Which Government Is Going To Take The Digital Currency Plunge? – Seeking Alpha
Before last year, we did not hear much about the world of digital currencies from the financial press. There were a few pieces once and a while, but the recent ascent of Bitcoin and Ethereum and many new coin offerings have vaulted the new asset class into the mainstream press who now cover the price movements on a daily basis. Perhaps more interesting for the press, has been the debate over the future of the cryptocurrency world as there is tremendous passion on each side of the issue.
The detractors argue that the world has not seen such a bubble since the tulip bulb mania in Holland in the 1600s. The supporters say that the digital currency movement is a logical extension of technological advances that are now coming to the financial markets. There are some very powerful people, and institutions in the financial and governmental worlds and Bitcoin and Ethereum are disruptive technologies that threaten the status quo. While there are compelling arguments on both sides of the debate, no one could argue with the price action that has brought the issue to the center of the world’s financial stage in 2017.
At first, I was dubious about the future of these assets, but I have come around to accept that they are a natural evolution of the technological age. The first government that issues a digital coin is likely to change the world and the question these days appears to be not if but when and who will be the first to take the plunge that will officially change the world and embrace the disruptive technology.
Bitcoin and Ethereum are star performers in 2017
The price appreciation of Bitcoin, Ethereum, and other digital currencies in 2017 has been a testament to their success. While many continue to call these bubble markets, and there is undoubtedly a great deal of speculative activity behind their ascent, the addressable market and acceptance of the cryptocurrency world have increased and gained a head of steam. Many detractors and bankers point to the many nefarious uses of Bitcoin and its cousins and have stressed the pitfalls of anonymous currencies. On Thursday, in an interview on CNBC, the Bank of America chief pointed out that in the U.S. the highest denomination of currency in circulation is the one-hundred dollar bill to avoid the anonymous element of cash transactions. However, it is just that factor that is the attraction of the digital world for many who have adopted Bitcoin, Ethereum, and others are the future for currency instruments. Globalism is a rejection of a divided world, and digital money is borderless. With many people around the world fed up with governments and regulators, digital currencies are a statement of rejection of the status quo. The current debate represents a deep divide between the status quo and a new world order in many ways, and the ascent of these currencies is a sign that the status quo is losing the argument, in some ways. Source: Bitcoin Price Index – Real-time Bitcoin Price Charts
At the end of 2016, Bitcoin was trading at $968.23 against the U.S. dollar. This past week, it took a peak above $6000 and was trading at the $5765 level on Friday, October 27. Bitcoin has appreciated by around six-fold since the end of last year. Source: Ethereum Price – CoinDesk
Ethereum was trading at $7.31 at the end of 2016 and has appreciated by over forty times so far this year. Bitcoin and Ethereum have been the best performing assets of all this year, and other digital currency instrument are moving significantly higher over past months. Source: Litecoin price | index, chart and news | WorldCoinIndex
Another digital currency, Litecoin, has appreciated from $4.45 at the end of 2016 to $55.00 and is almost 12.4 times higher so far in 2017.
There is currently a petition going around that is asking one of the world’s biggest retailer’s, Amazon (AMZN), to accept Bitcoin and Litecoin as payment. If that happens in the days, weeks, or months ahead, it will likely launch the digital currencies to even loftier levels.
The more detractors speak, the higher they go
Most of the vocal detractors of digital currencies have come from traditional financial institutions. Jamie Dimon, the chief at JP Morgan Chase has made no secret of his disdain for the world of cryptocurrencies and continues to believe that the rise is a bubble that is the biggest in history. The comments from the Bank of America chief, Brain Moynihan, were somewhat tamer than Dimon’s past rants but focused on the nefarious uses and lack of regulatory oversight in the digital world. Lloyd Blankfein, in perhaps the most astute observation, compared the introduction of digitals to paper months compared to gold years ago. Meanwhile, the naysayers are coming mostly from the traditional banking and financial institutions that likely have the most to lose if digitals were to replace the current foreign exchange system.
Meanwhile, regulatory bodies have taken an inconsistent approach to the digital currencies. The SEC has turned down derivative instruments in the form of ETF and ETN products claiming that they can be manipulated easily. My question to them would is, which financial instruments cannot be influenced by dominant buyers or sellers these days? The Commodities Futures Trading Commission has classified digital currencies as commodities in an attempt to take a lead role in their regulation when it comes to contract markets. Chairman J. Christopher Giancarlo set up a lab environment for FinTech and has appointed one of the new commissioners Brain Quintenz to spearhead the agencies effort. However, we have yet to see derivatives on the Chicago Mercantile Exchange or Intercontinental Exchanges, and with limited resources, it is probable that the CFTC does not have the bandwidth to properly regulate a market that transcends borders. The bottom line is that when it comes to traditional bankers and regulators, governments, and monetary authorities who control and monitor money supply, it is in their best interest to pop the asset bubble. So far, they have not found a pin that will do the trick.
The IMF is supportive of digital currencies
As currencies that transcend borders, it makes sense that some of the most favorable comments regarding digital currencies are coming from a supranational institution. In a recent report about the crypto world, the International Monetary Fund shared a positive view of the future for the new currency technology. Managing Director Christine Lagarde said, “In many ways, virtual currencies might just give existing currencies and monetary policy a run for their money.” The role of the supranational financial institution according to their mission statement is that “the IMF’s primary purpose is to ensure the stability of the international monetary system-the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.” The IMF, like the world of digital currencies, looks beyond borders, governments, and financial institutions to ensure stability on a macroeconomic basis. The advent of Blockchain technology and digital currencies where values are determined only by bids and offers in the marketplace is a worldview towards means of exchange around the world and fits the portfolio of the supranational financial institution like a glove.
Technology’s next step
I have been writing that my awakening when it comes to Bitcoin, Ethereum, and other digital currencies came when I realized that they are merely the next step in technology that took a long time to get around the traditional banking and foreign exchange markets. While other advances like ATMs, direct deposits, bill pay and online banking reduced the needs of customers to visits bank branches, digital currencies could make many of the services offered by financial institutions when it comes to deposit-accounts redundant. Moreover, the fee structure for these means of exchange makes them a lot cheaper for consumers when and if prices and exchange rates stabilize. Rather than fighting the disruptive technology, the IMF has cautioned banks and government to get with the program and embrace the new asset class and sooner rather than later a supranational institution or government will issue a digital currency that will start a trend that will change the world.
Candidates for the first government that will break ground
I have a lot of respect for Lloyd Blankfein, the CEO of Goldman Sachs. Blankfein began his career on the commodities desk at the institution and was involved in the gold business when I worked in the same department at the Philipp Brothers division of Salomon Inc. Gold has been a global currency instrument for thousands of years, long before any of the current paper currencies existed. The Goldman chief drew a parallel between gold and the introduction of fiat currencies and digital currencies compared to the current status quo in the foreign exchange markets. He pointed out that many traditionalists rejected paper money in favor of gold, and that they were wrong. I appreciate Blankfein’s open mind when it comes to the world of cryptocurrencies.
As the digital currency world continues to evolve, some will fall by the wayside and others will survive. However, the most successful digital coin has probably not yet hit the markets. The IMF, in their report, encouraged countries to issue these instruments and has said that it is possible that they may do so in the future. The first candidates to introduce a crypto are likely small nations. So far, Ecuador, the oil-producing country in South America has expressed an interest. Estonia has been working on their version of a digital means of exchange. China has been doing trial runs for their brand of crypto, and other nations including Senegal, Tunisia, Russia, Japan, and Sweden have all been working towards a solution and national currency that would embrace blockchain technology and make them the first to issue a coin that could be used on a widespread basis.
The IMF suggested that Sweden could be the perfect candidate to be first, as the country has a history of embracing technology. One of the problems that a digital coin issued by a government will face is that the process runs contrary for the reason many devotees subscribe to the digital currency world. The anonymity of a currency that flies below the radar of central banks and regulators is one of the leading attractions of Bitcoin and its cousins. However, when the first country puts a digital means of exchange into circulation, it will start a trend that will be impossible to stop, and many others will follow suit quickly.
Disruptive technologies tend to cause lots of conjecture. However, the price appreciation and attention to the digital currencies world means it is only a matter of time until the first government takes the plunge. I expect a national digital currency to hit the market before the end of 2018 at the latest. It will be interesting to see how it competes with Bitcoin and others that have been the best performing assets of this year.
To profit from commodities, you have to stay ahead of the trade. As a veteran commodities market watcher, I’m uniquely qualified to help you do that. My Marketplace service, the Hecht Commodity Report, offers a comprehensive weekly outlook on over 30 individual commodities markets, including U.S. futures. One of the most detailed commodities reports available, The Hecht Commodity Report provides weekly up, down or neutral calls on each market and highlights technical and fundamental trends. I also make timely recommendations for risk positions in ETF and ETN markets and commodity equities and related options. The Hecht Commodity Report is a must-read if you want to profit in commodities, so subscribe today.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.