Bitcoin is getting a lot of attention at the Bitcoin Conference in Miami. There is good reason for it. We are starting to see a shift in the entire financial landscape. We are still in the very early stages but things are starting to align.
The world's largest cryptocurrency is getting a lot more attention these days. One recent announcement has Honduras making Bitcoin legal tender in a special economic zone. This comes on the heels of El Salvador doing the same thing last year across that country.
So we have to indulge in the idea of Bitcoin to $1 million. This would give it a market cap of $21 trillion.
Is this really possible?
Bitcoin Bulls
There is little doubt that Michael Saylor and Kathie Wood are both long time Bitcoin bulls. The former is a Bitcoin Maxi believing that Bitcoin is the only thing worth holding. Wood takes a more open view of things also investing in the future of Ethereum for its smart contract capabilities.
Whatever the view, both feel that Bitcoin is heading towards $1 million. Wood has that target being met by 2030.
Her premise simply resides on the fact there are so many opportunities within the present financial system.
“We are so early. That $950 billion dollar market cap gives you a sense of network value, gives you a sense of how early we are. And the various use cases that we have written about… as institutions move in, where an appropriate asset allocation will be given risk and return parameters, various ones, and we also have dimensions, the use cases, the insurance policy that this represents against not only unhinged monetary policy but outright confiscation of wealth in other countries, demonetisation, trade settlement…
As for Saylor, this is what he had to say:
“I think the last 12 months has been just a 180-degree turn. If you roll back 12 months, you had so many smart people that had a lot of money and power saying ‘Bitcoin looks too good to be true, it’s so good [that] someone’s going to ban it’… and I think a couple of weeks ago with the executive order, what we had was the President of the United States giving a green light to Bitcoin…
“You have a one-page memo, and it says whereas 40 million Americans rely upon this and this is part of their future, I hereby direct every government agency to get educated on Bitcoin and figure out how you incorporate into the government. And I think that if I scan the last hundred years of history and I ask when’s the last time the president of the United States directed the government to embrace a new asset class, the answer is never…
These are two Wall Street minds who have a fair understanding what is taking place. They know how the traditional financial system operates and where the needs are. Also, both understand how money mangers will pounce on opportunity.
Up to this point, Bitcoin, like all of cryptocurrency, is mostly about speculation. People simply operate according to the greater fool theory: find someone who will pay more. That is what an overwhelming percentage of people in the industry are doing.
Saylor is not in that group. While he firmly believes the price of Bitcoin is heading much higher, he stated he will never sell it. That is because he understands the world of collateralization. His goal will be to leverage Bitcoin by using it as collateral. Here is where he is onto something.
Pristine Collateral
Distributed Collateral is creating a brand new economic system. This is something that is going to penetrate the entire financial sector, regardless of what governments and regulators do.
If we want to deal in the lending system, especially the overnight market where most major financial institutions operate, we see that there is only one form of pristine collateral: US Treasuries. And the best of the breed there is T-Bills. Everything else is at least one step below this.
Could Bitcoin enter this market and become an alternate form of this collateral? It is evident with such a large level of debt that we have a massive shortage of quality collateral. Unfortunately, the private sector has yet to create collateral that can perform at this level. Perhaps Bitcoin is the first innovation that solves this purpose.
When have hundreds of trillions of dollars in debt globally. With an estimated $20 trillion in US Treasuries, we can see how there is a major shortfall. Notice how we are dealing in trillions here. To be a player on this stage, those are the numbers Bitcoin is required to deal in.
At present, the market cap of Bitcoin is just shy of $1 trillion. That means there is a lot of upside.
Of course, to fill this collateral void, there are a few things that need to happen. The first is the market needs to get much larger. Volatility is death when it comes to collateralization. Lenders do not want a loan backed by something that has the ability to move 10% overnight. Everyone knows the volatility of Bitcoin yet it should be reduced as the market cap get larger.
Growth in the market will also help the second criteria: liquidity. To perform in this area, the Bitcoin that is acquired by a lender needs to be moved immediately. Naturally, the fact that the market is open 24/7 is helpful on this end. However, the market needs to be able to absorb hundreds of millions in a sale or two. If not, the appeal goes does a great deal in the eyes of lenders.
Distributed Lending
One area where this is going to come into play is with distributed lending. Here is where Saylor could be missing a big piece of the puzzle. Being a Wall Street veteran, there is little reason for him to believe in this premise. Yet, it seems that Wood is more attuned to this side of the equation.
Lending is done by institutions. This is what Saylor knows. Wood grasps that Decentralized Finance (DeFi) on a blockchain like Ethereum is not going away. This means that lending, in the future, is going to have a distributed component to it. Not all will be done through regulated institutions. In fact, there is a strong chance that more is done on decentralized platforms in the DeFi world.
To achieve this end, a lot more infrastructure is required. However, there are projects being worked on where that is the case. Do not be surprised to see many of these able to operate outside the reach of regulation. We also have to keep in mind that blockchain performs one function very well: it is trustworthy.
This is at the heart of the financial system. Without trust, everything simply collapses.
There are two ways to get really big numbers:
- few transactions with high dollar amounts
- Lots of transactions with low dollar amounts
With the second, we can see where things are heading. Billions can be reached in lots of thousands. It just takes lots of people engaging in the borrowing and lending practice. With distributed lending, this is likely.
Hence, we revert back to the idea of collateral. What is going to offer the best rates with the least risk? It stands to reason that Bitcoin could fill this role.
For this reason, we can see a market cap of $21 trillion in Bitcoin. In fact, if it is to be a valid form of collateral on the world stage, it is going to need to be this size.
It is the pathway to how it reaches $1 million.
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