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Decrypting the most powerful trends in crypto

Bitcoin is the monetary base of the Internet. Unlike national currencies, new bitcoins are created by a fixed and finite supply.¹ In an era of unprecedented monetary expansion Bitcoin’s value proposition is unique. There will only be 21 million bitcoins amid increasing trillions of dollars, pesos, yuans, etc.

In the past year, the supply of new yuan, dollars, and pesos has increased by 8%, 50%, and 75% respectively. The supply of new bitcoins has increased by merely 3%.

Instead of relying on central bankers to determine money supply, Bitcoin is decentralized. Global miners timestamp blocks of transactions² that are verified by a global network of nodes³ for a protocol maintained by hundreds of developers⁴ worldwide. Bitcoin’s first block was mined with the following cryptographic message in 2009:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”⁵

Global central banks have embraced increasingly unconventional methods since 2009. In May 2020, after a decade of sound Bitcoin monetary policy, miners etched a similar headline in digital eternum:

“NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue”⁶

In 2019, researchers from NYU highlighted the potential for private digital currencies such as Bitcoin to improve welfare in an emerging market with a selfish government.⁷ Search interest for Bitcoin has been rising in emerging markets such as China and Argentina.

With a smartphone and a digital wallet anyone in any country in the world can send, receive, and hold Bitcoin. Due to its finite and predictable monetary policy, Bitcoin is especially useful in emerging markets with high inflation. Excessive monetary devaluation (a.k.a. high inflation) is a facet of economic repression.

Priced against the range of G20 currencies, Bitcoin has significantly outperformed since the start of 2019. Incurred by an exorbitant increase in money supply, the Argentine peso (ARS) has devalued most severely of all. Or as Nobel economist Milton Friedman once explained:

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

As the supply of money grows in both developed and emerging economies alike, Bitcoin is a monetary stalwart. Bitcoin is showing considerable rates of adoption worldwide and especially emerging markets.⁸

In many emerging markets, access to currencies like the dollar is virtually impossible for regular citizens. Compelled by Bitcoin, a solution to universal dollar access is emerging via technology known as central bank digital currency (CBDC) or stablecoins.

Bitcoin is a technology that can be accessed from every corner of the earth. This innovation has catalyzed global central banks to begin upgrading money as we know it. According to Harvard Belfer Center research on the Future of Money, major central banks across the world are in the research, development, or pilot phases of creating central bank digital currency.

According to The Block, ~70% of CBDC’s intend to use distributed ledgers⁹, a technology pioneered by Bitcoin. China is the leader and is currently on the verge of releasing its digital yuan pilot. Although CBDC’s will likely promote global monetary freedom, there are fundamental questions about the trustlessness of CBDC’s. In a 2017 speech an Executive Board member of Germany’s central bank explained:

“Too little attention is being paid to Nakamoto’s primary goal of constructing a groundbreaking, trustless electronic payment system which, like cash, would facilitate peer-to-peer (P2P) transactions. At the same time, Nakamoto was looking to create a currency which was not based on trust. This aspect — forging a new currency that does away with central bankshas become a major talking point in the current debate.”

Global interest in central bank digital currency is rising, alongside a parallel term known as stablecoins.

What is the difference between stablecoins and CBDC? The governor of the Bank of England recently offered a helpful explanation:

“Stablecoins and CBDC are not necessarily mutually exclusive. Depending on design choices, they could sit alongside each other, either as distinct payment options, or with elements of the stablecoin ecosystem, such as wallets, providing consumers with access to a CBDC. So there will likely be a role for the private and public sector working together in the future of payments.”

Private sector stablecoins have been booming. USD Coin, for example, is backed 1:1 for dollars held in a bank account, and is designed to let dollars move globally from your crypto wallet to other exchanges, businesses, and people and has recently surpassed a market cap of $2 billion. USDT, the current leader despite existential questions, has facilitated economic freedom at the scale of $50 billion for Chinese citizens. Private sector stablecoins altogether are close to surpassing a market cap of $20 billion.

Ethereum, a blockchain that aims to extend Bitcoin’s functionality, has become the backbone of the stablecoin movement. In addition to being able to tokenize assets like dollars, Ethereum enables the creation of decentralized lending, insurance, and exchange applications. Collectively, network activity on Bitcoin and Ethereum has been nearing record highs.

As interest in Ethereum’s decentralized network has surged however, so too have costs to use it. Average fees to use Ethereum have recently reached ~$14, surpassing Bitcoin.

Innovative solutions are emerging to help scale to support the next billion users. USDC has recently enabled version 2.0, an upgrade that allows integrated projects to pay network fees for users when transacting with USDC. And Reddit, one of the world’s largest social media companies, recently announced the Great Ethereum Scaling Bakeoff¹⁰ to help enable Reddit Coins for its users.

Reddit is not the only social media company interested in cryptocurrency, however. Facebook is making a major foray into the space with its Novi project.¹¹ And major financial institutions have been embracing digital currency as well. Square and Fidelity are significant supporters of Bitcoin,¹² Visa has been advancing its digital currency initiatives,¹³ and Mastercard recently announced an effort to foster CBDC adoption.¹⁴

As further evidence of rising institutional acceptance, legendary fund manager Paul Tudor Jones recently added Bitcoin to his portfolio as a hedge against global monetary inflation.¹⁵ And on the CME, one of the world’s largest financial exchanges, Bitcoin open interest has been surging:

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