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If crypto disappeared would anybody actually notice?

The idea that a whole new crypto based version of the World Wide Web is coming down the track does not hold up in the numbers.

Leonid Bershidsky Contributor
Jan 25, 2022

Crypto is seemingly everywhere this year. The total market cap of all cryptocurrencies is still above $US2 trillion ($2.8 trillion) despite some recent losses. Last year, people spent more than $US44 billion on non-fungible tokens, or virtual ownership rights on digital objects .. an amount that approached the total size of global art and antique sales in 2020. The notion of Web 3.0  has firmly attached itself to crypto in the past year or so.


And yet, 13 years after the first bitcoin was mined, I can’t help thinking that not much would change for the vast majority of us if we woke up one morning and found that the entire crypto phenomenon had disappeared forever.

Imagine the web .. still Web 1.0 at that point, when Facebook was still called The Facebook ... disappearing in 2004, 13 years after Tim Berners Lee released his World Wide Web browser to the wider public. Even then, before YouTube (2005) and Netflix streaming (2007), no more internet would have been a major shock, a huge loss: No more Google? No Wikipedia? No Skype?

No more crypto in 2022, though? Meh, unless you’re one of the Millennial millionaires with more than 50 per cent of their assets in cryptocurrencies.

One could pick and choose adoption statistics to show that crypto is at about the same stage now as Web 1.0 was in 2004. There are some 71 million ethereum addresses and some 40 million bitcoin addresses with non-zero balances. These numbers are on the same order as those reported by the internet auction company eBay in 2004: 56 million active users who had bought or sold something that year, and 20 million active accounts in its payment segment, served by PayPal, then part of eBay. Coinbase Global, the biggest U.S. cryptocurrency exchange, has some 2.8 million monthly active users; in 2004, E*Trade Financial, one of the first internet brokers, reported 3 million active brokerage accounts, and TD AmeriTrade, another firm in that space, boasted 2.6 million. The market cap of the NASDAQ 100 Index, the mirror of the nascent internet industry, reached US$2.5 trillion at the end of 2004 ...  again, the same order of magnitude as crypto is today.

But even the most generous estimates of the number of crypto users, about 200 million today, are a far cry from the more than 1 billion internet users in December 2004. People were actually buying things on Web 1.0 ... books, plane tickets, pizzas .. and, after 13 years, not many of them are using Web 3.0 to buy things. BitPay, one of the biggest cryptocurrency payment processors, handles about 66,000 transactions a month, compared with Visa’s 17 billion or so.

That, of course, is a consequence of the crypto world and its inability to drive down transaction costs ... a median 1.4 per cent for both bitcoin and ethereum. That’s more than the current average cost of an international money transfer to Azerbaijan or Georgia, according to the World Bank. Wise Plc, the transfer company, which doesnt use crypto, moves money for as little as 0.35 per cent, depending on the currency. There’s not much of a benefit to switching to crypto from the traditional banking system, unless one is looking ...  probably in vain, should the authorities get interested ... for more anonymity at the cost of more risk (the crypto world is infamous for its helplessness in the face of fraud).

Yet, there’s more to the lower adoption rate for Web3.0 than Web 1.0 had after 13 years. The technological promise of crypto, despite what its boosters say, is far more limited than was that of the early Web. For every real life application of blockchain, you could name several that Web 1.0 opened up, many of them in areas that affect pretty much everyone’s everyday life. As early as 2004, the internet was the main source of election news for 18 per cent of Americans; it’s hard to find a comparable example involving crypto today.

That is one reason the internet’s progress throughout the Web 2.0 era can’t be projected onto crypto. Far fewer areas of business and life in general require the blockchain than Web 1.0 and Web 2.0 applications ... and even those areas will adopt it only if blockchain can do a better job than existing Web 1.0 and Web 2.0 tech. That is far from a given at this point, at least while the energy expended on one ethereum transaction is enough to power more than 100,000 Visa transactions.

The current crypto adoption rates, comparable in some cases to internet payment and trading tech adoption in 2004, are still driven by speculation that is taking place in a kind of walled garden. Despite the traditional finance world’s acute curiosity about the new, often lucrative crypto assets, it is only been dabbling in them. A $US6.5 million BlackRock investment in bitcoin futures has been touted as a breakthrough; that’s less than BlackRock had in shares of cybersecurity company McAfee in the third quarter of 2004.

According to CoinGecko, the biggest bitcoin holding by a public company, MicroStrategy, was worth $US5.1 billion, followed by Tesla’s $US2 billion and Galaxy Digital Holdings $US1.3 billion; the rest of the bitcoin and ethereum holdings were far smaller. By contrast, internet companies in 2004, survivors of the dotcom bust such as Amazon. or eBay, were legitimate if risky investments; Amazon’s bonds were rated a notch below investment grade in 2004. And if one recalls the dotcom boom itself, the frenzy in the regulated markets is hardly matched by the current cautious interest in crypto.

You could blame crypto’s walled off status , and thus its lack of systemic risk for the global financial system , on regulator wariness and the crypto worlds buccaneering spirit and antigovernment rhetoric. But Web 1.0 pioneers embodied the same anarchic spirit; they, too, wanted to break things. Perhaps the early 21st century busts have taught investors something about buying too much of the new, new thing.

The real breakthrough for crypto will only come if and when the world is unimaginable without it, as it was unimaginable without the internet back in 2004. Even 13 years after it all started, that sense of an irreversible technological revolution ... one that would deserve the Web 3.0 label ... still requires some technological leaps, even in areas where blockchain has its obvious uses, such as payments or the creation of contracts.

But the turning point will not come in the form of overwhelming statistical evidence, or as a single event, such as a major traditional investor’s conversion to the crypto creed or a major national adoption of a blockchain based currency. It will come as a feeling, a sense that Web 3.0 has changed the world so much that losing it would leave a scar. That sense is the biggest prize when it comes to technological revolutions

Bloomberg Opinion


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and keeping with the theme:

Could the crypto crash become a 21st century Tulip Bulb Bubble?


Concluding thoughts

There are doubtless many important technology innovations, such as Blockchain, that have been developed as part of the crypto ecosystem. These innovations may endure and become immensely valuable over time. 

Yet the cryptocurrency craze appears to share some commonalities with the great Tulip Bulb Bubble in the 1600s. In contrast to some of the more hyperbolic claims:

  • Crypto is not a stable store of wealth with 6x the volatility of US equities and 18x the volatility of the US dollar
  • Crypto is not an inflation hedge or a hedge against the much higher interest rates that accompany elevated core inflation. In fact, crypto appears to be an equity risk proxy and is highly correlated with stocks
  • Crypto is not being used as a widespread medium of exchange, and its adoption as such is being blanket banned by numerous nation-states. Western countries may ultimately regulate it out of existence
  • As a non income producing asset, the value of crypto relies on its efficacy as a store of wealth and a medium of exchange, both of which are being called into question
  • Future demand for crypto is likely to be undermined by the return of materially positive interest rates on risk free cash deposits, which will dramatically increase the opportunity cost of switching into crypto

Finally, for those who are hoping to rely on the central bank put option to bail-out equities and hence crypto, this time is different. We have not seen a fully employed US economy with wages and inflation characteristics like this since the early 1990s. The worry is that Omicron is only fanning these flames by introducing yet more constraints on the availability of labour and therefore supply chains. The risk is that elevated consumer inflation expectations remain stubbornly high and eventually bleed into wage price spirals as the balance of negotiating power in labour markets shifts from employers to employees.

To underscore the expiry of the Powell put option, when was the last time you can remember a US president egging on the Fed to crush inflation and raise interest rates? When do you last recall inflation being a major US political issue? The post GFC period has been defined by politicians trying to strong arm central banks into easier, not tighter, monetary policy settings. 

The arrival of a genuine inflation cycle means that central banks will have to try to normalise their cash rates irrespective of the financial market (and crypto) volatility that this might induce in the short term. This significantly raises the downside risks.

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  • 2 months later...

The first test of Australian retail demand for crypto will happen next week with the listing of the country’s first bitcoin ETF on the Cboe equities trading venue.

There is speculation $1 billion will flow into the country’s first bitcoin ETF.

ASX Clear, the powerful clearing house at the centre of Australia’s equity capital markets, now has four market participants willing to stump up the tough margin requirements needed to cover the settlement risks for this highly volatile asset.

.....  the only bitcoin ETF product in front of ASX Clear at the moment ,  the Cosmos Asset Management bitcoin ETF , can start trading on the Cboe on April 27.

The Cosmos product is essentially a fund of funds because it invests in the $C1.4 billion Purpose Bitcoin ETF listed in Toronto, Canada. This was the first bitcoin ETF in the world.

It is believed Cosmos has a product disclosure statement for its bitcoin ETF which has been screened by ASIC.

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