There have been two big surprises this year. One has been the insane rise of US markets, which I’ll cover in more detail tomorrow. The other one, which we’re concentrating on today, has been bitcoin.
It’s the story that won’t go away.
At my oldest child’s school concert last week, I listened to two fathers discuss the idea of buying bitcoin while sitting on a picnic blanket.
In my eyes, that made things official. When something becomes a ‘schoolyard’ topic, it’s gone mainstream.
The problem is that, once you’ve cottoned on to the potential of bitcoin and cryptos, where do you start?
Many people automatically turn to the mainstream rags for financial guidance. Yet more often than not these outlets sprout that cryptocurrencies are for crooks and cranks.
Banks aren’t helping matters. Powerful banking institutions have been quick to ridicule cryptos.
Take Teunis Brosens, an economist at ING, as an example. He questions the long-term value of bitcoin, recently noting:
‘The “true” value of Bitcoin depends on its future use case. If users would, en masse, lose interest, then it could end at zero. On the other hand, in the unlikely scenario that Bitcoin takes over all worldwide payments, its value could rise beyond $1 million.’
He adds that the digital currency ‘…has little to offer a wider audience, and will likely return to being a niche product for a select group of enthusiasts.’ And how the decentralised backbone of bitcoin is something that will stop its wider adoption:
‘Governments and regulators may never come to like decentralised financial networks at all. A negative event, such as a price crash followed by a public outcry could trigger a regulatory crackdown.’
Of course, the government doesn’t like the idea of a decentralised power having control over the money supply. The central bank/government duopoly over the money supply is what it prefers. So the government have a vested interest in maintaining the current monetary system.
But the biggest stumbling block to the rise of cryptos may be the banking sector.
Morgan Stanley recently noted in a report on bitcoin that the crypto can’t compete with credit cards. The bank argues that the costs of bitcoin transactions are simply too high for people to tolerate. Especially when credit card companies do it for almost nothing in comparison.
The two biggest global credit card companies, Visa Inc. [NYSE:V] and Mastercard Inc. [NYSE:MA], can process 5,000 credit card transactions per second. In contrast, it can take up to 10 minutes to process one bitcoin transaction.
However, both Morgan Stanley and Teunis Brosens are a little short-sighted right now. They are only seeing the current problems with cryptos. That’s because the transaction problems may soon start to take care of themselves.
One of the advantages of higher bitcoin prices is that it should encourage more miners to come on board. Except, instead of mining for new bitcoin, these miners will act as auditors on blockchain transactions. In other words, more miners authenticating bitcoin transactions should speed up the process. On top of this, the miners get a small fee from every transaction.
The more the bitcoin price climbs, the higher the commission becomes.
Who’s afraid of bitcoin?
Perhaps what’s most fascinating about all the noise surrounding bitcoin is the size of the market.
Let’s put it in perspective.
Market capitalisation versus total assets as at September
Source: Wall Street Journal/Daily Shot
[Click to enlarge]
Here, the Wall Street Journal has compared the value of the market cap with total assets held.
As you can see, the four major banks have a similar market cap to the total value of bitcoin. However, their assets are worth a couple of trillion dollars each. Although, as the financial crisis taught us, bank assets often aren’t as valuable as they may seem.
The point is, the total bitcoin market is tiny. Even compared to the smallest bank in this list, Citigroup Inc. [NYSE:C], the total market cap of bitcoin only just eclipses Citigroup.
However, it’s staggering that so many powerful companies and governments continue to discredit such a tiny asset.
The global gold market is worth around US$8.3 trillion (AU$10.83 trillion). Not to mention that the total value of global stocks is not far from cracking US$100 trillion (AU$130 trillion).
In comparison to this, bitcoin is nothing. A tiny sliver of the global market. Which makes you wonder why multi-trillion-dollar corporations are so quick to denounce it.
Regardless, one thing is clear: They’re not winning the war. If you’re ready to learn how you could take advantage of the rise of bitcoin and cryptocurrencies, click here.
Editor, Markets & Money