At the start of 2017, the market capitalization of all crypto assets was well below $18 bn.
Since then, investors have poured over $200 bn into Bitcoin, Ethereum and various altcoins — and the price of one BTC has gone from under $1,000 to over $8,000.
That’s a dramatic change, and this could be the beginning of something truly enormous. Harvard academic and Bitcoin investor Dennis Porto, believes that Moore’s Law and human speculation will push the price to $100,000+ before the end of 2021. Many agree.
There’s just one problem — and this problem is stopping investors of all walks from on-chaining trillions of dollars and sending the price of a single BTC through the roof.
In this article, we’ll explain what this problem is, how we can overcome it in the future and why you should care.
But first, let’s go over what happened to Bitcoin this year — and, more importantly, why it happened.
Bitcoin in 2017: The Facts
On January 1st 2017, a single Bitcoin was worth less than $1,000. Then, investors poured tens of billions of dollars into the asset — and its price surged to $3,000+ by August. But the rise didn’t stop there.
In Q3 and Q4 2017, even more investors joined the Bitcoin rush, driving price to $8,000+ (as of this writing).
The question is, why?
Why are people investing so much money in this new digital asset — and why is everyone so sure it won’t lose its value overnight?
Turns out, the reasons are way more straightforward than you might think.
Why the World Needs Bitcoin
The total amount of money in the world — including cash, derivatives, and debt — is estimated at a quadrillion USD ($1,000 trillion). Of that number, $81 trillion is broad money: debit cards, coins, banknotes, saving accounts, time deposits and other liquid assets.
Now guess how much of this broad money is backed by cash.
Not $81 trillion. Not $60 trillion. Not even $25 or $10 trillion.
The world’s entire cash supply is valued at $5 trillion. If you add checking accounts, that goes up to $29 trillion… Which is a whopping 64% less than the world’s broad money and 97% less than the world’s total money.
This means that most of our money isn’t backed by real cash. If something happens to your bank, or your government, or the world’s financial system, you stand to lose most (or all) of our broad money (because it only exists digitally).
You might think this doesn’t concern you. You might think this is something that only happens in remote, anarchic African dictatorships. But this is what very nearly happened in 2008, when some of the world’s most trusted banks and financial institutions — the Royal Bank of Scotland, Merrill Lynch, Fannie Mae, etc — were close to bankruptcy and had to be rescued. If it weren’t for those bailouts, tens of millions of people and businesses would have lost their broad money.
Since then, the market as a whole has been painfully conscious of how flimsy the financial system is. That’s why there’s a growing demand for ways to store value without holding money at all.
The classic way to do this is gold: an important depository of value that has a market cap of $7.8 trillion, i.e. 50%+ more than that of all the world’s cash.
Unfortunately, there are several problems endemic to gold. It’s a physical asset; it’s bulky in large amounts; it can be stolen, misplaced or permanently lost. But most importantly, gold is simply inconvenient to buy, store, process and sell — especially in a digital age where everything happens so quickly.
And this is where Bitcoin comes in. Like Gold, Bitcoin is an asset with a finite supply; an established market cap; an active trade market. This is why investors call it Digital Gold. Its code gives investors a real way to store value without relying on banks, governments, or bulky physical assets like gold and silver.
In short, Bitcoin is like gold… If gold could be stored on your computer, used to make payments, and transported across continents instantly.
This is why investors have poured over $100 billion in capital to Bitcoin. In a volatile, fast-moving world, it’s the first real digital gold backed by an immutable code that prevents cheating, hacking or fraud.
All of which brings us to our next important question.
If Bitcoin is digital gold, why is its market capitalization so small? What’s stopping investors and private individuals from pouring trillions more dollars into a much-needed asset?
The Single Biggest Problem with Bitcoin
Let’s quickly recap what we already know about Bitcoin. It’s built on an unhackable, uncheatable algorithm; its supply is finite and known; it’s already backed by over $100 billion in real money. All of this makes it a modern, digital gold in the sense that it’s a highly stable depository of value.
There’s just one very big problem. To illustrate it, we’ll talk about 2 events in 2017 when Bitcoin didn’t gain value, but rather lost a lot of it instantly.
In September 2017, JPMorgan’s CEO Jamie Dimon referred to Bitcoin as a “fraud” asset. It would later emerge that JP Morgan appeared to be buying up Bitcoins while this was happening — but the point is, Jamie Dimon said what he said.
The market reacted with a 22% price drop in Bitcoin’s value.
Yes; eventually, Bitcoin would recoup this loss and more than double in price through November… But that’s not what matters here. What matters is, a renowned authority cast doubt on Bitcoin’s legitimacy as a financial asset, and the market recoiled.
Now let’s go further back to March 2017; another month in which Bitcoin’s price fell by an even more dramatic 27.4%, from $1,350 to $980 in just a few hours.
Can you guess what happened then?
That’s right. Another event that cast doubt on Bitcoin’s future as an asset or security. This time, the Securities Exchange Commission denied the Winklevoss Brothers’ well-publicized bid to create a Bitcoin ETF fund. Specifically, they rejected Bitcoin as an asset that could be securitized because of its lack of international regulation.
This was the first large-scale attempt to securitize Bitcoin — and when it failed, investors released their positions in droves. The coin’s price fell by 27%+ immediately.
Do you see a pattern here?
At first glance, these two events have little in common. In one, a thought leader denounced the Bitcoin as having no future in “big finance”. In the other, the SEC rejected Bitcoin as an asset that can be securitized.
But they do have something in common. In both cases, questions about Bitcoin’s future as a “serious” financial asset led to drastic loss of market cap. And this is the biggest (and most important) reason Bitcoin isn’t cumulatively valued in the trillions of dollars yet.
After all, Bitcoin is a new asset. It’s still mysterious to many investors. But most importantly, it’s a digital asset that resists regulation, which means it’s vulnerable to fraud, theft and attacks by hackers.
And we’re not talking about individual cases of theft here.
In 2016, Last year, Hong Kong firm Bitfinex lost $69,000,000 in Bitcoin.
In 2017, the world’s 4th-largest exchange — South Korea’s Bithumb — lost tens of millions
In 2014, Mt. Gox — the company that processed 70% of the world’s bitcoin transactions circa 2014 — lost 850,000 BTC, worth $6.8 bn in today’s prices.
These are just several of dozens of large-scale hacks that affected tens of thousands of users in the last few years. Attacks like these can turn millions and billions of dollars into nothing in a heartbeat — and once that happens, there’s very little you can do.
This is why San-Francisco-based Bitcoin exchange CoinBase stores 97% of their coin reserves in hardware and paper wallets. When Bitcoin and other coins are taken off-chain and stored securely, the potential for abuse is near-zero. So long as CoinBase stores their Bitcoin using physical carriers locked in secure vaults, they’re safe.
It’s also why the world was so excited about the Winklevoss brothers’ fund bid. If Bitcoin was securitized and traded as an ETF, you could trade and invest in it without actually holding it and leaving yourself liable to theft. This would de-risk Bitcoin in the eyes of potential investors and fund managers — and pave the way for trillions more dollars in market capitalization.
The bad news is, the Winklevoss twins’ project didn’t succeed. The SEC felt the counterparty risks were too high.
The Good News?
The Winklevosses’ failure doesn’t spell the end of Bitcoin as a regulation-compliant, securitized asset.
In fact, one company — CyberTrust — has found a different way to securitize the cryptocurrency. It did this by creating internationally valid Bitcoin ownership contracts that derive value from physical crypto keys stored in a Luxembourg SPV.
These contracts are called Bitcoin Global Crypto Notes (BTC GCNs), and they have all the same key features that a stock does: title ownership, risk-free clearing, tax clarity and 100% legal compliance.
In other words, GCNs are the first way to invest in (and trade) BTCs without storing them in a hot wallet, on a USB stick or on a piece of paper.
Is CyberTrust going to single-handedly bring trillions of dollars in market cap to Bitcoin? Maybe not — at least not immediately. But it’s certainly a step in the right direction.
And if you’ve ever wanted to gift someone cryptocurrency without worrying about its security…
If you’re worried about potentially losing all your crypto assets to a hack…
Or if you’re just looking for a Bitcoin-derived security that draws its value from physically secure BTC…
Then you’ll want to read more about CyberTrust and the Bitcoin Global Crypto Notes they issue in their white paper today.
Cybertrust Telegram: https://t.me/cybertrustbank