Bitcoin has not changed in recent years, but the world has changed

Original title: What Explains Bitcoin's Resurgence?
Original source: Nic Carter
Original translation: 0x88
Nic Carter, a partner at Castle Island Ventures and co-founder of crypto data aggregation provider Coin Metrics, has been deeply involved in macro cryptoeconomics for many years. Castle Island Venture focuses on investing in crypto infrastructure and has invested in lending platform BlockFi, while Coin Metrics, as a leading data provider in the industry, has been favored by many crypto companies including Coingecko.
Before starting his own business, Nic Carter worked at Fidelity as the company's first crypto asset analyst. Fidelity also became an important limited partner of Castle Island Ventures. Nic Cater once proposed the Proof of Reserve concept that influenced the industry and published numerous in-depth works that inspired industry thinking.
In this article, Nic Carter briefly describes the ins and outs of this crypto bull run and analyzes the specific causes and effects in depth. BlockBeats translated this article for readers:

Bitcoin is back. Last month, the price of Bitcoin quietly broke through its all-time high, far surpassing the previous high of $19,600 in 2017, and hovering around $36,000 at the time of writing. At the end of 2018, the price of Bitcoin fell nearly 90% from its high point. This quiet operation of Bitcoin has been called a "quiet recovery" by many. Perhaps the most interesting phenomenon about this price trend that has risen nearly 1,000% from the March low is that "people don't seem to be very happy."

In the weeks since Bitcoin announced its three-year all-time high, Katy Perry didn’t get a Bitcoin-icon manicure. Floyd Mayweather didn’t launch a high-profile cryptocurrency product. The New York Times didn’t publish an article titled “Everyone Is Financially Free, But You Are Not.” Google searches for “Bitcoin” remain well below their 2017 peak. Entrepreneurs continue to quietly build financial infrastructure around crypto assets, but the public has largely ignored them.

So, what is quietly changing about Bitcoin when the traditional perception is still stuck in comparing the king of Internet native currencies to tulips? Technically, nothing. The last major update to the core protocol (the actual rules for transferring Bitcoin) was accepted by the community in July 2017. The latest update to the protocol is likely to be adopted by the community, but it improves privacy and efficiency. Even these minor changes to the protocol can take years to implement.

The fact that Bitcoin is fairly static from a technical perspective is one of its most classic paradoxes: while the creation of Bitcoin was a major technological leap that combined and reorganized important elements from cryptography, computer science, economics, and peer-to-peer networks, the protocol itself is quite rigid. As its anonymous creator Satoshi Nakamoto said, “Once Bitcoin 0.1 is released, its core design will remain unchanged throughout its lifetime.”

Bitcoin hasn’t changed in the past three years; the world around it has.

As a venture capitalist in the crypto space, I invest in startups that support the core financial infrastructure needed for Bitcoin and other public chains, which allows me to clearly see the development of crypto assets. Entrepreneurs who are committed to making the entire process of buying, holding, and trading cryptocurrencies easier have been looking forward to an opportunity to cash out in full. Today, it seems that this moment may be coming.

I believe that the current Bitcoin bull market is neither a fluke nor a bubble.

For professional investors, buying Bitcoin no longer presents any career risk

This idea of ​​completely removing people's discretion from the monetary system is so contrary to how central banks work today that Bitcoin has been heavily criticized by many old-school economists (see Twitter posts from Paul Krugman and Nouriel Roubini).

Still, more and more people who once didn’t believe in Bitcoin are becoming Bitcoin advocates. In the early days, Bitcoin was championed by venture capitalists and entrepreneurs like Mark Andreessen, Fred Wilson, and Chamath Palihapitiya, who understood the explosive potential of network effects based on their experience investing in software. But today, a new group of Bitcoin enthusiasts has emerged: veterans with decades of experience trading the market, who are more familiar with interest rates and commodities than tech startups.

These hedge fund experts have recently made their reasons for their allocations to various assets clear. Bill Miller, former CEO of Legg Mason, pointed to the unprecedented pace of money printing by the Federal Reserve and said of Bitcoin: "This is a technological innovation that we have never seen before, and it is gaining more and more acceptance every day." Stanley Druckenmiller, the investor who once participated in George Soros's attack on the British pound, compared Bitcoin to gold and cited its 12-year track record and growing credibility.

Paul Tudor Jones, a hedge fund star known for his currency bets, said in an interview: "I have come to the conclusion that Bitcoin is going to be the best inflation hedge - a defensive hedge." So if you believe that governments and central banks around the world will eventually push inflation higher, then keep Tudor Jones' analysis in mind and you may find that you need to allocate some Bitcoin.

Well-known Bitcoin skeptics on Wall Street are now starting to reconsider their positions. Larry Fink, CEO of BlackRock, which manages $7 trillion in assets, was previously indifferent to Bitcoin. Now he admits that Bitcoin could become a global asset and replace gold in investors' portfolios (worth nearly $10 trillion). Jamie Dimon, CEO of JPMorgan, called Bitcoin a "fraud" in 2017, but recently changed his mind and started dealing with players in the crypto space. Ray Dalio, who runs the world's largest hedge fund, is no longer so skeptical of Bitcoin, saying in a recent Reddit AMA: "I think Bitcoin (and some other digital currencies) have established their position as alternative assets similar to gold over the past decade."

When it comes time for financial institutions to make a final decision, Bitcoin gets something it never had before: no risk of getting fired for buying it. Herding is common on Wall Street. If you make a mistake that no one else has made, your career is over. But now that Bitcoin is being viewed as a valid monetary asset on Wall Street, analysts and traders can buy it without being looked down upon. The full support of a well-respected commodity trader has accomplished what Crypto Twitter could never do: make Bitcoin accepted in the world of financial giants.

All this indicates that institutional funds are pouring into the Bitcoin market

As recently as 2013, if you wanted to buy Bitcoin, your best bet might have been to wire money to an unregulated exchange in Japan that was originally used to trade and sell Magic: The Gathering. (Not surprisingly, the exchange was hacked and hundreds of millions of dollars worth of Bitcoin was stolen.) Obviously, professional investors would not consider such an investment. Even during Bitcoin’s run to $20,000 in 2017, very little institutional money flowed into Bitcoin. Bitcoin’s price surge at that time was driven primarily by retail investors who thought they could outsmart Wall Street or use Bitcoin as a vehicle to invest in other tokens.

But retail investors are often overly sensitive to price changes, and when prices began to fall in 2018, many retail investors sold their Bitcoin, packed up their bags and moved on. In contrast, institutional investors - hedge funds, mutual funds, endowments, pension funds, insurance companies, family offices and sovereign funds, etc., who hold tens of trillions of dollars, are more cautious when trading. A huge change is happening in the crypto world, and institutional investors are getting involved in Bitcoin for the first time in history.

The biggest reason for this progress is that the financial infrastructure of Bitcoin has made great progress in the past three years, especially in terms of custody. That is, if you are an institutional investor and want to buy some Bitcoin, who will custody it for you? Unlike retail investors, institutional investors do not keep digital assets in a device in a desk drawer or go to Coinbase directly through the iPhone app to trade. Upcoming exchanges like Coinbase and the Winklevoss brothers' Gemini were initially built mainly for retail investors to trade cryptocurrencies, without considering the needs of institutions.

But since 2017, many brokers and custodians have emerged that focus on serving institutions: Coinbase launched its Prime offering; my former employer, Fidelity, an asset management firm that manages trillions of dollars in assets, launched Fidelity Digital Assets, which focuses on institutional Bitcoin custody and trade execution; and many other "big players" have also joined the game. Pension funds, endowments, and sovereign funds may not trust cryptocurrency exchanges, but they may trust familiar brands like Fidelity as counterparties. The actual situation is this: Recently, NYDIG, a subsidiary of Stone Ridge, a $10 billion asset management company, facilitated the purchase of $100 million in Bitcoin by insurance company Mass Mutual; at the same time, Coinbase helped MicroStrategy, an enterprise software company headquartered in Virginia, purchase and custody more than $1 billion worth of Bitcoin.

So, a lot of money is being bought through convenient tools when there are reasonable reasons. Ruffer Investment Company, an asset management company with $27 billion in assets, calls itself an "all-weather allocator" and allocates 2.5% of its portfolio to Bitcoin, explaining: "Negative interest rates, extreme monetary policies, increasing public debt, dissatisfaction with the government - all of this has undoubtedly provided a strong impetus for the success of Bitcoin when traditional safe-haven assets, especially government bonds, are extremely expensive." On December 16, Guggenheim Investments CIO Scott Minerd revealed in an interview with Bloomberg that his analysis showed that each Bitcoin is worth $400,000, more than ten times the current level. And you can be sure that there are more high-net-worth individuals, hedge funds, trusts and family offices who are quietly allocating Bitcoin, but they won't explain any reasons on CNBC.

US government regulatory green light

In addition to infrastructure issues, many investors are also cautious about Bitcoin regulation. If you are an institution, it doesn't make sense if the assets you own will become illegal one day. But there is still a lot of good news for Bitcoin bulls in this regard. In the United States, the Office of the Comptroller of the Currency, the bank's regulator, clarified that banks can store Bitcoin private keys for customers. With this policy, it is only a matter of time before large banks offer Bitcoin investment tools to their customers. You may not trust small cryptocurrency brokers, but you almost certainly trust banks. In addition, the OCC recently granted a federal bank charter to a professional "crypto bank" called Anchorage, paving the way for closer ties between the traditional financial system and the cryptocurrency world.

As crypto startups gradually enter the unfamiliar regulated banking world, established banks also see opportunities in digital assets and have begun to form alliances with each other. As many crypto entrepreneurs know, it used to be almost impossible to get involved in banking in the United States. Now, as the crypto ecosystem is seen as an increasingly important market opportunity, multiple banks are vying to attract the attention of crypto companies. "Blockchain, not Bitcoin!" The mantra of Bitcoin opponents in 2017 is no longer there.

The Commodity Futures Trading Commission has also expressed a clear view that "digital assets such as Bitcoin and Ethereum are commodities", paving the way for them to enter the regulated derivatives market and gain a foothold in institutional portfolios. Trading Bitcoin and Ethereum is like trading oil, gold or wheat futures. The Chicago Mercantile Exchange launched Bitcoin futures products on December 17, 2017 (at the peak of the last cycle), and later launched options trading and announced the launch of futures products for Ethereum, the second largest cryptocurrency. The open interest in the Bitcoin CME futures market has reached an all-time high in recent weeks. When a hedge fund like Renaissance, which has a scale of up to $110 billion, participates in the game, whether it is long or short, it is often carried out through derivative instruments.

Bitcoin’s New Evangelist

Perhaps the most active Bitcoin bull in recent times is Michael Saylor, CEO of MicroStrategy, who has allocated more than $1 billion of the company's assets to Bitcoin, making his company the first public company to include Bitcoin as an asset on its balance sheet. He did so because "Bitcoin has a higher rate of return and better value preservation than holding cash."

Saylor expressed his confidence in Bitcoin by allocating personal assets, company assets and issuing bonds, and spared no effort to promote the advantages of Bitcoin through podcasts and other media. He called Bitcoin "the most efficient system in human history to conduct energy through time and space." He criticized inflation in traditional currency markets, believing that the problem is greatly underestimated; and called MicroStrategy's US dollar cash assets "melting ice"; and called his Bitcoin position a prudent hedge rather than speculation.

Although Saylor's statement may sound a bit exaggerated, he does have real money allocated to Bitcoin, which makes him qualified to evaluate the asset. So far, Bitcoin's performance has not disappointed him: Before the company announced that it would put part of its reserves into Bitcoin, the price of MicroStrategy stock was about $120. Now the stock price is close to $600.

Billionaires like Saylor, Fidelity’s Abigail Johnson, and Twitter’s Jack Dorsey are endorsing Bitcoin—once championed by marginalized libertarians and crypto-anarchists. The themes reiterated by new investors seem the same as they’ve heard before. Bitcoin has survived protocol forks, bugs, and exchange hacks. It has a nearly 100% uptime record and has settled trillions of dollars worth of transactions without a rollback since its creation. With negative real interest rates in the traditional monetary system seemingly inevitable and likely to fall further, zero-yielding assets like gold and Bitcoin have a new appeal. Many once-skeptical people point to Bitcoin’s recovery from the 2018 crash as proof of its ability to function as a store of value. In fact, the second recovery rally is more convincing. The first time, it might have piqued your interest, but you’d be wary of buying into something that looks frothy. The second time, you realize that what you once mistook for a bubble is actually just cyclical activity within a long-term trend.

Many people are uneasy about the dollar system

There is a fundamental difference between the Bitcoin rally before 2017 and the recent rally: three years ago, Bitcoin appreciated sharply due to its important role as the reserve underlying asset of the crypto industry (but the speed of the plunge was as fast as its rise). This was a completely independent phenomenon and had almost nothing to do with the outside world. In contrast, the fundamental reason for the Bitcoin rebound that began in 2020 is that people are worried that the massive money printing and debt spending of countries around the world will lead to instability in the global monetary system.

The COVID-19 pandemic and the recession it has caused have become a powerful excuse for central banks to accelerate the printing of money to make up for fiscal deficits. As the world's most important central bank, the Federal Reserve has been particularly aggressive in its monetary stimulus policy, which has led to a surge in the US money supply. At the same time, the status of the US dollar has also been shaken for many investors. Measured against a basket of sovereign currencies, the US dollar rebounded in the spring of 2020, but has experienced a long-term decline in the following period. Many dollar shorts in the market see more and more US debt on the market, but no one is buying it, and the dollar has fewer and fewer believers as the world's reserve currency, while other major currencies are also facing their own problems.

This distrust of the dollar and concerns about the stability of the current global monetary system have led to more interest in Bitcoin, whose predictable currency issuance policy tends to zero, making it the strongest currency in the world. While there are many other inflation-hedge assets to choose from, Bitcoin also offers unlimited room for growth - just like buying shares of tech giants. In a sense, it is a two-bet in one: a sound, unbreakable monetary protocol and a reserve asset in a rapidly expanding crypto-financial network.

Despite this banner year for Bitcoin, it still only accounts for a small fraction of global assets and is still relatively unaccepted by a relatively small number of people. The Cambridge Center for Alternative Asset Finance estimates that the global crypto user base will be anchored at around 100 million people, or 1% of the world's population. Bitcoin's current market capitalization is $650 billion, just 6% of the value of gold above ground and 2% of U.S. Treasuries. But at the same time, its market capitalization has tripled in the past few months. Just like before, there will be people who will look back and point out that Bitcoin is risky. For me personally, the story of Bitcoin is far from over, and this revolutionary digital asset still has a long way to go.