The opinion of the writer is their own and do not constitute financial advice in any way whatsoever. Edited by Sean Vanian, contributor for The Coin Radar.
Bitcoin adoption in relation to banking.
It has been nearly a decade since the invention of bitcoin back in 2008. While it has managed to create an entirely new industry, the adoption is yet limited. Moreover, governments are yet to understand it, ‘legal tender’ or ‘valuable commodity’ in many parts of the world confusion persists. Even when bitcoin is recognized in the category of ‘valuable commodity’, its question of volatility forever persists, which is actually its greatest attraction.
In this article, we are going to uncover the mystery behind the possibility of a wider adoption of bitcoin. Furthermore, we are going to discuss the role of banks in driving the price of bitcoin.
The Limited Supply of Bitcoin
As opposed to fiat currencies, bitcoin has a finite supply. The supply of bitcoin is limited at 21 million. After this, no new bitcoins will be mined (most likely outcome, but this is a different discussion). The limited supply makes this cryptocurrency all the more valuable.
The ongoing debates of the impact of upcoming bitcoin halving on its price are not surprising. Its limited supply ensures that the demand for bitcoin is going to increase. Consequently, analyzing it through the demand-supply metrics clearly reveal that the price of bitcoin will rise invariably.
Even the experts predict that the price of bitcoin will reach nearly $100,000 due to its finite supply. However, with bitcoin’s price somewhere in the range of $7000, down from $20,000 in 2017, the range of $100,000 looks like a far fetched dream. Let’s understand how ‘far-fetched’ the dream really is!
Bitcoin V/S Gold
From the 1900’s, Gold metal has been recognized as a valuable investment. In times of economic crisis, people have always retreated towards gold. The inclination towards gold has been due to several reasons including its preciousness, (limited supply), the fact that it cannot be undone or devalued by any government or group (decentralised) and globally accepted as a store of value (support, the trust factor). Consequently, such factors along with demand-supply metrics, play an important role in the price of gold.
Over the years, bitcoin has been compared to gold due to several characteristics which mirror the ones awarded to gold. From its scarcity to the trust, therefore bitcoin has received the label of digital gold.
Such comparative analysis backs up the idea of bitcoin reaching the mark of $100,000 in the next decade. Moreover, while gold has a market capitalization of $8 trillion, bitcoin’s market capitalization is only 1-2% of physical gold.
Inclination Towards Bitcoin
The trends in investments are clearly shifting. Call it millennials or gen z; prefer to invest in mathematics (bitcoin) rather than cultural value (gold). The millennials’ investment tendencies have radically shifted towards the technology sector.
Reports indicate that 30% of millennials, aged between 18-34, prefer bitcoin over traditional securities. Moreover, further analysis reveals that 19% of millennials prefer bitcoin over gold investment.
These statistics indicate that the next decade will see an increasing number of millennials investing in bitcoin rather than gold or even government bonds. It further explains that the adoption rate and bitcoin’s price are bound to shoot high.
Recognizing the Status of Bitcoin
In the last couple of years, the regulatory framework concerning bitcoin and cryptocurrencies have changed. While countries like India and China have directly or indirectly banned dealings in crypto, more nations have cautiously opened up.
Even the United States has taken a positive stance on bitcoin and has recognized it in commodities, much like gold. Other countries like Japan and Switzerland have opened above the call of duty and set real framework. Country representative in Malta has even gone as far as calling it as ‘the future of currency’ which is a ludicrous misclassification, but “A” for effort.
If all the indicators for wider adoption are positive, why doesn’t the situation seem so? Why is bitcoin playing the field of $7000 when it can clearly shoot up to $20,000?
Banks are the culprit?
We have established that bitcoin operates like gold; for its value to go up, someone has to pay more than what you paid. If anyone criticizes bitcoin they have to be ready to throw gold under the bus. And hence comes the problems with the banks. 99% of banks in the world today will close your account, if you make a transaction related to cryptocurrencies. (that statistic might be higher). During the 2017 bull run, banks were not regulating bitcoin, therefore new flow of money was unrestricted, however it is now all but blocked. If there is no new money, then your new highs are limited to the existing community trading.
So, why aren’t banks jumping at the opportunity?
Global banking system permits any transaction from one account to another while the banks process and governs these transactions. Each bank account is registered in the name of an individual with attesting KYC proof. Moreover, banks have a simple but mandatory AML requirement, (anti-money laundering and traceability) which is easily fulfilled by simple user registration..
However, when it comes to bitcoin this process is a little more complicated. The protocol of bitcoin allows semi-anonymous transactions to be conducted from one wallet to another. These wallets are not registered to any specific individual. The bitcoin’s protocol itself does not comply with the AML laws, in the absence of registration. Preventing fraud and identity thefts are considerably difficult with bitcoin due to its nature of anonymity and privacy. Would be the equivalent of setting up anonymous bank accounts.
Banks consider providing services relative to bitcoin a liability. Additionally, even if banks register individual wallets of a user, the prime question still lingers. Where does the bitcoin get stored? Banks would need to spend a considerable amount to develop the technology to be able to “Bank” bitcoin. Creating registered wallets is one thing, but having the ability to store with insurance, that's another. If your wondering how far custodianship of bitcoin has come. One of the biggest budgets in the game, the cryptocurrency exchange Binance was recently hacked out of 40 million usd. And one of the biggest custodians, Bitgo, was hammered by its own insurance underwriters for embellishing their true coverage. If the leaders in the space still havent got it right, how can we expect banks to?
The Role of Banks in Wider Adoption of Bitcoin
Until banks attain the ability to addressing the issues, the problem lingers. This factor is a major hindrance to the mass adoption of bitcoin.
Germany has taken an initiative that allows banks to act as custodian services to bitcoin from 2020 onwards. However France had taken a similar step about a year ago, and that has not materialised. The reality is the tech is not ready. However If the governments around the globe start following the same footsteps, it will just be a matter of time, and when it's ready you can expect for the millenials and gen z to push bitcoin way past the 1-2% market cap of physical gold that its at today.