Cryptogenesis, Act II

“It’s a wonderful prison, the world.”

🇮🇹 Per la versione in italiano clicca qui.

Words such as these, although wrongfully attributed to Shakespeare’s The tragedy of Hamlet, prince of Denmark, still would be worthy of a master of life such as The Bard. Their meaning is all but comforting. The world is a wonderful prison indeed, full of marvels, but, alas, a prison it remains.

Caged are Mankind’s will and freedom: it is but the rightful price to pay for coexistence. Freedom as a broad concept and all sorts of philosophical questions related to it, no matter how fascinating the reader and I might find it, won’t be the focus of this article. However, let it be allowed to shrink the first topic of discussion to economic/financial field, for even such is a prison, in which Mankind is “subdued” to central banks’ and regulators’ will. As a consequence fluctuations in currencies’ value, be them large or small, may lead to profound and undesired changes in one’s own financial security and purchasing power.

Let us then reprise that which was left hanging in Cryptogenesis, Act I: the decentralisation enabled by the blockchain as one of cryptocurrencies’ main selling points. To be independent from third parties unchains the users’ financial freedom. It doesn’t mean the value of digital currencies cannot fluctuate, but it ensures this is purely a result of the free market, subject to the intrinsic value users attribute to each currency.

It’s important to mention that decentralisation of peer-to-peer and customer-to-firm payments is just the tip of the iceberg. The next (r)evolution is DeFi (decentralised finance), which encapsulates debt instruments and derivatives, worth $ 253 trillions and $ 558.5 trillions respectively (all estimates dated May 2020). Should cryptocurrencies “steal” even a single-digit percentage of it, it would mark the beginning of a major shift towards full on decentralisation: if markets this big are involved, all other will follow the trend. During 2020 DeFi has only been getting stronger, although still being relatively small (circa $ 22 billions), having its growth led by decentralised applications, dapps for short (conceptually alike cellphone apps but running on existing blockchains, e.g. Ethereum), particularly in the swaps market (it’s up to the most curious readers to educate themselves on this peculiar market). Not to mention real estate, a market valued in mid 2020 at $ 280.6 trillions, that will DeFi’s next target.

These (almost) intermediary-free markets may only require users to provide for fees to be allocated to node validators, which is to say a series of specialised computers spread all around the globe tasked with confirming transactions by writing them on the blockchain itself (for the readers’ information, almost anyone with a sufficiently capable computer and some cryptocurrency holdings can apply to become a validator).

Let’s now switch to this article’s final topic: in Cryptogenesis, Act I it was briefly mentioned the main reason why cryptocurrencies are now going mainstream, that’s to say the involvement of institutional investors. The reader may ask himself: why now after a “complex” to say the least 2020 and amid a global pandemic that has generated health crises in the majority of countries? It may sound strange, but there never has been a better moment. The consequences of the much talked about virus, which momentarily built an extra layer of walls in the prison Mankind lives in, don’t stop to health: far worse will be the long-term effects on the global economy. The symptoms of the last economic crisis, which were slowly diminishing all around, showed up again, reopening like ill-treated, putrescent injuries that would need drastic solutions, such as amputation, to be cured. But for now, the only cure governments seem to have up their sleeves is inflation, by means of printing more sovereign currency. It should be obvious to the reader that it isn’t a desirable option for firms and individuals in general, but even less so for big banks and investment funds which keep their holdings in fiat currencies, especially US dollars. These entities want to hedge their holdings against the rising inflation and what better way than doing so through the (almost fully, since some cryptocurrencies provide for their own rate of inflation) inflation-free cryptocurrency market?

The rising demand from institutional investors, paired with cryptocurrencies’ limited supply, resulted in the skyrocketing prices we have seen since the last days of December 2020. Supplies, especially of Bitcoin, are running thinner and thinner, with giant funds such as Grayscale and Microstrategy leading the way in coin accumulation, the first of which now holds more than 3% of all Bitcoins ever produced and doesn’t plan to stop buying any time soon. As a further note, even BlackRock, the world biggest investment fund ($ 8 trillions in assets), has recently made news for looking to hire blockchain experts, foreshadowing its imminent entry in the crypto-assets market.

Surely, those institutions above worth billions of dollars have “made their homework”, concluding that the potential revenue from Bitcoin especially, but also other crypto-assets, far outweighs the risks. It’s as if the reward is Goliath and the risk is David: although the story tells how the man killed the giant, in this twisted version the giant is about to crush the man. For example, the most conservative estimates see Bitcoin’s value, and as a consequence that of many other cryptocurrencies which usually follow their king’s trends, more than double trough 2021 (from about $ 35,000 to $70,000 or $ 100,000), while the hardest believers hypothesise five-zeros-figures in the same time frame.

Now, the main risk for institutional investors and retail investors alike will be regulatory reactions from world governments, some of which have already expressed themselves on a few matters, but the majority of which hasn’t (this topic will be covered in the third and final act of this series of articles, Cryptogenesis, Act III, to be soon published on Il Cambio).

Our world is such a beautiful prison, which may be slowly becoming just a little freer.

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