We can imagine the conversation around so many Thanksgiving dinner tables last week:
“Say, my boy, how is that Bitcoin doing for you? I remember you told me it was the future last year and so your grandma and I went out and bought as much as we could get our hands on…”
Check out this story from CNBC dated November 25, 2017. Highlights include:
“Bitcoin climbs more than 8 percent to a record high over $9,000, according to CoinDesk.”
“The largest bitcoin exchange in the U.S., Coinbase, added about 100,000 accounts around Thursday's Thanksgiving holiday, to a total of 13.1 million Friday, data shows.”
“The gains come ahead of the expected launch of bitcoin futures in the second week of December by the world's largest futures exchange, CME.”
Fast forward to this article (also from CNBC, for consistency) from November 23, 2018:
“Bitcoin tumbles again, loses a quarter of its value during Thanksgiving week”
From where we sit today, it is almost easy to see how the market got all those accounts opened and the price of the limited supply of Bitcoin rose to meet the FOMO-fueled demand for Bitcoin. Can you imagine the uncles and cousins who watched “little hacker Jimmy” roll up to Thanksgiving dinner in a brand new lambo? Good news - you don’t have to imagine - you can see the reaction in the price chart of Bitcoin.
The chart...it shows you things. Specifically, it shows you human emotion at a given point in time. Doesn’t matter if it’s tulips or Bitcoins.
The chart then shows something else that is really easy to see in hindsight. It shows what happens in large groups of humans when something goes from being “impossible to bet against” to “easy to bet against”. That’s right – along came futures contracts. Unfortunately, the futures contracts that are available to trade make very little sense from a “long” perspective, given their large margin requirements. Even if the futures contracts ultimately serve to legitimize the asset class (as was the theory in anticipation of their arrival), they first served Wall Street’s own feelings of FOMO, and provided any early-stage, large-scale investor the ability to hedge their position by shorting the futures contract (for a commission, of course).
Futures started trading on December 10, 2017:
Imagine the bankers seeing Jimmy and his lambo… and missing out on all those commissions that Coinbase is cashing in on.
And then imagine the smart money selling short the futures - meanwhile Uncle Steve is just now opening his Coinbase account.
What a disaster.
Today we can’t help but feel like the roles have reversed and the retail crowd that got beat up for the past year is selling out to the institutional investors (like us) just as it has played out in traditional capital markets repeatedly, for years and years. Time will tell.
Anyway - that is the bad news.
The good news is that the something far more profound than a futures contract has taken a major step toward legitimizing cryptoassets of all stripes, for good.
When we think of money - medium of exchange - we think of what gives it value. Typically, value comes from government backing or endorsement and/or threat of force. Gold gets its value from things like Scarcity, Durability, Divisibility and Portability. In the case of Bitcoin, it was more like gold than money but mostly, value came from willingness of network participants to accept Bitcoin as payment. And folks were willing to accept the coins because they expected to be able carry the process forward later by using the coins to pay for something of value for themselves – but with no assurances and little historical record. (We could go on about how human behavior kicked in here with those requiring Bitcoin to transact facing off against those who wanted to hold for appreciation causing violent price spikes - but we’ll move on.) The network is still where Bitcoin gets the vast majority of its value to this very day. But something big just changed!
One major (often overlooked) factor that gives the dollar value is that you must use it to pay your taxes. This is not optional - you can’t pay your taxes in just any currency. For example, the IRS says:
“Payments of U.S. tax must be remitted to the U.S. Internal Revenue Service (IRS) in U.S. dollars.”
Pretty clear, we’d say. This factor alone contributes to massive (and repetitive) demand for dollars – supply, meet demand.
So, when you wonder where Bitcoin gets its value, just ask yourself, “Where does my dollar get its value?” we suppose the ultimate answer is at the wrong end of the barrel of a gun…
Why is this important? Here’s why - Bitcoin now officially benefits from one of the exact same sources of value as the coveted US Dollar - thanks to the great state of Ohio!
The Wall Street Journal reported that starting yesterday (11/26/2018), Ohio accepts Bitcoin as a legal tender to pay taxes via OhioCrypto.com. This officially makes it the first state in the Union to do so.
Payments will be processed by BitPay. At first, only businesses will be able to pay via BTC. But the plan is to include individual tax-pay process is “in the works.”
Ohio State Treasurer Josh Mandel said:
“I do see [bitcoin] as a legitimate form of currency,”
And, he added:
“I’m confident that this cryptocurrency initiative will continue,”
Whether you see this as a new source of value for Bitcoin, or simply a substantial increase in the size of the network, the news is nothing but great for investors.
Cheers to you, Ohio! And grandma – you can pay your taxes with your Bitcoin now.
Shane Fleury | President & CIO - Elevate Ventures
Steven Orr | Portfolio Manager - Third Wave Digital Asset Fund