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Banking with Bitcoin and Beyond

Bitcoin hit an all-time high again. Of course, not before slumping shortly afterwards. It peaked at an intraday all-time high of $19,510, more than 300% above its low point in March earlier this year. It last attained such numbers in December 2017, a year which saw its value skyrocket nearly twenty-fold before collapsing nearly 80% over the following year. A myriad of factors were said to be behind this crash, with computer-driven trading funds and speculative investors, not too unlike those of today, shouldering the brunt of the blame.

Bitcoin, and the larger world of crypto currencies have long been subject to such volatility and sudden price movements. Over the past decade, it has been hailed as the next big thing and the key to a technological revolution, yet it has also been passed off as a short-lived fad fuelled by a manic furor by those desperate to invest in the latest technology. Its recent run-up is perhaps not necessarily an indicator of any change in the underlying perceptions of cryptocurrencies as a whole, but rather reflective of the shifting macroeconomic climate in which the boundaries between technology and finance grow thin.

What is it anyways?

For the uninitiated, Bitcoin is a form of digital currency that has no centralised control or authority. Amongst its many promises, Bitcoin was touted as a way to securely store and transfer value between parties around the world —a foolproof alternative to the fiat currencies underlying the global financial system. It set out to solve, or at the very least alleviate, the problem of creating an electronic payment system based on cryptographic proof instead of trust, doing away with the need for a trusted third party and allowing any two willing parties to transact directly with one another. Running on a peer-to-peer network with a decentralized and distributed ledger dubbed “blockchain”, Bitcoins act as units of currency which is fixed in supply and whose security is theoretically guaranteed by the collective computing power of all participants in the network. Top that off with complex, yet alluring terms, such as Byzantine Fault Tolerance and Proof-of-Work consensus protocols and it was just the right mix of arcane buzzwords and grand promises to draw people in.

Since its peak and subsequent crash in 2017, Bitcoin has had its fair share of controversy — from allegedly secure cryptocurrency “wallets” being compromised to regulatory crackdowns on its use. This is not to mention the vast amounts of energy it was consuming as people squeezed every last bit of computing power out of their machines to “mine” and effectively compete for a fraction of a Bitcoin. Its inherent structural inefficiency, energy intensity, and obscure complexity proved to be significant hurdles in gaining traction amongst the general populace.

There is little doubt that the first inventors of Bitcoin and cryptocurrencies certainly held the right ideals at heart, and despite the bumpy road since its inception more than a decade ago, by no means will the fundamental motivations behind Bitcoin be going away anytime soon. While it may not have lived up to its promise of replacing the central banking system we have in place today, it has carved out a space for itself and has set the stage for further development.

History repeats itself

In a year of unforeseen market volatility, the price movements we saw last week bore all the hallmarks of the rise and fall we saw in 2017. Since then, the question as to whether Bitcoin remains a purely speculative bet or the currency of the future remains hotly debated, with no clear answer. Word on Wall Street is that the winds appear to be shifting, with growing interest from professional investors coming to view cryptocurrency as a long-term investment. This begs the question: is this time round different?

JPMorgan recently reported that inflows into Grayscale Investments products were on the rise, amongst them a listed Bitcoin trust offering exposure to Bitcoin price movements. As of last week, assets under management in said trust were $10bn, suggesting interest from larger players in the market who feel that the crypto market is maturing. Chainalysis, a market intelligence company, reports that fewer units of Bitcoin are changing hands regularly than before, suggesting a shift towards longer-term holdings. It has even been suggested that as Bitcoin becomes more of a mainstream asset, it could be viewed as an alternative to gold as a hedge against inflation. If the markets, as of the time of writing, are anything to go by, the sharp pullback may be more of an overdue correction rather than a sign of impending collapse. 

In the face of all of this bullish optimism, the water remains murky around the challenges it faces. Transactions involving Bitcoin are far and wide apart with most large banks not offering any sort of cryptocurrency services. Even as household names such as Paypal begin to offer services for storing and converting Bitcoin, users are still unable to make payment in the cryptocurrency without it first being converted into a fiat one. With a rigid and immutable system lacking a lender-of-last-resort guarantee backstopped by a nation state or global authority, Bitcoin’s path to the masses remains unclear. The “new gold”, as it has been often called, is far more volatile than any other traditional asset and while it may not quite be ready yet to take the place of the real thing, it has helped nudge along the widespread integration of technology into finance.

Moving beyond Bitcoin

As rumours swirl around the possibility of damaging new regulations by the US Treasury clamping down on cryptocurrency use cases, Big Tech seems to be shrugging off the public scrutiny and antitrust pressure it has faced over the past few months. Wading into the fray are tech giants such as Facebook and Apple, illustrating how such companies have managed to find common ground with financial institutions in terms of the services they can provide.

Libra, another cryptocurrency not too unlike Bitcoin, has been championed by Facebook and is set to launch as early as January next year. It has overcome significant challenges to get to this stage and is being rolled out in a severely trimmed down version. Early members of the Libra Association jumped ship over its controversial reception when it launched several years ago, with critics citing fears of monetary stability and potential money laundering. Despite all that, this scheduled launch of Libra is demonstrative of the quickening shift towards digital payments and, by extension, a greater role for cryptocurrencies to play — given the appropriate oversight and regulation of coure.

Taking on a broader view, we see greater assimilation of tech into the financial system that surrounds us today. Amazon recently announced a deal with Barclays’ credit card business, offering financing for purchases and individualised plans for a seamless shopping experience. Google made its move by promoting a new form of a centralised and mobile bank account all accessible from its Google Pay app, following closely in the tracks of Apple’s credit card with Goldman Sachs which laid the groundwork for arrangements such as these. Complementing this digitisation of consumer financial services is the rapid proliferation of AI within the sector, with Jack Ma’s Ant Financial Group leading the race in this aspect.

These are all entire topics of discussion on their own, but they serve to drive home the point that this recent rally in Bitcoin is less of a speculative bubble than it may seem. It is increasingly difficult to ignore the virtues of a more technologically progressive society. Echoing the words of Dan Schulman, chief executive of Paypal, “the shift to digital forms of currencies is inevitable”, and so the day where we pay our Internet bills not in our local denomination but rather some new-fangled cryptocurrency may not be too far off.


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