October 28, 2020

But what is bitcoin really for? | Innovation


“Actually, almost nobody uses bitcoin for payments, they use it more as an alternative to gold. It is a reserve of value; it is a reserve of speculative value like gold ”. The phrase of the president of the Federal Reserve of the United States, Jerome Powell, during an appearance in the Senate to talk about Libra, the cryptocurrency of Facebook, was very celebrated by the active global community of bitcoin apostles. They had motives. The same people who used to talk mockingly about “magic internet money” now compared them to gold.

Half a year has passed since those words of Powell, and the comparisons between gold and bitcoin proliferate. They are not only opinions, but also data: the upward quotation curves of both assets were practically identical after the assassination of Iranian General Soleimani by the United States, as well as that of oil. Bitcoin, specifically, rose 19% in the five days following that January 3.

Bitcoin suits crises well, when cracks appear in everything apparently solid. But is it really possible that an asset as volatile and risky as bitcoin has become a refuge value, comparable to gold? If the answer is yes, the preconceived idea about investors in the cryptocurrency will have to be cornered. They would not be restless technologists expert in blockchain – the technology that underpins bitcoin – but conservative financiers who are interested in innovation far less than security.

Ramón Ferraz is the CEO of 2gether, a ‘neobank’ specialized in cryptocurrency operations. They have studied how their 10,000 clients are, in 19 EU countries, and the result is lawyers, accountants and economists are their main users, 15%, far exceeding computer scientists, 7.9%, who are also below unemployed and retired. Those who operate with cryptocurrencies in 2gether are relatively young (56% are between 26 and 45 years old) and overwhelmingly men (77%), which Ferraz explains because “this is a financial world, and traditionally there dominates the masculine.”




Demonstration in protest of the murder of Qassem Soleimani in front of the US consulate in Istanbul, Turkey, on January 5.

Bitcoin is a luxury … sometimes

“In recent years, money does not give any profitability, and the population with more financial knowledge seeks alternatives such as bitcoin,” explains Ferraz, who is a certified financial analyst. “In the western world,” he continues, “bitcoin solves problems that are not critical. But in countries such as Angola, Venezuela or Argentina, where your money may not be worth anything or they can take it from one day to another, bitcoin can solve the main problem of the economy. ”




Comic ‘Hunt for Satoshi Nakamoto’

So what in the West is a luxury, a financial sophistication, in other countries is a necessity. In the same line, Álex Casas, cryptocurrency specialist and founder of León Blockchain Hub, explains: “When there are restrictions on access to the banking system, bitcoin behaves like a refuge: it happened in Cyprus in 2013, in Argentina in 2014, in Greece in 2015 and it’s happening now in Lebanon. ” It is not merit of the cryptocurrency, but mistrust in the financial system, he explains.

Weak points

Another test for the consistency of bitcoin

The bitcoin protocols, established by Satoshi Nakamoto, establish a system of issuance of fixed and immovable currency, which would have its final point in 2140, when the circulation of bitcoins reaches 21 million units. The system depends on the ‘Miners’, computer operators that launch bitcoins into the market obtaining as payment for their work an amount of the cryptocurrency itself. The Nakamoto protocol established that this remuneration would be progressively lower, and it is expected that in May, for the second time in the eleven years of bitcoin history, it will be reduced: from 12.5 bitcoins (about $ 100,000 at the current exchange rate) to 6, 25 bitcoins

How can this change in working conditions affect the price of bitcoin? “They play too many factors to dare a forecast,” says Alex Casas, but there is a certainty: all bitcoin architecture rests on the work of the miners, who operate –and spend a lot of energy– for an economic reward. If it is not enough for them, the world of bitcoin can falter.

In the eleven years that have passed since the birth of bitcoin, the cryptocurrency has been presumed dead several times, and has been accepted, little by little and with reluctance, in financial circles. For Ferraz, one of its main virtues is that it is an incorrect asset, that is, its price is totally independent of any other asset, and that adds attractiveness to the composition of a financial portfolio. “It serves to diversify portfolios in times of uncertainty,” explains economist Javier Santacruz, “but no institutional investor includes bitcoin in his portfolio because he knows that you can’t play the rooms with that.” No institution supports an investment in bitcoins, and that closes the doors of the institutional investment to the cryptocurrency.

Santacruz, very skeptical about the consideration of bitcoin as a refuge value, attributes the similarity of its valuation curves with gold to automated portfolio management through algorithms. “The interesting thing about bitcoin is its technology, its protocols, its network architecture … that’s unstoppable, and I don’t want to believe that your final product is bitcoin.” “No regulator in his right mind will allow the massive circulation of a currency that he does not control,” he forecasts.

It’s a lesson that seems to be learning Facebook postponing Libra, and which bitcoin may face soon. Meanwhile, it has the virtue of adapting to the needs of its users: refuge in weak financial systems; diversification in the most stable.

The bubble that survived the bubble

In addition to the skepticism of financiers, bitcoin faces competition in its own terrain, that of cryptocurrencies. There are hundreds of quotes and only one, Ethereum, makes it some competition, with just over 10% of its market value (16,000 million dollars versus 155,000 million dollars).

So many cryptocurrencies, many of them useless, are a consequence of the bubble of ICO (initials for Initial Coin Offering) that occurred between the second half of 2017 and the first of 2018. According to data from the specialized website Coinschedule, in 2017 this business financing mechanism through the launch of cryptocurrencies and ‘Tokens’ globally earned 6,557 million dollars; in 2018, 21.620 million dollars. But in 2019 that figure plummeted 85% -3,255 million dollars, less than half that two years before- and in recent months the market is particularly cold.

Jesús Pérez Sánchez, former president of the Spanish Fintech Association and CEO of Digital Asset Institute, specialized in the valuation of crypto assets, recognizes that bubble, but minimizes its importance: “There was also at the time with the Internet, because the paradigm changes cause capital investments greater than those needed by the projects ”. In his opinion, not only bitcoin has come to stay; Other cryptocurrencies will also mark the future of the economy.

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