Wed. Mar 3rd, 2021

Credits: www.pymnts.com

We’ve seen it all before, right? Bitcoin at $20,000 seems so … 2020.

We’re at $50,000 now and counting, and 2021 is barely a month and a half old. And next month, it may drop. The month after that, it may swing up again. It’s such a rapidly changing issue that even Nobel-prize winning economist Paul Krugman once called cryptocurrency economically irrelevant.

Bottom line, cryptocurrency has defied accurate predictions. But there are market dynamics that are starting to lead to reasonable analysis. For example, Stephen Pair, CEO of crypto management platform BitPay, said in an interview with PYMNTS CEO Karen Webster that bitcoin’s buoyancy has been due to a number of factors.

First there is the scarcity value. The meteoric rise in 2020 can be traced in part to the fact that there’s been a cut in the supply of new bitcoins being created — in half. That process, where every four years the crypto’s issuance across networks is in fact halved, means that there is less coin to go around.

“You’re also seeing a lot more institutional interest,” Pair said, where companies have been investing portions of their balance sheets into bitcoin.

MicroStrategy and Tesla come to mind. Hedge funds and big banks are making the leap.

All in all, he said, “This time’s a little bit different than previous times where it’s largely been driven by retail purchasing.”

All of these events, he said, are creating an environment where more people want to have exposure to the asset class, and bitcoin is the oldest and the most secure of the lot.

“Bitcoin among all the cryptocurrencies is probably the most well understood in terms of how it behaves, how it works,” he said. “It’s not changed very much over the years, and it’s not likely to change very much from here on out.”

With that stability in place, utilities and use cases will evolve.

Bit by bit the use of bitcoin as a currency is taking time and, as Webster noted, card networks (such as Visa) are enabling crypto to be spent over their rails.

For cryptos to become part of mainstream payment options — versus assets akin to digital gold — Pair said that “the point of investing your savings into anything is that this action will either preserve value or increase in value. What we see are people who maybe during the last cycle invested in bitcoin and now want to spend that wealth in various ways.”

He noted that BitPay-enabled commerce spans everything from car and yacht dealerships to home purchases to charities.

In the bid to “monetize” bitcoin, he said, people realize that their most valuable holdings are also the least liquid — and they may want to funnel those gains into real world commerce. If BitPay did not exist, he said, people would have to move their bitcoin — or any crypto, really — to an exchange, sell the crypto, withdraw it to a bank account (into fiat) and then make the transaction. In other examples, the individuals with investment accounts can move money to Charles Schwab, with debit accounts that can be used to make purchases.

But with those models, bitcoin is expensive to use.

“There can be congestion on the networks, and there are fees that can equate to $5 to $10 to $20 per transaction,” he said.

That means bitcoin, for now, is not suitable for very small-value transactions.

“But that does not make it any less of a good payment tool just because it costs more,” he said. (PayPal and others, who are making bitcoin available as a method of payments for merchants, would tend to agree.)

“The reality is when you look at bitcoin, it’s a digital commodity that makes this database called ‘bitcoin’ work,” Pair said. “And the same thing for the other native cryptocurrencies: They create the incentive mechanism to secure that database and make sure that it doesn’t get compromised as a commodity. You’ve got a supply, you’ve got demand, and then you’ve got a price. If the supply remains fixed, which it is with bitcoin, the supply is a known function, then the price is going to fluctuate in response to changes in demand.”

There’s been some debate over the mechanics of actually mining bitcoin — and although the timing and cadence of production won’t change (it takes minutes to create the digital currencies), Pair noted that we may see continued innovations in energy development and use (as in renewables) given the heavy consumption tied to crypto production.

Institutional Activity Creates New Era For Bitcoin

“The $5 or $10 that somebody has to pay to get a transaction into the blockchain, that’s where miners will make all their money,” he said. “And so, depending on how valuable a bitcoin transaction is to somebody … how important it is for them to get that transaction into this database, they will pay more or less depending on that. Energy consumption is going to be a direct reflection of the value that people get out of creating these transactions in the bitcoin blockchain.”

Not A Dollar Threat

As far as bitcoin as a store of value and unit of currency, Pair was quick to point out that bitcoin is not designed to go head-to-head and compete against the dollar.

But by way of contrast to bitcoin, the dollar — in terms of supply — is not fixed. It’s controlled by the Federal Reserve. The Fed’s overall objective is different and is focused on maintaining a stable price for the dollar. The Fed will change the supply in a bid to keep pricing stable over long periods of time. Currencies are an important finance tool for governments, he said, and are simply not going to “go away.” He added that companies that want to do their accounting in denominated, international currency are going to want to transact in those same currencies because it simplifies the process.

BitPay, he said, does something similar for its corporate customers: “We allow them to allow their customers to pay in cryptocurrency, but we manage all of the conversion of that into their local currency. So, whether it’s dollars, euros or another currency, the company doesn’t have to take bitcoin onto their balance sheet.”

It’s a valuable mechanism for cross-border transactions, he said.

But beyond the cryptos themselves, he noted that the blockchain — the block-by-block list of records that are immutable — allows for the tokenization of many things, ranging from cryptos to dollars to even, potentially, shares of Apple stock.

“Companies will issue their equity on a blockchain in a blockchain form, and this can prevent things like you saw with GameStop, with naked short selling,” he said.

There’s no reason why BitPay couldn’t make it feasible down the line for stock to be used to buy goods or services across the blockchain or be used to pay an invoice.

Bitcoin In 2021 And Beyond

Bitcoin recently touched the $50,000 milestone. Asked by Webster where the price could be headed, Pair said the most obvious use case for the bitcoin blockchain is as a store of value.

“If you look at the value of all the gold in the world (i.e. above ground gold), which people use as a store of value … if bitcoin were to see as much adoption for that use case as gold does, then the applied value of bitcoin is something like $300,000,” Pair said. “But that’s not the only use case of bitcoin.”

He pointed to ID initiatives such as those under development by firms like Microsoft, where bitcoin’s blockchain could become the foundation of a modern internet that’s built entirely around blockchains. In that case, bitcoin’s value would be significantly higher than $300,000, he said.

As to where we are headed this year, it may not be in the cards that we’ll see banks suddenly embracing cryptos wholeheartedly. Part of that is due to a technological heavy lift.