recognized me — whether I’m bullish on dogecoin. I really don’t have the answer. I certainly was 4 years ago, but now it seems more like a toy than anything else, or perhaps a fashion accessory.
But never mind: all these tokens are fungible. If you like playing with them, there are easy-to-use tools that allow you to adjust your portfolio while standing in line at the grocery store. I recommend Shapeshift. It allows you to drag and drop any of them into any of the others. It’s a fun way to “trade” while not spending any fees.
Bitcoin dominance will continue for years, but lots of very smart money is diversifying into other tokens and services.
However, let me offer this heads up. In the coming days or weeks, you will see a correction after the market hits new highs. Then prepare for the headlines about the death of Bitcoin. It’s like night follows day. The only way to really win in this market is to ignore the day to day nonsense, even the big news that moves the market up dramatically. Long term, only the fundamentals rule.
The key is that in a world of inflation, stagnation, mandates, broken supply chains, insane debt and spending, alongside dangerous levels of political upheaval, the crypto sector looks ever more like a safe harbor.