Nine years ago, in 2012, I was working with a company developing a project for them. My quoted price for the project was US$1,500. The owner of the firm called me and wondered if I would accept 400 Bitcoin for the project. I was familiar with Bitcoin, they were worth $4.80 each at the time, but I saw them as a novelty and declined the offer (sigh). I tell you that story to underscore the changes in crypto currency in just nine years and to further underscore the significance of the changes occurring in the present day.
According to data from CoinMarketCap, there are currently more than 12,170 crypto currencies in existence (not all are active) and you’ve likely heard of just a handful. The value of all those cryptos has fluctuated roughly from $2T to $3T (USD) in 2021. Bitcoin (BTC) represents 42% of the total crypto currency value and the top 5 cryptos represent 70% of the total value. The crypto currency landscape is changing, and I want to discuss a few of the recent trends I’ve noticed.
Crypto Currency Regulation
In April of this year Coinbase Global, Inc. (NASDAQ: COIN) became a publicly traded company. They are one of the largest trading platforms for crypto currencies with 50M daily active users on a global scale. As a publicly traded USA company Coinbase is now subject to scrutiny by several government agencies including the Securities Exchange Commission and the Internal Revenue Service.
The Biden administrations proposed 2022 budget included crypto reporting requirements, the IRS is cracking down on reporting, and crypto regulations even became a temporary sticking point in the passage of the infrastructure bill being debated in the US Congress. Crypto regulations are coming but creating rules and passing laws is a slow process and might have difficulty keeping up with the rapidly changing world of cryptocurrency.
Governments across the globe want to place some controls on crypto trades including the ability to track transactions. I believe that regardless of the varied postures and efforts of governments looking at Coinbase and their transactions, the real goal is “how do we tax it.”
The Significance of El Salvador
El Salvador has converted its economy (small at $25B) to a Bitcoin based model. The El Salvador economy doesn’t impact world trade much, but the fact that a sovereign nation moved its economy from fiat currency to one based upon crypto currency has garnered attention. Over a dozen countries have banned or restricted crypto currency transactions with China’s recent ban on settling transactions with crypto currency the most significant.
In very recent news, Bitmain, one of the world’s largest manufacturers of bitcoin mining machines, is planning to suspend sales of its machines to miners in mainland China following the Chinese government ban on crypto activity. Alibaba will suspend sales of mining hardware on October 8th.
Stablecoins Backed by Commodities and Fiat Currencies
Larger economies realize that crypto currencies could eventually supplant their fiat currencies and that is creating some concerns. Due to increased transaction reporting and government intervention, some of the newer cryptos are stablecoins, a low volatility version of a cryptocurrency whose value is tied to a specific asset such as gold, real estate, or fiat currency. Some of the popular stablecoins are Tether, USD Coin, and Paxos Standard.
A new stablecoin is expected to be available by the end of 2021 and it may disrupt the crypto landscape as it will be offered by Facebook, Inc. (NASDAQ: FB). This new crypto currency, called DIEM (fka Libra) has been in development for a couple of years. The company has also developed Novi, a crypto wallet and the whole project is supposed to be overseen by a consortium of financial interests called the Diem Association and backed by fiat currencies. The Diem blockchain will also be programmable, much like Ethereum, so that developers can create custom apps.
FB is facing some headwinds as officials have raised concerns that Facebook could exert too much control over the digital currency Diem, and that it could use Novi to lure users into its financial ecosystem to create a behemoth to challenge the U.S. dollar and other legal tender. Why all the concern? FB would be the first company to issue a crypto currency, the company is worth a trillion US dollars, and they have 2.7 billion subscribers to their platform. The developments for Diem will be interesting to say the least.
Crypto Energy Consumption
Earlier in 2021, Elon Musk (Tesla) announced a major investment in BTC and that you could pay for a Tesla vehicle with BTC. It was only a couple months later that those positions changes with Mr. Musk announcing that the huge energy requirements for mining BTC were unacceptable to him.
Many of the newer cryptos are being offered on a Proof of Stake blockchain platform which uses only a fraction of the mining energy that the BTC Proof of Work platform requires. But what do about Bitcoin? Greenidge Generation Holdings Inc. (NASDAQ: GREE) is a newer public company aiming to mine BTC in an energy responsible way.
The company has approximately 14,300 miners and generates and distributes electricity through a natural gas power generation facility with an installed capacity of 106 megawatts located in New York. Electricity generated from natural gas is cleaner, with less of a carbon footprint, than electricity generated from coal.
Decentralized Finance (DeFi)
DeFi proposes to offer people access to financial services, borrowing, lending, and trading, without the need for traditional institutions such as banks and brokerages, which often take large commissions and other fees. Instead, “smart contracts” automatically execute transactions when certain conditions are met. DeFi is surging in popularity, with investors pouring tens of billions of dollars into the sector.
DeFi really has regulators pulling on the reins and yelling whoa. Recently, Coinbase was planning to launch a program called Lend, which would allow investors to let others borrow from them a form of crypto called USDC, a “stablecoin” whose value is tied to the value of the US dollar. In exchange, lenders would receive 4 percent interest on the loan, a higher rate than banks currently offer on their savings accounts. The SEC threatened to sue Coinbase over Lend before the project was even launched.
DeFi is creating a scenario whereby the banking system as we know it could become obsolete. That prospect has politicians breaking a sweat as we all know banks offer a lot of support to people running for elected office. Banks make a large part of their profits off the fees they charge their customers for just about everything, and if crypto currencies take over too much of banking business those fees will go away.
Digital currency and the blockchain are here to stay, will be a part of the future, and they will change. These changes in the crypto currency landscape are noteworthy for a few reasons reaching into the future. Consumers are unwilling to support the massive carbon footprint that mining crypto currencies has created, demanding a cleaner, more efficient way to conduct crypto transactions. More regulations and taxes are surely coming to the crypto universe as government’s thirst for taxation will never be quenched.
Author: Mark Roberts, Editor Traders News Source
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