Coining it: Are cryptocurrencies the future of money or just bit players?

Bitcoin saw its price surge after electric car giant Tesla invested €1.5bn in the cryptocurrency. But is it another temporary market spike or will we soon all be using it in our transactions, asks Pádraig Hoare
Coining it: Are cryptocurrencies the future of money or just bit players?

Bitcoin began life in 2008 with a white paper on a peer-to-peer electronic cash system by a Japanese enigma named Satoshi Nakamoto.

When a billionaire hums the tune, the investor begins to dance.

Cryptocurrencies, so long the private realm of those defiant and disdainful of establishment ideas and governance, have been planted firmly in the mainstream consciousness with the actions of Tesla chief executive Elon Musk.

The South African inventor’s endorsement of Dogecoin, founded as a bit of a gag to spoof Bitcoin in 2013, saw its value soar into the billions when Mr Musk declared airily that there are “no highs, no lows, only Doge” last week.

Whatever those words meant is anyone’s guess — Mr Musk has a personal communication style that is a law unto itself — but Dogecoin was suddenly worth $7bn as investors flocked to get in on the act, and the joke cryptocurrency was no longer funny.

The grandfather of them all, Bitcoin, received an even bigger endorsement from Musk when Tesla announced it would buy $1.5bn worth of the cryptocurrency this week, launching its value to the highest in its history at more than $48,000 per coin.

He knows the impact of his words.

“I think bitcoin is really on the verge of getting broad acceptance by sort of the conventional finance people,” he said on Clubhouse, the latest must-have social media app, before adding that he should choose his words on the cryptocurrency a little more carefully, lest he be accused of market manipulation.

Analysts definitely knew the power of Musk’s words.

“One of the world’s largest corporations doing this — I think it opens the floodgates,” said Meltem Demirors of London firm CoinShares.

European Central Bank president Christine Lagarde was critical of Bitcoin last month, insisting cryptocurrency has been enabling “funny business”. File photo: PA
European Central Bank president Christine Lagarde was critical of Bitcoin last month, insisting cryptocurrency has been enabling “funny business”. File photo: PA

Let’s wind back — what is cryptocurrency exactly?

It may seem an obvious question, but ask 10 people on the street, and nine would likely become tongue-tied.

According to the finance explainer website Investopedia, a cryptocurrency is a “digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend”.

Many cryptocurrencies are decentralised networks based on blockchain technology, a distributed ledger enforced by a disparate network of computers, Investopedia says.

A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation, according to the website.

So far, so good. But what is blockchain? Investopedia again:

“Blockchain seems complicated, and it definitely can be, but its core concept is really quite simple. A blockchain is a type of database. To be able to understand blockchain, it helps to first understand what a database actually is.

“A database is a collection of information that is stored electronically on a computer system. Information, or data, in databases is typically structured in table format to allow for easier searching and filtering for specific information.

“A blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the blockchain.”

Like a database, Bitcoin needs a collection of computers to store its blockchain, according to Investopedia.

“For Bitcoin, this blockchain is just a specific type of database that stores every Bitcoin transaction ever made.”

The security of a blockchain and the difficulty in altering or hacking it is what makes it so appealing to Bitcoin enthusiasts.

How did Bitcoin begin?

Invented by a Japanese enigma named Satoshi Nakamoto — whether he actually exists or is an amalgamation of anonymous creators is still debated today — Bitcoin began life in 2008 with his whitepaper on a peer-to-peer electronic cash system.

As the internet became more entrenched in everyday life, the concept of digital currencies took root.

However, there was no reason why someone could not replicate a digital token or coin by simply making a copy of the original, retaining it, and passing on a duplicate.

After all, the idea of zero regulation of the currency was part of its appeal, but that brought inherent risks as to its potential abuse. Nakamoto’s use of blockchain technology solved that worry.

Investopedia says:

Bitcoin requires that all transactions, without exception, be included in the blockchain. This mechanism ensures that the party spending the bitcoins really owns them.

Hackers and thieves have had little success in stealing Bitcoin because of its blockchain, thereby giving it legitimacy among enthusiasts and driving up its value.

After its official launch in 2009, it has skyrocketed in value ever since, going through turbulent highs and lows as digital investors try to get a slice of the pie. In late 2017, it seemed like its value would keep rising, hitting $20,000 per bitcoin in 2017, before plummeting to less than $3,000 per coin a year later.

It is now on its stratospheric rise once again, and this time investors say it is different, with the might of Musk giving it legitimacy as the currency of the future.

There are sceptics of its latest rise to more than $48,000 per coin, especially from the establishment.

JPMorgan Chase strategists said this week: 

The main issue with the idea that mainstream corporate treasurers will follow the example of Tesla is the volatility of Bitcoin.

However, they did concede that the current spotlight on Bitcoin cannot be ignored.

“Irrespective of how many corporates eventually follow Tesla’s example, there is no doubt that this week’s announcement changed abruptly the near-term trajectory for Bitcoin by bolstering inflows and by helping Bitcoin to break out above $40k,” said Chester Spatt, finance professor at Carnegie Mellon Tepper School of Business.

Mr Spatt, who served as chief economist and director of the Office of Economic Analysis in the US markets supervisor and regulator, the Securities and Exchange Commission, said: “I’m certainly very sceptical that there’s going to be widespread movement in this direction in the near term. You have huge volatility, so that raises a lot of questions.”

He said Musk’s decision to place 8% of Tesla cash reserves in Bitcoin and announcing it will eventually accept the cryptocurrency as payment for its cars would be key.

“Are they going to price their cars in Bitcoin or are they going to price their cars in dollars? That’s the key to what this means,” Mr Spatt said.

Bitcoin proponents argue that finally its time has come after years of volatility.

Longtime cryptocurrency investor Mike Novogratz was bullish about its future, saying that “every company in America” would soon be accepting Bitcoin as valid payment.

Novogratz, the founder of cryptocurrency investment firm Galaxy Digital claimed it could rise above $100,000 per bitcoin in the future, ostensibly by the end of 2021.

Hailing Musk as a “genius” that gave unquantifiable legitimacy to Bitcoin and cryptocurrencies, Novogratz said: 

One of the things that connect Bitcoin, and Tesla and solar stocks and ESG investing is millennials and Gen Z, young people are buying into the future, and they see cryptocurrencies — Bitcoin and others - as their currencies.

“Now you got the biggest, the wealthiest man in the world and one of the biggest stories doing it. You’ve got to think other CFOs and CEOs are saying, what should we be doing?”

European Central Bank president Christine Lagarde was critical of the cryptocurrency last month, pouring cold water on Bitcoin’s supposed security, weeks before its latest market explosion.

Cryptocurrency has been enabling “funny business”, she insisted.

“For those who had assumed that it might turn into a currency — terribly sorry, but this is an asset and it’s a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity,” Lagarde claimed.

How did Musk’s announcement about buying bitcoin affect the market?

According to Bloomberg, Bitcoin surged to an all-time high after Tesla said it has invested $1.5bn, the biggest endorsement of the cryptocurrency by a mainstream company.

Bitcoin rose as much as 16% after Tesla made the disclosure in a regulatory filing, with prices exceeding $44,000 for the first time. It has since gone above $48,000.

Tesla also said it would begin accepting the digital token as a form of payment for its electric cars.

Other coins surged as well. Ether gained as much as 11% to a record and Litecoin rallied a similar amount Monday in New York, according to data compiled by Bloomberg.

Antoni Trenchev, co-founder of Nexo in London, claimed Tesla has now “paved the way” for cryptocurrency to become fully legitimate and acceptable.

“The world’s richest man allocating $1.5bn of his company’s treasury to Bitcoin speaks volumes about the magnitude at which crypto gains institutional adoption,” he said.

He said he expects that at least 10% of S&P 500 companies will be invested in Bitcoin by the end of 2022.

Tesla remains the only member of the S&P 500 to disclose any Bitcoin purchase.

Other analysts pointed to Musk’s previous idiosyncratic behaviour as a reason to keep calm about Bitcoin’s chances of mass acceptance.

Bloomberg’s Olivia Raimonde and Olga Kharif wrote: “The world’s richest man is known for his publicity stunts and need for attention. 

He infamously involved himself in the rescue of a trapped Thai youth soccer team. He smoked a joint on podcaster Joe Rogan’s show.

“Lately, he’s been tweeting about Dogecoin, another digital token created as a joke.

“Musk can say Tesla will take the coin for a car, but years of data show that most investors see it as a speculative asset, not something to have in a traditional wallet. But giving his fans the potential to use it as cash-only heightens their attraction to Tesla and Bitcoin.”

Luis Cuende, co-founder of Aragon, which helps run decentralised organisations with over $650m in assets under management, told the Bloomberg authors that Tesla’s accepting payments in bitcoin “is more of a sign of approval for crypto assets gaining mainstream adoption, rather than something that customers will do en masse”.

                        Elon Musk of Tesla has announced a $1.5bn investment in Bitcoin and a plan to accept the digital currency as payment for electric cars. Bitcoin’s price gained more than 20% from its level before the announcement.
Elon Musk of Tesla has announced a $1.5bn investment in Bitcoin and a plan to accept the digital currency as payment for electric cars. Bitcoin’s price gained more than 20% from its level before the announcement.

“Tesla, as the coolest car manufacturer, keeps on improving their image and brand by positioning themselves as the edgy early adopters,” he said.

Others said that, despite all the latest noise surrounding bitcoin, the proof of the pudding would be its use in the real world, and not just enthusiasm among the chattering digital classes.

Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte, wrote: “The crypto craze is entirely driven by short-term speculative momentum/mania. For all the noise I keep hearing about how high Bitcoin may go, the noise around how it will be used in everyday life is deafeningly silent.”

After hitting an all-time high on Tuesday at $48,000 per bitcoin, there are signs already that it may be a step too far for the cryptocurrency, with adjustments coming. It dropped back to $46,000, but still remains 30% up since the beginning of the month.

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