During the California Gold Rush, the folks who made the real money were the ones creating a business around the trend.
One might compare the 2017 spike in cryptocurrencies to the Gold Rush. An unprecedented amount of new money flowed into the market and the media finally started to take it seriously.
According to Bernstein, a wealth management and insight company, Bitmain made between $3-$4 billion in operating profits in 2017. According to Bitmain’s website, they “develop and sell the world’s leading bitcoin miners using Bitmain’s ASIC chip technology.”
The company was founded in 2013 by Micree Zhan and Jihan Wu. In a new report, it is estimated that Bitmain holds between 70-80 percent of the market for crypto miners and specifically ASIC cards.
This new estimation puts Bitmain’s yearly income at a higher rate than that of NVIDIA’s, which has been in business for almost 25 years. It is impossible to perfectly calculate and analyze the various income streams Bitmain has, but according to Bernstein, Bitmain generates its revenue from the parts highlighted in gray below.
It is hard to tell if this success will last for the fairly new company. The future of crypto remains fairly unknown and it is not guaranteed that mining will continue to be a profitable venture. For the average crypto enthusiast, it is already hard enough to mine popular coins such as Bitcoin due to the high electrical cost and low return. Bitmain will continue to market towards more corporate and professional areas and forget the average “hobbyist”. As more “whales” enter the crypto market, the more legitimacy the movement gains.
Wells Fargo Bans Buying Crypto with Credit Cards
In an email to CBS MoneyWatch, a Wells Fargo spokesman has confirmed that the company will now ban all cryptocurrency purchases with their credit cards.
The abrupt decision is “due to the multiple risks associated with this volatile investment,” said the spokesperson, who also stated that “this decision is in line with the overall industry.”
In the past year, Bank of America, JPMorgan Chase, and Citigroup have all banned cryptocurrency purchases. Since the crypto space is hyper-volatile, they are worried that many customers may not be able to pay back the loan. In a poll conducted by loan marketplace LendEDU, it has been discovered that 18 percent of bitcoin buyers used a credit card to pay for the currency. Of that 18 percent, 22 percent were unable to pay off their balance after purchasing bitcoin.
These sweeping changes to policy come after a rough two quarters of 2018. Bitcoin has fallen from around 20,000 USD in December 2017 to around 7,000 USD currently.
It is unclear where the cryptocurrency market will be in the future, but Wells Fargo has stated that they will “continue to evaluate the issue as the market evolves.” In order for these large banks to fully back crypto purchases, the market will need to prove that it is mature and stable.
Bitcoin is Beginning to Trade Like a Commodity
For much of the last year Bitcoin’s price appreciated at exponential levels. Clearly this was due to demand side pressure driving the price upwards, as the supply of Bitcoin, currently circulating at 17,000,587 coins, will only able to marginally increase over time, with a max capacity of 21,000,000 coins. A small, potentially immaterial amount of supply side pressure can be added, as people will inevitably lose private keys to their Bitcoin due to cold storage failure or hardware corruption.
However, in the recent time frame of the last three months, Bitcoin has seen a marked change in its price action. This particular cryptocurrency now has taken on attributes of the price action commonly seen in the commodities market. The two types of traders of cryptocurrency and commodities also share a similar profile. Commodities traders will seek to purchase futures to hedge crop prices needed to run a business or lock in profit on a sale so that they are guaranteed to meet all operational and living expenses. Many Bitcoin purchasers also seek to hedge against the inflation of their local government’s fiat currency or governmental political risk of losing ownership of physical assets in times of political instability.Additionally, speculators in both markets trade the price swings and, at times, can amplify price movements in either direction. While price volatility is seen as commonplace in the cryptocurrency space, the commodities market has its share of volatility also, however. An important caveat to note is the difference of the reference time frame.
We can see the apparent departure from extreme volatility as Bitcoin traded within a 43.60% band from its height in this three-month span.
data source: https://coinmarketcap.com/currencies/bitcoin/historical-data/?start=20180127&end=20180427
Here we can see the chart for oil as it fluctuates 73.63% percent from its high over a 5 year span. It is important to note that even blue chip commodities can go on long losing streaks before rebounding.
data source: http://www.macrotrends.net/1369/crude-oil-price-history-chart
It can be seen below that gold fluctuated 27.7% over this 5 year period of time. While it would have been a good choice to hedge against rampant inflation, buying gold on leverage or holding a large position in it would have seen a sizeable downswing for many years in a portfolio.
Bitcoin would have to maintain a track record of many years of trading within a relative band to match some of these long time commodity giants. Perhaps recent volatility can give us hints to a potential price floor and some illiquidity from amongst those owners who keep their coins off exchanges. Regardless of the degree, volatility has, and always will, behoove one to correctly construct a portfolio with asset allocation matching his or her appetite and ability to sustain risk (volatility).
Do like the Winklevoss Twins: Learn How to Keep your Cryptocurrency Assets Safe.
The Winklevoss twins are pioneers in the modern day bitcoin space. They not only started their own bitcoin exchange, but they were also instrumental in creating the public adoption of the title of gold 2.0 for bitcoin. They also were worth an estimated 1.3 billion dollars in bitcoin as of December 2017, giving them the title of bitcoin billionaires. Having such a large fortune in digital asset begs the question, how do the Winklevoss twins keep this safe from most conceivable negative eventualities.
Cold storage is the answer to this question. They use an ingenious system that is more complex than simply writing down their private key on a piece of paper for safe-keeping. Their system, according to Investopedia, is as follows:
“To protect their bitcoin holdings, the brothers distributed snippets of a printout of their private keys across multiple safe deposits around the United States.”
This division of responsibility, of dividing their private keys up amongst multiple parties, makes it increasingly difficult to have a breakdown in their system because many collaborators, in this case not just multiple people but multiple banks, would have to get together in order to perpetrate theft.
Whether or not you have a large fortune in cryptocurrency, there is still due diligence that can be done to keep even your smaller investments, or fractional coins that remain on exchanges, as safe as possible. Whether or not you have a system of cold storage set in stone, it is still a good idea to verify and do research into the brokerage website or App of your choosing.
Agency problems are traditionally between the owners and managers of a business, but there is a very similar relationship between bitcoin owners and brokerage site owners. It is important to note that the problem in bitcoin is that owners of these brokerage sites and owners of bitcoin might not always have the same set of interests. Keep in mind, agency sites make money from fees related to trading and other instruments such as leverage rather than on the actual capital appreciation of the asset. This could incentivize the brokerage side to create or allow financial instruments that actually increased volatility of the assets in which they broker trades. The most common example in the last decade would be the financial crisis of 2008 in which banks ignored their responsibility as underwriters in an attempt to package for sale as many mortgage-backed securities as possible. It is important to understand what types of activities your exchange might be partaking in because inherently risky or illegal activities might possibly lead to your exchange declaring bankruptcy or being shut down by the governing body in the country where it originates.
As of the writing of this article, Gemini maintains that “[t]he majority of digital assets are stored offline in our proprietary Cold Storage system.” And Coinbase maintains that “98% of customer funds are stored offline”. Doing your due diligence and looking into the safety measures and policies of an exchange is essential for giving yourself the smallest possible chance of being a victim of fraud or theft.
Historically, the US has some of the strictest laws governing and regulating exchanges. While regulation might seem inhibitory at first glance, digging deeper we reveal some broadly overarching economic patterns. The legendary Walter Wriston, CEO of Citibank, said “Capital will always go where it’s welcome and stay where it’s well treated.” To be well treated any financial instrument must be transparent and free from fraud or potential abuse. Fair and meaningful financial regulation could be one important step toward generating a positive cash inflow into cryptocurrency projects such as bitcoin that propose to solve some of the world’s financial needs.
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