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THE NEXT BITCOIN

Currencies / cryptocurrency Jan 17, 2022 - 05:21 PM GMT

By: Raymond_Matison

Currencies

Most people, when thinking or talking about bitcoin, see it as a constant non-changing, immutable coin.  However, the fact is that ever since the initial introduction of the original Bitcoin platform in 2009, there has been a near constant flow of imitators, look-alikes, and attempted improvements – in other words a “next bitcoin”.

Because Bitcoin’s programing code is public and available free to anyone desiring to download, use, or alter it to create a new version, the first bitcoin contender appeared not long after bitcoin itself was launched.  Hence, several Bitcoin “forks” have been created – which were attempts to create a new and “improved” bitcoin, while also continuing to maintain the original version.

A new platform is only as effective and valuable as the size of its user community.  When a Bitcoin fork is effected, a more modest size of a split user community will have its use languish, and value of its token proscribed, regardless that it may have improved functionality in terms of speed of transactions, finality, security, or cost.


Technological innovation and regulation will greatly influence the nature and number of future generation’s upgraded “next bitcoin’s” emission in ways that we cannot imagine.  In addition, the original bitcoin can extend itself with approved code changes and upgrades which expand both its functionality, usefulness and adoption.

Important bitcoin characteristics

As bitcoin is not based on, or require the emission of any company’s or a country’s national debt for its creation, its coin is not a liability of any large corporation or national government entity.  In this regard it is similar to gold as a universal asset in that it has no counter-party risk; also tends to be deflationary. 

Often Bitcoin is cited as an extremely volatile asset, which is why some “experts” believe that it could lose most of its value in the future.  That is a sobering thought!  However, despite its volatility and potential for a future near zero value prognosis, it must all be considered in context.  It is factually true that since the delinking of gold from our fiat U.S. dollar in 1971, the value of that dollar has declined by 98%!   Gold has held its purchasing power over centuries, as an ounce of gold which was priced at $35 before 1971 currently costs over $1800 – the loss of purchasing power since 1971 is astronomical.  If instead, one were to use the state manipulated CPI numbers, the value of the dollar has declined by 85.4%.   That is also an incredible amount of decline in purchasing value for a relatively short time period.

Every fiat paper currency issued by any and all countries around the globe over millennia has ultimately declined to a zero value over time!  In this context, bitcoin’s performance has been positively stellar, as it has risen to astronomical heights in just a decade from a near zero value at its original issuance.   Therefore, it is absolutely clear that bitcoin cannot have a future value in history worse than that of any nation’s paper currency, including the U.S. dollar. 

Even if bitcoin could go to zero – and that would be an unimaginable loss in value today – that future near zero price would be very close to its original issue price of just fractions of a penny.   By comparison, fiat currency has consistently lost value since the founding of the Federal Reserve System in 1913, without any sustained periods in which it has gained and held significant value.  So the dollar has been much less volatile than bitcoin, but steady and relentless in its decline of purchasing value.

As bitcoin’s persistent global adoption for its use keeps growing, and its network is getting stronger, the coin’s value should continue to rise over time.  Further, the superiority of digital asset coins issued without any offsetting liabilities versus debt issued fiat currency is so clear that it requires little debate.  The dollars of fiat currency that one deposits in a bank is technically a junior liability of the bank, and not your asset.  Just take any paper currency from your wallet and examine it – it will state that it is a Federal Reserve Note, financial jargon for a liability.  Gold, bitcoin and other virtual cryptocurrencies are assets without being the liability of another institution.

Because of the high cost of transaction confirmation through its “proof of work” process, and slow processing time to guarantee a high level of security based on highly decentralized computer networks, bitcoin has not become a universal transactional payments platform.  Over recent years bitcoin has come to be more closely identified as an important store of value.  Accordingly, it has been criticized as having a limited utility for its use.  Given the steady decline of fiat currency purchasing value, a store of value is an important use case.

The bitcoin transaction confirmation process in “proof of work”, called mining, requires huge investments in state of the art computer technology, which necessarily has gravitated to large financially enabled companies.  The days of a single miner are long gone.  To this extent, there is some centralization of mining, especially corporate mining, which can be less than optimal for decentralized proof of work transaction confirmation.

An important characteristic of bitcoin is its programmed limitation of the issue of its 21 million maximum coins.  Every four years, the number of coins emitted as a reward for transaction confirmation is reduced by half.   Accordingly, the original 50 coin reward for every blockchain transaction block confirmed in the initial four years was reduced to 25, and followed by subsequent reduction every four years to its present 6.25 coins reward during the present four year cycle.   As a result, about 90% of the maximum 21 million bitcoins has been mined.   This reduction in coin rewards forces miners to become more efficient, and the reduced number of coins issued serves to support a higher price.

Bitcoin’s price is surely volatile, but is it risky?  Risk is necessarily associated with the future, not the past.   When you are evaluating your original purchase price with the current market price and you are profitable – you will likely conclude that your investment was not risky.  However, if your investment shows a loss, you will likely conclude that it was a risky investment.  Given the price activity over the last ten years, one is forced to confirm that bitcoin has been volatile, but not risky.   

Early modifications and forks

Bitcoin’s blockchain started with its genesis block on January 3, 2009.  In October 2011, Litecoin launched its “next bitcoin” by increasing the maximum supply of coins to 84 million (4x that of bitcoin), and block times reduced by ¼ that of bitcoin.  This is really not much, but useful, innovation from the original Bitcoin network.  Litecoin’s market capitalization is now $9.2 billion, or 1.1% of bitcoin.

Authors Jared Tate and Andrew Knapp of the highly informative, even technologically panoramic book “Blockchain 2035” published in 2019 write: “In October 2013, I forked the Bitcoin code and began experimenting with a few changes.  These changes came to fruition with a launch of the DigiByte mainet on January 10th, 2014.”  They add, “From the start, our goal with DigiByte has been to build a stronger blockchain: to be faster, more secure, more decentralized, and more forward thinking.”  That was another of the early “next” bitcoins.  Its market capitalization is just 0.4% of Bitcoin.

When Bitcoin developers could not agree on what the size of a block should be, because it affects both the timing and computer power necessary to confirm a block, the dissidents executed a hard fork though which two separate chains were created.  The new, “next bitcoin”, started on August 1, 2017, named Bitcoin Cash.  Today, Bitcoin Cash price is approximately $400 per coin, with a total market value of $7.3 billion.  This is in stark contrast to bitcoin itself with a capitalization of $790 billion.

The following year, another “next bitcoin” was forked from the Bitcoin Cash platform, known as Bitcoin SV.   The new “next bitcoin” intended to offer scalability that would allow it to serve as a peer-to-peer electronic cash transfer system.  The logic of this fork is also compelling, but the capitalization of Bitcoin SV is only $2 billion, confirming that smaller supportive communities do not produce sufficient adoption and use, even if the technology is improved – to the detriment of the coin’s use and price.

Other historical examples as the “next bitcoin” includes Dash and Zcash.  And surely there will be other future examples of a “next bitcoin”.  The importance of this technology is that it is vibrant, evolving, and not going away.  Future bitcoins will be an evolution of the current Bitcoin platform, or new forks based on presently unimaginable technological development.

Bitcoin’s self-development – Lightning Network and Taproot

Bitcoin’s network cannot scale to accommodate it being a global payments system, because it can only transact seven tractions per second.  To improve Bitcoin’s functionality some developers started building the Lightning Network in 2015, completing the project by 2018.  Authors Tate and Knapp describe it as follows: “The Lightning Network is a secondary layer built on top of bitcoin that focuses on micropayments through the use of what are known as payment channels.”  This layer offers lightning speed for transferring payments at essentially zero fees, while maintaining bitcoin’s traditional security.  As the Lightning Network is not a blockchain, it does not require the costs normally associated with bitcoin transactions.

Establishing a payments channel requires a deposit of bitcoin with a multisignatory wallet which allows settlement if the parties agree on its details.  The proof of its functionality lies in the fact that the country of El Salvador has been using the Lightning Network successfully since last September with positive effects for its population.

In November of 2021, the Taproot upgrade to Bitcoin became operational, and it is the most significant improvement to Bitcoin since the Lightning Network.  This upgrade provides many important improvements: it will lower transaction costs by batching some transactions, it will improve scalability through faster verification, it will improve privacy by denying some information on the movement of coins, and it improve smart contract functionality on the Bitcoin network.

With Taproot’s implementation, bitcoin will gain significant utility over time beyond its use as a store of value.  This is also the proof needed to confirm that innovations have been happening to Bitcoin all along.  It is also an indication that the “next bitcoin” will evolve soon after the need for it is identified.  As technology is not static, future upgrades will continue to both amaze and liberate.

Bitcoin’s digital asset global nature

The real beauty of digital asset cryptocurrencies, including bitcoin, is that it is a global development and movement.  Bitcoin is used in many economically war-torn or otherwise undeveloped countries where banking services are sparse.  Countries along China’s Belt and Road economic project embrace it.  The BRICS countries of Brazil, Russia, India, China, and South Africa are all promoters of digital asset currencies as a means to getting out from the suppression and manipulation of a dollar denominated, centralized global system.

America’s continued use of sanctions, by cutting off selected countries from the use of dollars within the SWIFT international money transfer system may be backfiring now as China and Russia have developed their own money transfer systems.  Iran is another but different prime example, as it now has aligned with both China and Russia, seeking to escape sanctions and the dollar denominated suppression.  Indeed, the original BRICS countries have expanded over years to become CRISIS countries for the western world, consisting of China, Russia, Iran, South America, India, and South Africa which seem to be commonly aligned - at least with respect to the use of the dollar. 

Also, foreign central banks have been gradually diversifying away from the U.S. dollar for decades, as USD as a percentage of foreign reserves have declined from 71% in 2000 to 60% in 2021.   The simple point of this observation is that increasingly fewer countries desire to use the dollar, when that is an option.  This is partially due to the accelerating inflation of the dollar confluent with its decline in value, and foreign country exposure to this inflation without any lack of effective control, or escape.  Opting out of this system either has meant using the Euro, which is also in danger of collapse, and therefore not a good option, or using China’s or Russia’s currency which is also not an option due to their own unique limitations.  

The new world monetary system appears to be working on a global bridge currency which would create a multipolar financial world, decreasing reliance on the global dollar hegemony.  As all fiat currencies are debt based, it is easy to envision a long term movement towards asset based digital bridge currencies, even as current elites and politicians would be against it. 

Crypto.com Research has indicated that on a global basis an estimated 114 million people held bitcoin as of year-end 2020.  By year-end 2021 that estimate has risen to 292 million people – still under a miniscule 4% of global population.  As adoption continues to grow over the next decade, the laws of supply and demand should be quite constructive to the future price of bitcoin.

Stablecoins and central bank digital currencies

In the top 100 coins listing by market capitalization, seven are so called stablecoins – which are backed by a national currency, and therefore much less volatile than bitcoin or other digital assets, or cryptocurrencies.  However, it is a mistake to assume them to have constant purchasing value.  They are only stable to the degree that the value of its underlying currency does not erode in value due to inflation, which is accelerating.  Since stablecoins are backed by some combination of currency and short term high quality liquid debt securities, their “stability” is dependent on currency inflation, reduction in purchasing value, or even the level of interest rates set by centralized banks. 

Stablecoins are also in the crosshairs of regulatory agencies, which want to control issuer independence and influence.  Stablecoins are likely to become the on and off ramps for accessing and using the digital asset space for the general public – their means of initially purchasing cryptocurrencies like bitcoin with fiat bank accounts or credit cards – and a refuge currency when investors seek shelter from cryptocurrency volatility.  As such, increased adoption by the public and interest in owning digital platform tokens means that people increasingly will use stablecoins issued by banks or any other permitted entity to issue them.  Accordingly, government regulators have a keen interest in controlling their use, and even a greater interest in identifying all taxable transactions.

It should be noted that before the debt-based currency system was established with the approval of the FED, the country’s citizens were not required to file a personal income tax.  Money necessary to fund government operations were obtained primarily from foreign tariffs.  With the establishment of the FED, IRS and personal income tax, government funding expanded and produced a cycle of ever increasing taxation and government intrusion into the personal lives of citizens. 

By contrast, the potential issuance of a central bank digital currency (CBDC) includes complexities that for some nations it could preclude its use.  First, we must note that a central bank digital currency is the old paper currency just dressed up in new digital garb.  The central bank would still issue the nation’s traditional currency as a liability, only with new electronic technology for storage or payments.

As our government tries to cope or balance its increasing military and social expenditures with a slowing growth economy and negatively affected tax base, the acceleration in the issuance of more currency is even more likely. Therefore, increased borrowing and money issuance will accelerate to erode that currency’s purchasing value, and produce price inflation.   Central bank digital currency issues would also disintermediate thousands of banks presently existing under the federal umbrella.  In addition, the electronic currency would allow governments to monitor every single expenditure of all citizens.  Therefore, CBDC’s characteristics will vary widely among differing nations of the world, but some nations could choose not to issue its own CBDC.

Abridged history of Gold money, fiat, enter Bitcoin

Over thousands of years and through the insistent action of the marketplace worldwide, gold was conferred the crown of ultimate money.  People used it universally before large centralized governments came into being.  Fast forward scores of centuries, as gold gains increasing acceptance, the need for storing increasing amounts of gold also arises.  Trusted goldsmiths issue receipts for deposited gold.  Cities grow, as do goldsmith deposits.  Since their experience dictates that all depositors never ask for their gold at the same time, human ingenuity and greed creates their awareness that more receipts can be issued than the actual gold deposits, creating the earliest version of a bank.  

Banks grow through the concomitant growth of cities and industry to gargantuan size.  People through the 1700-1900 period bring their gold to be deposited and safeguarded into these banks.  As banks continue to grow, and as piles of gold accumulate, innovative bankers conceive of an improved way to dominate or control this market - through national regulation.

The establishment of a Federal Reserve banking system in the U.S. is formulated and created by rich bankers, receiving Congressional approval in 1913.  Originally, people’s deposit of gold was certified by the Federal Reserve’s issuance of gold certificate money that are essentially paper receipts for gold, which at the option of the holder could be converted from certificates to physical gold.  As the centralized piles of gold grow also from annual increases in global mining operations, envy from governments rises in parallel.  Taking advantage of a Federal Reserve caused market crash and subsequent economic depression, in 1933 government outlaws common citizen ownership of gold money. 

After a several year human and financial bleeding of belligerents in WWII, and a judicious timing of entry into the war, the US becomes victorious and accumulates most of the gold of the waring countries through the sale of war materials.   In 1944, the US becomes the issuer of the world reserve currency, with the US dollar exchangeable by foreign countries to gold at $35 an ounce.  Fast forward twenty seven years, and the US declares that it is closing the gold exchange window – shafting every foreign holder of dollars.  With no more gold restraint on the emission of fiat currency, it expands at a rate now experiencing the highest price inflation in forty years, and foreshadows possibly a hyperinflationary rate which will evaporate citizen value of dollar-based assets.

So, what has really happened here?  The people had gold money, and brought it to the banks for safekeeping.  The banks and governments now own the gold money while the people own paper currency, which when deposited in a bank is not your asset but rather the bank’s junior liability, which in the case of bank failure will be lost.  So, people’s gold money has been taken from them, as their paper money becomes worthless.   It is the heist of century by the collusion of bankers and government.  No one needs to guess the intent of the FED – their historical actions proves their goals.  Once the people of this world truly understand this, the manufacture of pitchforks should become a growth business.

America’s founder Thomas Jefferson understood this as he sounded his warning in1802 stating: “I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.”

As stated before, in the period when the dollar was backed by gold, before the existence of the FED there was no personal income tax.   With recent birth of honest money in the form of bitcoin and other cryptocurrencies, which is not based on debt for its issuance, we may be able to go back and eliminate the personal income tax.  No frustrating hours of tax computation, or fees to tax accountants, and finally no acknowledgement of a requirement for people to fulfill unnecessary federal mandates.  Asset-based digital money would eliminate inflation and currency devaluation.  As bitcoin and blockchain cryptocurrencies provides an alternative to the corrupted, dying inflationary fiat system, America’s leaders could make decisions which truly benefits its people, allowing them to reclaim the title as “the exceptional nation”.  

Consequences

With banks and governments having stolen substantial real assets of citizens over the last century, it should be no surprise that regulators are also trying to control the new digital currency assets of people.  They want and need to preclude your financial independence from the controlling interests of banks, bankers, and governments – the old legacy system.  Accordingly, the risk of regulatory overreach is being experienced in the digital asset world as regulators are actually trying to dismantle this new and independent asset class, and the elite of this dying legacy financial system will do anything and everything possible to maintain control – so expect regulation to reach constitutionally destructive levels.   Investors in this digital asset space are already experiencing the influence of frightened but powerful bankers over the SEC, in their bid to remain relevant.  Unfortunately, for the new digital Phoenix of “life, liberty, and the pursuit of happiness” to rise, the traumatic collapse of the legacy system is necessary.  This is not wishing anyone ill, it is simply evolution in its truest, most basic form.

No method of surveillance, suppression or dismantling of new institutions, individuals, or financial systems will stop the advance of continuing technological innovation, which over more than the last decade appears to support decentralization, individual liberty, inclusion, and freedom from increasingly grasping banks and governments. Banks and government have been able to confiscate the real assets of people, but they cannot confiscate new globally decentralized cryptocurrencies, including bitcoin.  As the decline in purchasing value of the dollar accelerates, it will create a global citizen stampede towards bitcoin. Accordingly bitcoin could achieve price levels in a decade that simply are not credible to state today.

Expected price corrections in the equity and fixed income markets will sympathetically initially also affect the cryptocurrency markets.  Early stages of meshing the rise of digital assets and blockchain technology, with the demise of traditional legacy financial systems, will unfortunately also negatively affect cryptocurrencies.  As time passes and both equity and fixed income market declines become more substantial, recognition that legacy financial systems, institutions, and governments also are suffering from a demise in trust, gradually evolves to transfer that trust, viability, and value to the new digital asset paradigm.

Since the economy, our inflationary dollar, and traditional fiat money based markets will crash at some time, it is important for financial self-preservation to have exposure to the assets than can or will thrive in that environment. Those assets include real estate, gold, bitcoin, and other digital assets or cryptocurrencies.  The new Phoenix is rising.

Raymond Matison

Mr. Matison was an Institutional Investor magazine top ten financial analyst of the insurance industry, founded Kidder Peabody’s investment banking activities in the insurance industry, and was a Director, Investment Banking in Merrill Lynch Capital Markets.   He can be e-mailed at rmatison@msn.com

Copyright © 2022 Raymond Matison - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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