Updated: Apr 13, 2020
What is blockchain? What is Crypto? Where does Bitcoin play into this new environment that's coming as a result of the economic changes?
Since 2008 there has been a silent revolution forming to build an alternative financial system that could rival the current system. The Great financial crisis of 2008-2009 led to the formation of Bitcoin. The crisis shined a spotlight on the dysfunctional, fraudulent, and predatory nature of the financial system at the time. A decentralized currency solved the issue of needing to trust banks or third party intermediaries to facilitate transactions. It gave power back to the individual.
Many people have lost interest in this area of innovation; this article will give you an update as to why blockchain companies are best equipped to handle the evolution of the currency system.
We will also explain why crypto could be a viable investment as a hedge to the current currency system.
Why does bitcoin exist?
The Byzantine General Problem
The Byzantine general problem is a case study presented to computer scientists that helps illustrate a situation where involved parties must agree on a single strategy in order to avoid complete failure, but where some of the involved parties are corrupt and spreading false information or are otherwise unreliable.
- In the official description of the Byzantine Generals’ Problem, in order to achieve consensus, the commanding general and every lieutenant must agree on the same decision.
The solution to the problem relies on an algorithm that can guarantee that:
All loyal lieutenant generals decide upon the same plan of action, and
A small number of traitors cannot cause the loyal lieutenants to adopt a bad plan.
The loyal lieutenants will all do what the algorithm says they should, but the traitors may do anything they wish. The algorithm must guarantee the first condition regardless of what the traitors do. The loyal lieutenants should not only reach an agreement but should agree upon a reasonable plan.
The Byzantine Generals’ Problem is the analogy most often used to illustrate the requirement for consensus for distributed ledger technology (DLT).
Blockchain- A system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.
Crypto-Currency- A digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
Bitcoin (BTC) - A cryptocurrency. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Bitcoins are limited. The total amount of bitcoins that can ever exist is 21 million.
Alt-Coins- (Alternative coins)- Other cryptocurrencies launched after the success of Bitcoin. Generally, they sell themselves as better alternatives to Bitcoin.
1982 - Computer scientist David Chaum first proposed the concept of e-Cash .Chaum published a paper entitled "Blind Signatures for Untraceable Payments" that detailed a new form of cryptography which he claimed could allow for an automated payment system where third parties could not see information on the payment.
1988 - 1992- The Crypto Anarchist Manifesto circulates around the small circle of programmers and silicon valley "cypherpunks". This document explained the revolutionary impact of crypto and the issues that would follow as a result.
1998 - In late 1998, Wei Dai released an essay detailing his idea for "b-money," a cryptocurrency whose exchange reads similarly to what the blockchain in Bitcoin would eventually become. The proof-of-work system creates the currency by solving a mathematical computation, and the transfer of money is broadcast to the network.
2008 - Satoshi Nakamoto releases the whitepaper for Bitcoin in a discussion group of collaborators. His identity is anonymous to this day.
2009 - Bitcoin is made available to the public for first time, mining is introduced. Bitcoin mining is the act of acquiring bitcoin.
2010 - The first recorded purchase of goods was made with Bitcoin when Laszlo Hanyecz bought two pizzas for 10,000 BTC.
2010 - First cryptocurrency exchange appeared in the name of bitcoinmarket.com. In July that year, Mt.Gox was launched.
- 1 Bitcoin was worth $1 for the first time.
- Litecoin -- now the seventh-largest cryptocurrency by market cap -- debuted.
- Mt.Gox got hacked for a first time: 2,000 BTC was stolen, having a value at around $30,000 at the time, $13.8 Million today.
2012- Bitcoin was on its way to becoming the world's top digital coin: crossing the $100 threshold in April.
2013 - Price reaches value of $1,000 for the first time and was becoming the most successful wallet and exchange available.
2013 - Mt.Gox became the largest cryptocurrency exchange, at its peak handling 70% of all Bitcoin transactions.
2014 - January 2014 price fell below $1,000 and struggled below the key level for a few years.
2014 - Mt.Gox became the first major cryptocurrency exchange hack. 850,000 BTC were stolen from it. This is the largest theft of BTC in Bitcoin history, which was valued at $460,000,000 at the time. $5.865 Billion today.
2015 - Bitcoin price plummeted by 50% and did not recover to its initial price till late 2016. Cryptocurrency exchange hacks have remained common since MT. Gox.
2015 - The Ethereum network, currently the number 2 crypto asset in terms of market capitalization, was launched. It brought smart contracts to the cryptocurrency world.
2017 - Biggest year for Bitcoin. In August, this led to Bitcoin Cash (BCH) being created via a fork in the network. Bitcoin Cash is now the fifth-largest cryptocurrency by market cap. By the end of December Bitcoin hit a peak of $19,783. More and more people and companies began chasing the trend as the price just kept rising.
2018 - The drastic growth of BTC was short lived. Early into 2018 Bitcoin was back at $6,500-$6,900. It fell from the 2017 highs crashing all the way down below $7,000 by April 2018 and below $3,100 by November 2018. An 82% decline in price.
2019 - In June of 2019 price had seen a surge back above $10,000 and hit a peak high of $13,895. The year ended with price being at $6,900.
2020 - Bitcoin rebounded to $10k in February and then hit a severe drop to $3,846. (At the time of this article, price is back to $6,900).
The Blockchain industry today
- The blockchain industry today is a multi-Billion dollar enterprise. This is comprised of exchanges, crypto-currencies, blockchain technology companies, and companies that have publicly traded shares (coins).
- The current market cap as of [04/10/2020] is roughly $198.881 Billion. With an average trading volume of $148 Billion per day.
- Bitcoin's market cap is $126,369,351,712, 64.2% of the total market.
Largest Crypto Exchanges Today
1) BKEX - $46.37 Billion
2) Coinsbit - $45.91 Billion
3) BiKi - $43.89 Billion
4) LBank - $42.89 Billion
Although still a fraction of the stock market total capitalization, $200 Billion is still impressive. These companies are well capitalized from private equity, hedge fund, and institutional investor investments. Many fortune 500 companies have developed some blockchain research projects to better understand how blockchain can be adopted into their current system.
The Crypto market has since turned into a playing field for day traders and speculators due to the potential profits generated from the volatility that bitcoin and other coins provide.
The current financial crisis is going to provide a massive opportunity for crypto related investments to flourish. There exists multiple fronts where blockchain/crypto can be used as a solution to a crisis that would would otherwise have no end.
The first front of the crypto revolution will likely come from large banking, data, and security companies. The investments into various companies in exchange for access to their system is becoming increasingly common. *Example: JPMorgan Chase created Quorum in 2016 as part of the Ethereum Enterprise Alliance (EEA), of which it is one of the founding partners. The platforms runs on the Ethereum (ETH) blockchain and is modeled after the Ethereum Go client. It is currently used by pharmaceutical companies Pfizer and Genentech as well as Microsoft.
The second front will be in the adoption of developing countries. Developing countries will not have the same access to credit as larger GDP nations during this coming financial crisis so their demand for a system that can allow global access to a decentralized network will be almost necessary. The ability for private investors to allocate money to a project in a developing world will be made possible without the need for global banking approval.
Developing countries that need payment systems but have a week centralized economy can create a new sharing economy through the use of decentralized payment systems.
The Federal Reserve bank of the United States controls the monetary policy that gives value to the Dollar. 70% of the financing that happens globally is transacted through U.S. dollars, making the Federal reserve the leading monetary institution in the world. The fed, along with the other central banks of the large GDP nations, have begun implementing monetary strategies to handle the coming financial crisis. In their response includes: Lowering interest rates to 0, printing money through the Treasury program, and buying back corporate debt and other securities in the open market. Since the majority of the developed nations have low interest rates, and some cases like Japan and Europe they're negative, then there is no more room to lower rates to help stimulate the economy.
If the Federal Reserve pushes for negative interest rates then this could have severe impacts on the global economy, the price of foreign debt, and the stability of the economy. Negative rates means that banks will play less of an important role in the economic structure.
The global printing of cheap/ free money puts in question the value of the current currency system. If the Central Banks can print and flood money into the economy whenever things get tough, but there is no plan for anyone to pay this money back, then there is a lack of trust in currency and devalues the currency system.
In an environment where currency is depreciating and the supply is getting bigger, assets that act as a store-of-value will become more valuable. Gold was generally seen as the ultimate hedge to currencies because of its limited supply. The greater the supply of currencies, the weaker the Dollar became and the more expensive store-of-value investments increase in value.
Bitcoin is today's version of Gold. It is digital gold that can be mined and has a limited supply. It has a utility, can be held as a store-of-value, and can be used for transaction as currency.
In an environment where currency systems are in question, investors will start to look for hedges to protect themselves from a systemic collapse. Bitcoin will be the most attractive due to its market capitalization and its limited structure.
As investment companies begin reallocating their investment capital to the bitcoin/Alt-coin markets there will be a surge in coin prices due to the increase in total capitalization.
Ethereum is like the silver to Bitcoin's Gold. Silver, unlike gold, has more utility function than gold. Silver has more industrial use cases than gold; yet Gold still trades at a higher multiple because its regarded as a store-of- value.
Ethereum has more use cases than bitcoin because it provides a platform to build other blockchains on top. The utility and popularity of Eth. will allow it to have a sustainable market, but will still trade lower than Gold.
1) The global credit system collapses due to the inability of countries to restructure their debt as a result of changes to monetary policy. Developed countries all around the world are lowering their interest rates to at-or-below 0. If any developed nation does not follow then it will create in imbalance in the currencies and will cost some countries more money to pay back their foreign debt. This will lead to structural debt defaults and the need for a new credit systems Digital currencies and blockchains will play a critical role in the solution by ensuring that the economy continues to operate despite the inability of access to global credit lines.
2) Quarantine creates a remote working environment where privacy, customer data, sensitive material, classifies material, internal documents, and personal data are at risk. The shift to remote access has left many flaws in the system where personal devices are used to operate corporate data. This open the opportunity for innovative blockchain companies to provide data protection solution at a more efficient rate of scale than current networks. This structural leap will open the doors to other major players such as banking, government, and IT adopting block chain solutions.
3) There is a rush into all safe-haven investments as global macro investors look to hedge their traditional investments. This means Gold and Crypto will see a rise in price. As investors re balance their portfolios and reduce some of their foreign debt exposure, domestic equity exposure, and domestic debt exposure, they'll be looking for alternative investments. Generally this would be found in developing market economies, however, due to current circumstances there are higher risks associated with emerging economies. The investment institutions will aim to look to the future and invest in other counter-traditional investments such as bitcoin.
Today [04/10/2020] one bitcoin = $6,912.
1) There will only ever exist 21 Million Bitcoins.
2) There are currently 18,316,912 bitcoins in circulation; which leaves 2,693,087.5 bitcoins left to be mined.
21 Million Bitcoin x $6,912.00 per coin = $145.152 Billion
In order for bitcoin to reach the following prices, here are the necessary market caps:
I) $10,000 Bitcoin Price = $210 Billion Market Cap
II) $20,000 Bitcoin Price = $420 Billion Market Cap
III) $50,000 Bitcoin Price = $1.05 Trillion Market Cap
IV) $100,000 Bitcoin Price = $2.10 Trillion Market Cap
In order for price to hit 10,20,50, or 100 thousand in price would involved hundreds of billions of dollars being invested into the markets. Is there enough money circulating that that could find its way into the crypto markets? That's very possible.
Are there enough central banks in shambles that could benefit from having a hedges currency investment? That's also very possible.
Are there enough companies that see the opportunity in crypto to invest tens of Billions? There are plenty.
Are there going to be enough struggling economies that could benefit from moving their traditional currency over to a more decentralized alternative? There will be plenty.
Due to the current nature of markets we are getting a very close look at the structural problems within the current economic system that existed since before the crisis. The federal reserve policy to begin quantitative easing in 2009 fundamentally changed the way our economy functions. Credit found itself in the hands of the people who were well capitalized enough to afford taking on debt and the wealth gap got exponentially larger.
This current cycle of Quantitative easing and interest rates policy change will further exacerbate the wealth gap and force society into an alternative monetary system. The government will try and impose their own form of digital currency. If they can successfully regain the public trust after the crisis then the implementation will be successful. If the public doesn't trust the new currency systems then there will emerge shadow currency networks that will create structural problems for the government.
The main point is to understand that there are major structural changes coming to baking, commerce, credit, and currency and that it would be in an investors' best interest to have a hedge against the collapse of an already fragile system.
Disclaimer: This article is the result of the analysis carried out by analysts associated with ChartAddicts. The article does not purport to represent the views or the official policy of ChartAddicts. This is not investment advice.
Fiorillo, Steve. “Bitcoin History: Timeline, Origins and Founder.” TheStreet, 17 Aug. 2018, www.thestreet.com/investing/bitcoin/bitcoin-history-14686578.
Vaidya, Kiran. "The Byzantine Generals Problem." Medium. 10 Nov. 2016, https://medium.com/all-things-ledger/the-byzantine-generals-problem-168553f31480