The Tectonic Shift in Crypto

This past week a few slightly “under-the-radar” events caused a major shift in the crypto arena that most people are totally unaware of. Just a couple of weeks ago, Joe Biden was threatening to Veto pro-crypto legislation, and Sen. Elizabeth Warren was railing about the evils of crypto and how it is only good for hiding assets and mafia transactions. And the Democrat-controlled Security Exchange Commission (SEC) was actively targeting several major crypto sponsors despite having approved Bitcoin Exchange Traded Funds (ETFs) in January.

Then along comes Trump, who holds a Crypto “Love Fest” at Mar-a-Lago, which catapults crypto into the political spectrum. (And then he doubles down even more specifically at the Libertarian convention). The next thing you know political analysts are looking at the crypto single-issue voters in the swing states and discovering that according to Kristin Smith, CEO of the Blockchain Association “digital assets have emerged as a significant issue in the upcoming election… over one quarter (26%) of voters indicate that they are actively weighing political candidates’ positions on digital assets when making their decisions.”

The survey Smith is referencing is a May 7^th, Harris Poll, conducted among twelve hundred Michigan, Nevada, Ohio, Montana, Pennsylvania, and Arizona registered voters to discover their attitudes on crypto. Key findings were:

• A sizeable number of voters (40%) wish political candidates talked more about digital currency.
• Most voters do not trust elected officials to understand innovative technology like crypto.
• More than half are concerned about policymakers stifling innovation via overregulation.
• The vast majority want policymakers to be sure they understand crypto before regulating.
• Nearly half of voters do not trust political candidates that would interfere with crypto.

Demographics:

• Crypto-positive voters are more likely to be male, younger, Black, or Hispanic, and are less likely to have a four-year college degree compared to voters overall.
• Crypto-Positive sentiment is not limited only to crypto owners – about 40% of Crypto-Positive voters have never owned crypto.
• Crypto-Positive voters do not show any major differences in household income and political party lean.

So what does this mean?

1. Minorities like Crypto and it could influence their votes.
2. Both Democrats and Republican voters favor crypto and positive crypto Legislation.
3. This could be enough of an issue to swing the swing states.

Suddenly, younger Democratic Lawmakers woke up and realized their Party was on the wrong side of a major political issue. They were antagonizing three major typically Democrat demographics.

1.  Young Voters
2. Minority Voters
3. Big Banks

Suddenly, we see the first bipartisan passage of any legislation in years. This crypto legislation had been in committee for a couple of years and passage was questionable, despite the Republican-controlled House. But the House did pass H.R. 4763, the Financial Innovation and Technology for the 21st Century (FIT21) Act, by a vote of 279-136, including 71 votes from Democrats. The bill passed despite opposition from the White House in a Statement of Administration Policy (SAP) and opposition in a statement by U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler. But still has to be ratified by the Senate.

This bill does a couple of major things.

1. It defines how a crypto can be classified as a commodity (thus removing it from the SEC purview).
2. It clarifies the rules and regulations crypto needs to follow, in order to not accidentally run afoul of the law.

Up until this point, the SEC was making up the rules as they went along and refusing to give clarification until they prosecuted someone.

Crypto Goes Mainstream

The next major domino to fall was the approval of an Ethereum ETF. This was a major shock to the crypto community (but in a good way). Ethereum (ETH) is the second largest crypto by value, second only to Bitcoin (BTC). But with the May SEC approval deadline approaching, the crypto community had almost given up on the approval of the Ethereum- ETF, due to the SEC’s antagonism toward Crypto, with only 25% of experts thinking it would happen before the end of 2024. As recently as April 25^th, Reuters said “US SEC expected to deny spot Ether ETFs next month.”

But suddenly with the May deadline at hand, headlines read, “Breaking: Ethereum ETF Approved By The SEC”.  One interesting side note is that it was approved under “delegated authority”. That is, by staff, with no vote by the commission higher-ups. Theoretically, the higher-ups could rescind the staff approval. But more likely, they gave their tacit approval but didn’t want to be seen as flip-flopping on the issue after being so against it just weeks earlier. So they just let it slide through with underlying approval.

This approval permits Ethereum ETFs in general, but as of yet no specific Ethereum ETFs have been approved. But several of the big boys like BlackRock are pushing for their own versions and they should be approved after ironing out minor details in the next few months.

So, before long, we will have both Bitcoin and Ethereum ETFs. And then, regular retail investors can easily add these two cryptos to their investments and even to their IRAs. This is HUGE, taking crypto from the fringes to a mainstream investment.

Biden Swims against the Tide

Biden had signaled his intent to veto the  Staff Accounting Bulletin (SAB) 121—(which is separate from the FIT21 bill) on the day that it was passed by the U.S. House of Representatives in a 228-182 bipartisan vote. But that was before all this other stuff happened. The political tide was turning, everyone expected the White House to see the writing on the wall and soften their stance on all things crypto. But then on Friday, May 31^st, Biden notified Congress that he had Vetoed  SAB 121 which was simply a Bipartisan attempt by Congress to reign in the SEC’s overstepping of its authority in regard to crypto custodians. This is bound to anger not only small crypto voters but also Big Banks who are the “Custodians” being targeted.

You’ve Come a Long Way Baby

Despite setbacks like the Biden veto, crypto has come a long way in the last decade and a half. Bitcoin was invented in 2008, use of Bitcoin as a currency began in 2009, and by 2021 it was adopted as legal tender by El Salvador. Some constituent states even accept tax payments in bitcoin, including Colorado and Zug (Switzerland).

David Andolfatto, Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other Central Banks because it prompts these institutions to operate sound policies. In other words, a little competition is a good thing. 

According to the European Central Bank, the decentralization of money offered by Bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek‘s book The Denationalization of Money, in which he advocates a completely free market in the production, distribution, and management of money to end the monopoly of central banks.

It is said that BlackRock alone through their IBIT (Bitcoin ETF) actually owns 292,000 bitcoin  ($19+ Billion).

Money serves three purposes: a store of value, a medium of exchange, and a unit of account. According to The Economist in 2014, bitcoin functioned best as a medium of exchange. This is changing and although its value fluctuates wildly, it is becoming more and more a store of value by everyone from hedge funds to banks and corporations. As transactions shift to being carried on the blockchain crypto will increase and unless the calculation for the M2 money supply changes to include crypto, there will be an increase in “off-balance sheet” money supply.

Why Bitcoin?

Bitcoin’s draw is that it is a store of value and a medium of exchange outside the government-controlled fiat currency system. This of course is why it garners government ire from those who want to control everything. At one time, economists like Paul Krugman said that cryptocurrencies like bitcoin are “only used by bank skeptics and criminals”, (which was pretty much Elizabeth Warren’s stance as recently as a month ago).  On the other hand,  crypto advocates considered it “digital gold”.

Like gold, Bitcoin has a fixed growth rate, that rather than accelerating, is actually decelerating. This is due to rules built into the Bitcoin algorithm, with a maximum quantity of Bitcoin set to be reached at 21 million. But because the production is made twice as difficult approximately every 4 years (called a halving) the absolute limit may never actually be reached, it just gets closer and closer to 21 million without ever getting there. Although production has a maximum end date in the year 2140.

Why Ethereum?

Ethereum has an entirely different value proposition than BTC. ETH is scalable, programmable, secure, and decentralized. Rather than just being “digital gold” that sits in a vault and is occasionally trotted out to make purchases, Ethereum is a decentralized global software platform powered by blockchain technology. Other applications can be built on top of ETH’s chain and powered by fees charged in ETH currency. So ETH is being used constantly to run the system and has its own programming language that runs on a blockchain. While BTC has a limited supply, ETH is theoretically unlimited. But it has a mechanism that actually decreases supply called “burn”.  That means that ETH used as transaction fees are destroyed rather than accumulated called a “deflationary supply”. This means that its value may increase if demand remains the same or increases.

In 2022, Ethereum switched to a different validation mechanism than BTC called “proof-of-stake” rather than the energy-intensive proof-of-work mechanism required by Bitcoin.  According to Investopedia, “Ethereum was intended as a platform to facilitate immutable, programmatic contracts and applications via a global virtual machine and to take a position as the infrastructure behind Web 3.” Bitcoin doesn’t have a programming language because of the potential vulnerabilities that presents. Although ETH has excellent security provisions, including automated penalties for corrupt stakeholders, it prioritizes the ability to do other things (like run programs) over absolutely perfect security.

Other Alt Coins

Layer 1

In addition to BTC and ETH, there are other cryptos called “Alt-Coins”. They serve a variety of other purposes (or in the case of meme tokens, no purpose at all).  ETH is considered a “Layer 1” crypto meaning that other applications can be built upon it. But ETH is not the only Layer 1 crypto (although it is certainly the largest by Market Capitalization and daily volume. Market Cap is constantly changing as the price changes but as of this writing, ETH has a market cap of just over $456 billion.

The second largest is Binance (BNB), but it has had a serious run-in with the SEC, so it isn’t traded on the largest U.S. crypto exchange, called CoinBase. But BNB still has a market cap of $88 billion.

The third largest Layer 1 crypto is Solana with a market cap of almost $77 billion, followed by Cardano with a market cap of $16 billion.

Layer 2

In addition to Layer 1 coins, there are Layer 2 coins that sit on top of Layer 1 and provide extra functionality, improved speed and lower fees. The top layer 2 cryptos by market cap are:

Stable Coins

There are also “Stable Coins” with a fixed value tied to some other currency like the U.S. Dollar which act like money market accounts (without FDIC protection of course).

And PayPal even has its own stablecoin with a market cap of around $400 million. So if you add up the global market cap of all cryptocurrencies you get $2.67 TRILLION as of this writing, which is up 126.8% over a year ago. If we want to compare that to gold we find that  about 244,000 tones of gold have ever been mined. Of that the physical financial gold market – made up of bars, coins, gold ETFs and central bank reserves – is about 40% of the total gold ever mined. So, 244,000 x 0.4 = about 98,000 metric tonnes. There are 32,000 ounces of gold in one ton, and the price of gold per ounce was about $2,327 as of this writing. So, 98,000 x 32,000 x $2,327 = about $7.3 trillion. So the current crypto market is about 36% of the size of the current gold market. As of the end of 2023, the global stock market was $109 Trillion, so Crypto is worth about as much as 2.4% of the world’s stocks, up from absolutely zero 15 years ago. This is huge! 

Looked at another way, the U.S. M2 money supply is about $20.8 Trillion, so all the crypto in the world is worth about 12.8% of the U.S. money supply and as more value shifts to the blockchain, that percentage will only increase. That is why big banks and investment firms are locking up more BTC and other cryptos. It is almost impossible to overstate how big this shift is and how little understood it is by the masses. It has been described as being similar to the advent of of Apple, or Amazon or the Internet itself. But it all depends on where on the curve of adoption you are.

If you think about the internet, there was major hype in 1999 but then a big crash came in 2000 and again in 2008. It wasn’t until 2012 that the hype began to become reality. In my opinion, we are roughly at that same tipping point in the Crypto cycle. Crypto has become mainstream, it is no longer the purview of visionaries and nutcases.

You might also like:

• Crypto Goes Mainstream
• Applying the ROC to Crypto
• The Modern Day Wild West: Crypto Scams And Opportunities
• Blockchain Goes to Ethiopia
• Ripple the Cryptocurrency of Banks
• 4 Investments Making Waves in the Technology Sector
• How High-Inflation Drives Countries Towards Crypto
• Can Crypto Solve Venezuela’s Hyperinflation Problem?
• Cryptocurrencies and Inflation
• Cryptocurrency: Is Bitcoin the Future of Money?

Image created with Meta A.I.