THE BITCOIN STORY 2021

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 THE BITCOIN STORY 2021

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• The start: Bitcoin (BTC), the world’s “first decentralised digital currency”, was launched in 2009 by a mysterious person known only by the pseudonym Satoshi Nakamoto, whose true identity is still unknown. 
• The headline: On January 3rd 2009, a headline on the front page of the Times, London, read: “Chancellor on brink of second bail-out for banks”—a reference to the British government’s efforts to save the country’s financial system from collapse. 
• Genesis block: When Satoshi Nakamoto, the mysterious inventor of bitcoin, created the first 50 coins, now called the “genesis block”, he permanently embedded the date and headline into the data. The hidden text was a digital battle cry. 
• Free from all: Mr Nakamoto had decided it was time for something new: a decentralised cryptocurrency, free from the control of governments and central banks. He was also upset with the GFC (Global Financial Crisis) that had rattled the global economy.
• Gone: Mr Nakamoto has vanished from public view, but his invention has gained prominence. It first gained widespread attention in 2013 as a financial curiosity, when its price climbed above $1,000. In 2017, in a frenzy of speculation, the price spiked just shy of $20,000, but then quickly fell.
• Price through the roof: By 2021, it had gone through the stratosphere!
• The basics: What exactly is Bitcoin, and how does it work? Unlike regular currencies, which are issued by central banks, Bitcoin has no central monetary authority. It is underpinned by a peer-to-peer computer network (P2P) made up of its users’ machines. 

1. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. 
2. The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21 million. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation. The last BTC will be mined in 2140 AD.
3. Since the genesis block back in 2009, the Bitcoin network has already undergone three halvings, with the third halving taking place in May 2020. 
4. As the issuance of new coins is halved every four years, the last Bitcoin is not expected to be mined until 2140. On May 11, 2020, the reward halved again to 6.25 bitcoin. This effectively lowers Bitcoin's inflation rate in half every four years. The reward will continue to halve every four years until the final bitcoin has been mined. In actuality, the final bitcoin is unlikely to be mined until around the year 2140.
5. The entire network is used to monitor and verify both the creation of new Bitcoins through mining, and the transfer of Bitcoins between users. A log is collectively maintained of all transactions, with every new transaction broadcast across the Bitcoin network. 
6. Participating machines communicate to create and agree on updates to the official log. This process, which is computationally intensive, is in fact the process used to mine Bitcoins: roughly every 10 minutes, a user whose updates to the log have been approved by the network is awarded a fixed number of new Bitcoins. This has prompted Bitcoin fans to build ever more powerful computers for use in Bitcoin mining.

• Buying: Bitcoins (or fractions of Bitcoins known as satoshis) can be bought and sold in return for traditional currency on several exchanges, and can also be directly transferred across the internet from one user to another using appropriate software. This makes Bitcoin a potentially attractive currency in which to settle international transactions, without bank charges or exchange rates. 
• Problems: The complexity and opacity of the system means it also appeals to those with more nefarious purposes in mind, such as money laundering or paying for illegal drugs. But most will be reluctant to adopt BTC while the software required to use it remains so complex, and the value of an individual Bitcoin is so volatile.  Just as BitTorrent was not the first file-sharing service and Skype was not the first voice-over-internet service, it may be that Bitcoin will be a pioneer in the field of virtual currencies, but easier-to-handle rivals will arrive!
• Recent surge: The year 2020 ended with a massive surge in the price of the world's most famous cryptocurrency (CC) - Bitcoin (BTC). The first surge in the price to around $1,000 in 2013, produced new CC millionaires, brought declarations of a bubble and left some early fans kicking themselves. 

1. One unlucky man in Wales had thrown away a hard drive containing 7,500 accidentally discarded bitcoins, whose value had grown from almost nothing to $7.5m. 
2. Since then bitcoin has been on a wild ride. Pushed by casual speculators and market manipulation, its price surged to about $19,000 in December 2017; over the next year it fell by more than four-fifths. Bitcoin’s 2020 ascent has been the sharpest.
3. Having tripled in just three months its price is now over $35,000. Some find it the start of a new race, others a bubble ready to burst.
4. Year 2021's BTC josh is striking because it's not just the libertarians ("we need no State") supporting it, but some of Wall Street’s finest too.
5. Larry Fink (BlackRock, the world’s largest asset manager) said in December 2020 that BTC could become a “global market”. 
6. Big hedge funds such as Renaissance Technologies have been punting on cryptocurrencies. Ruchir Sharma, a strategist at Morgan Stanley’s investment arm, argues that America’s mounting debts may make cryptocurrencies more appealing.

• Fiat: The total value of outstanding bitcoins exceeds that of Canadian dollars today! But few of the new crypto converts think it has any chance of replacing government money, the original dream of early CC believers. 
• Too slow for mass use: It is too inefficient to be of much use for making payments. Why not? Because BTC is capable of processing fewer than ten transactions per second. By contrast, the firms transforming consumer finance, like Alipay and Venmo, minimise friction. But of BTC could solved that problem, then governments would clamp down quickly on it as it would threaten their monetary sovereignty. 
• FB’s problem: Regulatory resistance has already forced Facebook’s digital currency, Libra, to rebrand itself to “Diem”, scaling back its early ambition. 
• CBDCs: Meanwhile, the competition is heating up as central banks improve payments systems and launch slick digital currencies of their own. China already has tested its CBDC and it may go mainstream any day.
• Mania: Bitcoin mania of 2021 is rooted in the possibility that it might offer a safe store of value like gold, but more convenient because it is easier to maintain a digital wallet than a physical vault. It could also win a small but permanent slice of investors’ portfolios. Like BTC, gold pays no interest or dividend. Unlike bitcoin, gold has fundamental uses, but it is fluctuating demand from investors for the yellow metal, not jewellers and chipmakers, that drives prices. 
• Steady now: So, BTC's high price could prove self-sustaining. If BTC became as popular with investors as gold (measured by the market value of their positions) the price would rise to $1,46,000, calculates JP Morgan, a bank. Already, millennial investors appear to prefer cryptocurrencies to bullion.
• Gold: There are reasons to doubt that BTC can emulate gold. Its price is much more volatile and moves with the stockmarket, which is hardly desirable for a supposed haven. The market is illiquid and cryptocurrency trading remains a wild west in which fraud and theft are rampant, and which facilitates crimes such as selling drugs online. Investors in cryptocurrencies must tolerate a large dose of financial and reputational risk. 
• The big guys: Hedge funds, which thrive on dicey investments, may be piling in but the stolid end of Wall Street, which includes pension funds, is wary.
• But it’s not all air: It would be wrong to dismiss BTC's 2020-21 surge. An accommodation with regulators, more liquid trading and clampdowns on criminal activity could give it a wide appeal. 
• Then and now: Bitcoin was originally sold on the promise of upending the global monetary system. Its success now hinges on finding a more modest role within it.
• Over the years BTC has spawned an entire ecosystem, including lots of copycat tokens, such as Ether; and several exchanges to trade cryptocurrencies, such as Coinbase, founded in 2012. 
• Many have dismissed investing in it as a pursuit for those on the financial (or even legal) fringe. Bitcoin is no stranger to scandal: in 2014, for instance, Mt Gox, another exchange, collapsed after a hoard of tokens was stolen.
• Unlike the last occasion when prices were rocketing, the current 2021 surge seems to have been spurred by interest from the financial establishment, most of which had long scorned it. 

1. Tudor Investments, which manages $38bn, has said it could increase its BTC position to as much as a “low single digit” percentage of its assets. 
2. Stanley Druckenmiller, a former protégé of George Soros, has also warmed to the idea of using bitcoin as a hedge in place of gold, which is often used as a financial bet on anarchy, or against inflation. 

• On December 17th Coinbase filed to go public. 
• A long-predicted bitcoin exchange-traded fund (ETF) may at last come to fruition in 2021.

1. So, if some big portfolio managers invest in bitcoin, its value could climb further or, at least, there could be a floor to it. 
2. If the masses pile in through an ETF, that would also maintain demand. 

• But other investors, such as the managers of huge pension funds, are likely to keep steering clear. They typically invest in things that generate reliable future cashflows, like bonds or stocks, and tend to shy away from things that don’t, such as gold, other commodities, and BTC!
• Bitcoin was conceived as a currency, for payments and transactions. For that it would need to be stable and easy to use. Today, it is thinly traded and thus less liquid and more volatile than gold. It is increasingly treated by those who buy and sell it, and by regulators, as an investment. 
• It may be good news for those holding bitcoin that others are piling in, but speculators’ enthusiasm suggests that cryptocurrencies will fall far short of their founders’ lofty aspirations.
• A bitcoin exchange-traded fund (ETF) could finally land on Wall Street in 2021 after VanEck filed an application with the Securities and Exchange Commission (SEC).
• Regulators have previously rejected numerous bitcoin ETF proposals, including one from VanEck in September 2019. But BTC's surge to new highs in 2020 - driven by increased adoption from institutions and a changing of the guard at the SEC - could improve the chance of regulatory approval for an ETF.
• A bitcoin ETF operated by VanEck would follow the path of gold-trust ETFs in that it would hold the underlying bitcoin, the filing said. The VanEck Bitcoin Trust would reflect the performance of the MVIS CryptoCompare Bitcoin Benchmark Rate.
• Bitcoin is up nearly 300% year-to-date, and big-name Wall Street institutions have warmed to the cryptocurrency. 
• In the corporate space, Square and PayPal have been purchasing bitcoin in recent months and facilitating the buying and selling of bitcoin in their respective apps. Still, there are hurdles for a bitcoin ETF approval as it seeks acceptance among regulators, and it's likely to hinge on who President Joe Biden chooses to run the SEC.
• Market Capitalisation: The idea of a “bitcoin market cap” makes no sense.

1. The first problem is that bitcoin is not of course a company and not even a real asset, so working out its “market cap” is a non-starter. 
2. It was originally designed to be a currency that could be used to buy actual things! And although it fails to meet all the criteria that would make it a currency, it does have one thing in common with it: its price is underpinned by sheer faith. 
3. The difference being that with fiat currencies, that faith is effectively placed in the governments of the nation states who issue them, whereas for bitcoin, the faith is placed in?the hope that other people will keep having the faith. A faith in faith!
4. In the context of companies, the “market cap” is what someone would have to pay to buy out all the shareholders in order to own the company outright.
5. Companies, of course, have real-world assets with economic value. And there are ways to analyse them to work out whether they are over- or undervalued, such as price-to-earnings ratios, net profit margins, etc.
6. With BTC, the whole value proposition rests on the idea of the network. If you took away the coinholders there would be literally nothing there, and so bitcoin’s value would fall to nil. Trying to value it by talking about a “market cap” therefore makes no sense at all.
7. Another problem is that although 18.6m bitcoins have indeed been mined, far fewer can actually be said to be “in circulation” in any meaningful way.
8. For a start, it is estimated that about 20 per cent of bitcoins have been lost in various ways, never to be recovered. Then there are the so-called “whales” that hold most of the bitcoin, whose dominance of the market has risen in recent months. The top 2.8 per cent of bitcoin addresses now control 95 per cent of the supply, and more than 63 per cent of the bitcoin supply hasn’t been moved for the past year.
9. What we call the “bitcoin price” is in fact only the price of the very small number of bitcoins that wash around the retail market, and doesn’t represent the price that 18.6m bitcoins would actually be worth, even if they were all actually available.
10. So the “market cap” is in this way nonsense multiplied.

• THE INDIAN CASE

1. The market capitalisation of cryptocurrencies surged past the $1 trillion mark on the back of a sharp rally over the past month. Bitcoin surpassed its 2017 peak of just under $20,000 on 16 December 2020 and currently trades close to $40,000.
2. In India, crypto is not a legal tender and the regulatory framework is not very clear. There are exchanges and platforms, where one can buy or sell cryptos, but because of the regulatory and taxation issues, many Indian clients do not buy here. However, they buy it outside India.
3. In January 2021, Cryptocurrency exchanges in India stepped up their efforts to detect suspicious activities and clamp down on ‘pump and dump’ schemes, as bitcoin breached the $40,000 mark yesterday. CoinDCX, a large cryptocurrency exchange said that it has frozen 4 accounts which were used for artificially pushing up the price of smaller cryptos in a bid to lure retail investors to enter at inflated prices.
4. India lacks any formal KYC rules or exchange regulations for cryptocurrency and hence exchanges have devised their own rules. The lack of regulation comes even as the US Financial Crimes Enforcement Network (FINCEN) has proposed compulsory KYC norms for transfers of cryptocurrency to non-custodial wallets above $3,000.
5. WazirX, India’s largest cryptocurrency exchange, now reports a user base of over 1 million, up from the 550,000 users it mentioned in a blogpost in June 2020. The exchange reported transactions worth $2.34 billion in 2020. However 70% of its users were below the age of 34 and 85% were men.

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