Biden is expected to choose Gary Gensler to lead the SEC. Gary Gensler has previously written that bitcoin is a catalyst for change, seeing that we already live in an age of digital money and that Blockchain technology has the potential to transform the world of finance. Gensler was on staff at MIT as Professor of Blockchain, Digital Currency, and Senior Advisor to the Digital Currency Initiative. The SEC under Gensler will be pro-bitcoin.
People associated with cryptocurrencies, such as Kristin Smith, the executive director of the Blockchain Association, see Gensler's appointment as a sign that Biden's administration could bring other persons familiar with cryptocurrencies into his administration, personnel that would work to advance blockchain cryptocurrency policies.
Biden has selected Brian Deese, a BlackRock executive, to be the director of the National Economic Council. BlackRock management has stated that bitcoin is here to stay.
BlackRock’s chief investment officer in fixed income, Rick Rieder, has stated that the day is coming when bitcoin will rival gold as a store of value as a hedge against the loss of value of the world's fiat currencies.
Brian Deese, as a Black Rock executive, will have similar views.
Biden has chosen Janet Yellen for United States Secretary of the Treasury. She will be Biden's adviser relating to federal monetary policy.
From 2014 to 2018 Janet Yellen was the head of the Federal Reserve, which is the central banking system of the United States. In recent years the Federal Reserve Board has made favorable comments about cryptocurrencies, and because of Yellen's close ties with the Federal Reserve, people familiar with cryptocurrencies, such as Dan Held, hold out the plausibility that Janet Yellen will now be favorable to Bitcoin and cryptocurrencies in general.
Janet Yellen has said that blockchain is a new technology and could have implications in the way that transactions take place throughout the financial system. She stated that the Fed does not have the authority to regulate bitcoin.
In 2018 she said that she was not a fan of bitcoin because it can be used for illegal transactions. During the present Biden confirmation hearings, Janet Yellen said that cryptocurrency transactions were mainly used for illicit financing and that lawmakers should curtail the use of bitcoin.
However, the very construction of blockchain technology will make criminals avoid the use of bitcoin. Bitcoin leaves a permanent record, that can not be altered, of its transaction, and this would allow law enforcement officials to convict persons involved in illegal bitcoin transactions.
Criminal activity linked to cryptocurrency transactions has been falling. In 2020, criminal-linked transactions related to cryptocurrency was 0.34%, compared to 2.1% in 2019. Ninety percent of illegal transactions involved the use of $100 bills because cash is untraceable.
Janet Yellen will be conferring with Biden's cryptocurrency experts, such as Gary Gensler, in making her decisions. She follows the advice of experts in their fields. They will explain that bitcoin will hinder illicit financing, and therefore its use should be encouraged. Janet Yellen will follow their advice.
The Chamber of Digital Commerce PAC, with ties to the blockchain industry and whose members include representatives from Microsoft, JP Morgan, and IBM, initiated a campaign called 'Crypto for Congress'. They sent a $50 bitcoin to all members of the House of Representatives, and the Senate, Democrats, as well as Republicans, along with a package containing an extensive amount of material, in order to raise the Congressional's awareness of blockchain technology. The combination of having their own personal bitcoin, and information on its usefulness, will allow the members of Congress to act more knowledgeably whenever the topic of cryptocurrencies is brought before them.
All of this indicates that President-elect Biden's administration will be pro-bitcoin, plus the members of congress will have received information about bitcoin and will be more open to its usefulness.
This may be only a small part of the forces that will propel bitcoin upward.
People are starting to realize that the dollar is losing its value.
When our nation was growing by expanding westward, America obtained the money to run the government by selling parcels of the land it acquired. Then through the start of 1900, the U.S. also received the money needed for running the government by an ad valorem system in the form of tariffs, by charging a percentage of the value on imported goods from foreign countries.
But the government wanted more money. In 1909 the government implemented the Business-Corporation Tax as a way to obtain money, and in 1913 the Underwood-Simmons Act established the federal income tax on U.S. citizens.
1913 was also the start of the destruction of the dollar when banker J.P. Morgan convinced Congress to approve the creation of the Federal Reserve Bank. The Federal Reserve Bank would provide funds to prevent the financial panics that periodically occurred, and it would allow the banking system to create money if needed for general administrative purposes. That was the problem.
The dollar up to that time had been backed with gold. People, and foreign nations, could convert their dollars into gold at the rate of $20.67 for an ounce of gold.
Source: World banknote images
But now, in addition to that, the Federal Reserve Bank could produce Federal Reserve Notes as legal tender out of thin air just by government decree. The money created by the Federal Reserve is called fiat money. Fiat is Latin for 'by decree'.
Today's dollars, $1, $10, etc., are actually Federal Reserve Notes.
Paper bills for money were originally backed by gold. People knew the paper money was valuable because it could be exchanged for gold. Over time paper money, even without its backing by gold, came to be considered real money.
All 'money' serves to facilitate exchange. It's easier to use than barter. People accept 'fiat' money because they know that other people will accept it in exchange for goods and services. But behind that acceptance is the basis that people are accepting that the entity, in this case, the government that is backing the money, is keeping it intact, and not letting it become worthless.
If people start to realize that the money, the fiat paper money, that they are holding is starting to lose its value, they will start to try to find a better substitute, such as bitcoin. As the fiat money continues to lose value, and they perceive that their fiat money is starting to spiral downward faster, they will increasingly seek a substitute that will hold its value and protect their family's assets.
Is the dollar in danger of accelerating its loss of value? Are ALL fiat currencies in danger of losing their value? If so, how will this affect bitcoin?
Congress at times finds it necessary to spend more money than it has. When that happens, the Federal Reserve issues money to cover the debt. In doing so, the Federal Reserve increases the money in circulation.
By the 1930s the U.S. had increased the money supply so much, and so fast, that we did not have enough gold to convert all our dollars into gold.
In 1934 President Roosevelt, under the Gold Reserve Act, decreed that it would take $35 to convert dollars into an ounce of gold, instead of $20.67. Therefore, it would take more money to buy an ounce of gold. That meant that each dollar would now buy 41% less gold than previously, and our gold reserves were now sufficient to convert all our dollars into gold.
Under the Gold Reserve Act, the dollar was no longer redeemable to US citizens for gold, but foreign governments could still convert their dollars into gold.
The Federal Reserve kept on producing extra dollars, above and beyond the ones that were removed approximately every five years when they became too torn and ragged for use, and by the late 1960s, and the start of the 1970s, America only had enough gold to back 22% of its dollars.
Foreign governments saw that the dollar was losing its value, and wanted to convert it into something that would hold its value. Gold would hold its value because the more the dollar dropped in value, the more dollars it would take to buy an ounce of gold, and so the price of gold would rise, offsetting the drop in value of the dollar's purchasing power.
In increasing numbers, foreign governments started exchanging their dollars for gold. President Richard Nixon realized that we would either have to stop our spendthrift ways, and strengthen the dollar, or we would have to stop backing our dollar with gold.
In August 1971 he took America off the gold standard and made all dollars hence forth fiat dollars, backed by the full faith and credit of the U.S. government, but not by gold.
How much has the dollar fallen?
After the creation of the Federal Reserve in 1913, the government started printing money to pay its debts. This increased the number of dollars in circulation. According to the quantity theory of inflation, increasing the number of dollars in circulation, decreased the purchasing power of each dollar, which meant that it took more money to buy goods.
During the depression of the 1930s the dollar's fall was reversed, although, at its highest, it only reached 75% of the purchasing power of the 1913 dollar. If you had money you were in command, and the buying power of money was enhanced.
When World War II started in the early 1940s the government started printing money to finance the war effort, and the extra money it was printing caused the dollar to once again start losing its purchasing power.
Even after the war, the government continuously found reasons why it needed more money than it was taking in, and the dollar has been losing purchasing power ever since then.
The dollar has now lost over 96% of its value since 1913. Today's dollar is worth less than 4 cents in 1913's money. 3.76¢ to be exact.
Source: CPI Inflation Calculator.
The fall of the dollar has been so slow, lasting over generations, that almost no one has really been aware of what has been happening. But this slow fall was suddenly turbocharged by the coronavirus. The country being shut down by the coronavirus caused the government to issue the giant $3.6 trillion stimulus bill that was needed to help bail out people and companies. This was more than the government received in taxes in 2020. Because the government was spending more money than it was taking in, 2020's stimulus bill will increase the government's debt and accelerate the fall of the dollar.
And now Coronavirus cases have started exploding again in frequency, after having leveled off.
Source: Coronavirus (COVID-19) statistics
States, such as New York are shutting down again.
Mutated forms of the virus have shown up in Britain, Africa, and Brazil, which are 70% more infective than the original coronavirus. They may also be more deadly. The British COVID-19 variant appears to be 30% to 40% more lethal than the original COVID-19 strain. Some, such as the Brazilian virus, may be partially resistant to the virus vaccines. And now, a new variant has shown up in California. Dr. Sara Cody, a health officer in Santa Clara County, warned that COVID-19 continuously mutates and adapts.
This is not the 1918 influenza pandemic. Even though it killed tens of millions, once people developed herd immunity, it went away. That is what medical experts hope happens with COVID-9.
Manaus, a city in Brazil with a population of 2 million did not require masks or distancing. Cases surged, but by April 2020 they started to decline and stayed low and declining for 7 months. Tests of the population showed a seroprevalence of 76%, far above the basic 67% herd immunity threshold.
Then new cases exploded exponentially. Hospitals were overwhelmed faster than in the first infection. Oxygen supplies ran out, and people that should have lived, died because oxygen wasn't available. A new COVID-19 mutation had developed that originated in the city itself. It was similar to the B.1.1.7 and B.1.325 mutations from Britain and South Africa, which are 70% more transmissible, but this mutation evolved an E484K spike protein mutation which allows it to infect people with antibodies to CIVID-19. This mutation may be able to partially evade the body's immune system and has an increased severity, especially among people that been previously infected. This new mutation has now shown up in Japan and America.
The battle against COVID-19 may take longer than expected, and if so, the upsurge in cases may put a severe strain on the medical community's ability to respond to the virus, which could prolong the lockdowns.
Biden has submitted a $1.9 trillion stimulus bill, but many Democratic politicians are saying that it does not go far enough and therefore another stimulus bill may follow this one, especially if the coming lockdown is protracted. Considering that the government's tax receipts will be greatly reduced in 2021 because of the new shutdowns that are being ordered, these new stimulus payments will very likely also be more than what the government will be collecting in taxes in all of 2021. This will speed up the fall of the dollar even further.
People are realizing that our country is in trouble. And not just our country. Throughout the world, businesses were shut down, and people were ordered to stay home in order to prevent the spread of the virus. This caused businesses, especially small businesses to lay off people, and by June of 2020, worldwide, 400 million full-time jobs were lost.
Last year Europe, Britain, and Japan spent a total of $19 trillion in stimulus payments. This placed severe financial stresses on their governments. Britain's government was spending more than it was taking in from taxes.
Now countries worldwide are shutting down again. They will be giving out more stimulus payments, which will rapidly debase their currencies even further.
The stimulus bill added trillions of dollars to America's federal debt.
Source: Federal Reserve Bank of Dallas
Yellow strip = addition of stimulus payments
Our national debt was already growing prior to this, but these extra trillions of dollars acted to explode our debt higher. And now, with America's, and all the world's economies already weakened, these new lockdowns will require massive stimulus payouts just to maintain the present status quo. This will cause a further explosion of debt.
The only way out of this is for businesses to recover. That way they can hire people who will then use their money to buy goods. In turn, the companies that supply the goods would hire people in order to produce more goods to replace the ones that people bought. Thus more and more jobs would be created, which would start a sustained recovery.
The problem is that the government is up against the 80/20 Pareto Principle, named after economist Vilfredo Pareto, which shows that 80% of the private sector's economic activity is produced by local small to medium-sized family businesses. These are the businesses that are most affected by mandated shutdowns, and this coming round of shutdowns is starting to look like it will permanently bankrupt many of these businesses.
By the time this new upsurge in COVID-19 cases is contained, so many family businesses will have been bankrupted, that it will take years for America, as well as other countries, to recover. World Bank calculations indicate that in some regions a full recovery will not be achieved until 2025, or possibly even later.
This will mean that even after the pandemic has passed, there will be a multi-year period where America, and the other countries of the world, will have drastically reduced tax receipts.
To the average person, knowing that the stimulus bill has increased the national debt, will not mean anything. However, people involved in bitcoin are aware that fiat money is being debased by the ever-increasing national debt of America and other countries, and that bitcoin will protect their savings.
Jim Reid of Deutsche Bank says that increasingly people are turning to bitcoin over gold to hedge the dollar's risk.
A recent global survey has shown that two-thirds of millennials prefer Bitcoin to gold as a safe-haven. People accumulating cryptocurrencies are educated in how cryptocurrencies work in relation to fiat money. Gone is the day when only one person in 10,000 understood what was happening to our currency. And these people will be buying bitcoin. Their buying will accelerate as they view what is happening.
Prior to COVID-19, fiat currencies were losing their value, but so slowly that it would have been years before it really became noticeable. Now fiat currencies, including the dollar, are falling so fast, that their increasing loss in purchasing power is becoming common knowledge.
Bitcoin is superior to gold in protecting against fiat money's loss of value.
Gold is heavy and awkward. You can't really use gold as money for buying everyday things. If you travel, such as to a foreign country, it would be difficult to lug it with you.
Unlike gold, you don't have to store digital money in a physical site, such as a safe. Bitcoin is stored electronically. You can access it on your cellphone. It goes where you go. You can easily use it in monetary transactions. Critics say that bitcoin is too expensive to use for buying everyday goods. But bitcoin also comes in fractional denominations.
Bitcoin comes in three denominations. You don't have to use bitcoin by itself.
Basic Bitcoin – BTC – (1 full Bitcoin)
MilliBitcoin –mBTC– (1 thousandth of a BTC)
MicroBitcoin – uBTC – (1 millionth of a BTC)
mBTC ~ $35
uBTC ~ 3.5¢
Bitcoin's superiority is causing a shift away from gold towards bitcoin as a safe haven.
This appears to be borne out by the fact that gold has barely reacted to everything negative that has been happening, but bitcoin has been rising and is now surging.
Gold has been used as a safe haven by people throughout history. Gold can not be manipulated by governments. Gold is a physical substance. It is limited by the amount that has been mined. The U.S. can print as many dollars as it wants. But the more dollars it prints, the less they are worth, and as the dollar drops in value, it takes more dollars to buy the same amount of gold. This increases the price of gold, and the increase is enough to offset the drop in the value of the dollar. Therefore, gold holds its value. Hence the term, gold is a store of value.
Like gold, Bitcoin can not be manipulated by central governments. Bitcoin is limited to a maximum of 21 million bitcoins when the last are produced in 2040. But many bitcoins have been lost, so the total number of bitcoins that will be in circulation will be less than 21 million. When bitcoin was new it was trading for less than a dollar for a bitcoin. People were not diligent in trying to protect them. Many were lost because the hard drive in which they were stored, was accidentally wiped clean or lost. People have died without having gotten around to giving their next of kin their security code. People are now very conscientious in protecting their bitcoins, but approximately 3.25 million bitcoins have been permanently lost. That means that the maximum number of bitcoins that will be in existence will be 17.75 million bitcoins, not 21 million.
The number of bitcoins that have been produced to date is 18.5 million bitcoins, but, because of the lost bitcoins, the actual number of bitcoins in existence at this time is 15.25 million bitcoins. But the amount in circulation is less than that.
Major institutions own 5% of the bitcoins available, and they will be retaining them. That means that there are only 14.5 million bitcoins in circulation.
The number of bitcoins available for trading could be MUCH LESS than that. Illiquid bitcoins are bitcoins being held by individuals, or institutions, that haven't sold any bitcoins in five years or longer. They make up 77% of the bitcoins that haven't been lost. 77% of the 15.25 million bitcoins that haven't been lost is 11.75 million bitcoins.
That would leave only 3.5 million bitcoins available for trading.
Increasingly, institutions and affluent individuals, are turning to bitcoin as a preferred choice over fiat money. If the buying of bitcoins shows a sustained incessant demand, this limited supply of available bitcoins will cause its price to significantly rise above its recent $41,000 peak.
Gold is a store of value because it is a physical entity that can only be produced via mining, not government decree. The amount of gold present in the world is 197,576 tons, which would fit in a cube 66 feet on a side, the size of one 6 story building. The amount of gold has been increasing at a rate of 1.4% year, but that rate has been slowing down because it is becoming more difficult to locate large deposits of gold. Still, over time the amount of gold will increase over its present amount.
Bitcoin can be an even better store of value than gold because the maximum number of bitcoins will be 17.75 million bitcoins, and this will not increase. Also, bitcoin is secure. Its encryption can not be broken. Governments can not confiscate it. They can confiscate gold.
Major companies are acquiring bitcoin in order to protect themselves from the depreciating value of fiat money. MicroStrategy states that it invested $425 million in bitcoin because its cash pile is being eaten alive by government money printers.
MicroStrategy's executives believe that the most aggressive expansion of money printing is ahead. As a result, they explored the various options available to preserve their assets, including gold. They concluded that bitcoin was the best choice. In fact, they predicted that gold investors will be fleeing to bitcoin.
MicroStategy has been buying increasing amounts of bitcoin, and as of the start of 2021 has accumulated over two and a half billion dollars worth of bitcoins.
MicroStrategy is going to host a virtual 'bitcoin corporate strategy' summit on February 3 and 4. Michael Saylor, the co-founder of MicroStategy stated that thousands of executives, officers, directors, and advisors of corporations have signed up for the event which is designed to help other companies, and their executives, learn how to acquire and integrate bitcoins for their companies.
MicroStrategy will give them its accounting guidance, legal guidance, and bitcoin integration guidance that will save them months on transitioning their companies into being bitcoin compatible.
Joe DiPasquale, the chief executive of San Francisco-based bitcoin and cryptocurrency hedge fund BitBull Capital, speculated that the aftereffects of the conference could lead to increased buying of bitcoins.
Bitcoin is becoming mainstream. PayPal allows people to use bitcoin in transactions. Fidelity allows institutional customers to borrow against their bitcoin holdings. Brokers, such as Vanguard and Swab allow customers to use bitcoin.
Visa has approved Visa-branded Bitcoin credit and debit cards.
Microsoft is going to team up with Starbucks, which will allow customers to convert their cryptocurrencies, such as Bitcoin, into fiat money to make payments at its locations.
Many influential Wall Street investors have changed their public stance on Bitcoin from negative to positive.
Hedge fund investor Paul Tudor Jones, with $40 billion for use in his hedge fund, used to be against bitcoin, but now has nearly 2% of his portfolio in bitcoin, and could increase that amount. He states that we are witnessing an unprecedented expansion of every form of money, unlike anything the developed world has ever seen. He believes that bitcoin is the best protection against the destruction of fiat currencies due to its advantages over gold. He states that bitcoin is easier to store and transfer than precious metal, and it's also more divisible.
He is now joined by another billionaire hedge fund investor, Stanley Druckenmiller. As recently as June 2019, Druckenmiller stated that he would not purchase Bitcoin, but he continued to monitor bitcoin and research it. He has now changed his mind, saying that bitcoin will perform better than gold and he is buying bitcoin.
Elon Musk, who owns Tesla, and is the richest man in the world with a $184 billion fortune, has spoken positively about bitcoin in the past. He is well aware of the dollar's falling purchasing power.
On December 21, 2020, Musk said that bitcoin was not real money, but he appears to be changing his opinion.
Barry Silbert, of Grayscale, tweeted that he is certain that Elon Musk already owns bitcoins. In fact, Elon Musk recently indicated that he is open to bitcoin ownership. On January 8th, bitcoin author Ben Mezrich tweeted that he would never turn down getting paid in bitcoin. The very next day Elon Musk tweeted me neither.
On 21 January 2021Musk changed his Twitter bio to #bitcoin and posted that In retrospect, it was inevitable.
Elon Musk is considered to be a pathfinder in opening up the possibilities that will be taking place in our increasingly technological future. Musk has 43 million tweeter followers. This will fan interest in buying and using bitcoins.
Additionally, it's possible that he will decide to convert some of Tesla's $14 billion in cash reserves into cryptocurrencies, especially bitcoin. This by itself could cause bitcoin's price to climb.
An increasing number of well-known financiers are now starting to get involved in bitcoin. Eric Peters, the founder, and CEO of One River Asset Management, in November, bought $600 million worth of bitcoin and ether, the Ethereum network’s currency. He plans on bringing his bitcoin and ether holdings to $1 billion in the first part of 2021.
Ethereum is used for tamper-proof decentralized financial contracts and applications. Bitcoin is a form of digital money. It is like cash in a wallet.
Ether is the cryptocurrency of Ethereum, but compared to bitcoin it is barely traded. Bitcoin is the main cryptocurrency and Eric Peters will be putting most of his money into bitcoin. Peters says that the flow of money into bitcoin has only just begun.
That these well known and highly regarded, financially astute hedge fund managers, with their back up cadre of analysts, are now buying bitcoin, gives credence to the growing conviction that bitcoin is a valid financial instrument and not just a passing fad.
Bitcoin buying by large institutional investors in America and Europe increased dramatically in 2020 and now 36% of large institutional investors own cryptocurrencies.
Even multi-billionaire Mark Cuban, who is ranked #177 on the 2020 Forbes 400 list, and is the owner of the Dallas Mavericks basketball team, is buying bitcoin.
Throughout the world, wealthy individuals are buying bitcoin. Ricardo Salinas, the third richest man in Mexico, who is the 106th richest person in the world, holds 10% of his assets in bitcoin.
Laurent Kassis, the managing director of 21Shares AG, which is based in Switzerland, said that bitcoin's price is being driven by institutional money, and that there are not enough bitcoins to meet the supply, and that this will drive its price upward.
So much Bitcoin is now held by long-term institutional investors that the blockchain research firm Glassnode estimates that just 22% of existing Bitcoins are in circulation for trading.
Raoul Pal, the co-founder of Real Vision, used to have a mixture of gold, cash, bonds, and bitcoin in his personal account. It is now 98% cryptocurrency.
Real Vision is a financial media company that does in-depth interviews with renowned investors and institutions. Raoul Pal stated that every institutional investor he talked to was interested in buying bitcoin.
Raoul Pal also talked about bitcoin ETFs.
After years of turning down requests by companies to bring a bitcoin ETF to the market, the SEC is now accepting requests for bitcoin ETFs. VanEck, a global investment firm, has just applied to the SEC to start a bitcoin ETF, which if accepted would start trading this year. VanEck wrote in its application that its bitcoin ETF would be similar to gold-trust ETF's, but that it would hold bitcoin as the underlying asset of its ETF, instead of gold.
Raoul Pal said that a bitcoin ETF would be a game-changer. People, in general, don't buy bitcoin, even if they want to, because the process is too complicated. The same with gold. An ETF trades like a stock and gold-backed ETFs make it easy for a person to acquire gold as an investment. As people buy shares of a gold ETF, the ETF buys an equivalent amount of gold and stores it in their vault on the investor's behalf. In return, the ETF charges them a yearly fee, such as the SPDR Gold Shares ETF, which has an expense ratio of 0.40%.
A bitcoin ETF would act in the same way. As people bought the ETF, it would buy an equivalent amount of bitcoins and hold them on behalf of the investors. This would take the bitcoins out of circulation. With fewer bitcoins available, people trying to buy bitcoins would have to offer higher prices in order to outbid the other buyers.
Gold-backed ETF's, which receive funds globally, had inflows of $47.9 billion in 2020. A bitcoin ETF would attract some of the money that is going into gold ETF's. Additionally, people, and institutions that wanted to be involved in bitcoin, would specifically invest their money in bitcoin ETFs. The resulting inflow of billions of dollars worth of bitcoins into bitcoin ETF's would in itself propel bitcoin's price upward.
Mike Novogratz of Galaxy Digital said that he previously worked with Biden's pick to head the SEC, Gary Gensler when they were at Goldman Sachs. That Gensler has taught a class at M.I.T. on blockchain and bitcoin, and that he understands cryptocurrencies. Mike Novogratz believes that Gensler will approve a bitcoin ETF this year.
People are now removing gold from gold ETF's and using it to buy bitcoins. JPMorgan Chase noted that since October, gold-backed ETFs have had $7 billion of withdrawals, while at the same time Grayscale Bitcoin Trust, which invests in bitcoins for institutional customers, has seen an inflow of billions of dollars. JPMorgan Chase strategists suggest that this may indicate that institutional money is moving out of gold, and into bitcoin.
Red area: withdrawal of funds from gold ETF's
Famous people, that have a great influence on the public, are getting involved in bitcoin. NFL player, Russell Okung, has arranged for half of his yearly $13 million salary to be paid in bitcoin. Other professional athletes, including basketball players and members of the New York Yankee baseball team, are also planning on being paid in bitcoin.
All these players have a huge fan base, plus possibly even more importantly, all the residents of the cities which host their teams, avidly follow their careers and pay attention to what they say and do. With their involvement, bitcoin will become a household word throughout America.
And not just America. Athletes in other nations, such as internationally famous soccer athletes, will take note of what is happening and they most likely will also want part of their salaries paid in bitcoin. Their huge international fan base will take note of the athlete's interest in bitcoin.
Russell Okung has been frustrated with the lack of economic power of black athletes and people in general. He believes that bitcoin will give them financial independence. He has opened a site to reach out to people about bitcoin.
With athlete's involvement in bitcoin, worldwide, people in the general population will be talking about bitcoin. They will also see that it can be useful in their daily lives and bitcoin will become ingrained in society.
Fund managers have a lot of leeway in deciding how to manage their money, and so they have no difficulty investing in bitcoin. What is significant in the acceptance of bitcoin is that now even staid organizations are getting involved in bitcoin. 170-year-old life insurance company Massachusetts Mutual Life Insurance Company just invested $100 million in bitcoin. Before it could do a transaction such as that, it would have to go through committees, plus their lawyers would have to approve the transaction. Because its investment in bitcoin was approved, It shows that even Massachusetts Mutual's very conservative vetting committee members, and their litigation adverse lawyers, believe that bitcoin is a good investment choice.
Massachusetts Mutual has $235 billion to use for investment purposes. The $100 million represents only 0.0425% of the money it has available for
investments. Chelsea Haraty of Massachusetts Mutual said that the $100 million investment in bitcoin was only a first step and that it will evaluate its bitcoin outcome in relation to its decision for future opportunities.
Massachusetts Mutual is not investing in bitcoin in order to make money. Other investors may be investing in bitcoin in order to sell it at a higher price. They are hoping to trade their bitcoins for even more fiat money in the future, but by the time they sell their bitcoins, the fiat money they receive will have lost purchasing power.
Life insurance companies base their premiums so that the money they receive will cover the cost of paying off their policies, plus leave a profit, as long as the money they are holding in reserve retains its value. Because the dollar's loss in purchasing power was fairly negligible, even over periods lasting decades, this was not a problem.
Now, however, the dollar, and even foreign currencies, are losing value at an ever-accelerating speed. Massachusetts Mutual, and other life insurance companies, need to find ways to preserve the value of their reserves.
Life insurance companies have not been able to invest in gold as a safe haven to protect their cash reserves. Gold is too illiquid. Bitcoin does not have that problem, plus it is now mainstream and is recognized as a valid monetary instrument.
Life insurance companies would want to be sure that bitcoin itself, was not a liability. There was concern that governments might confiscate bitcoin. But bitcoin has an unbreakable blockchain encryption system. Governments would not know which citizens have money in bitcoins, and even if they did, they would not know how much money they had invested in bitcoin.
However, the most important factor in bitcoin's security is not its technical encryption code, but the growing size of its network, the people and institutions that are using it.
Bitcoin's value, monetarily as well as its value socially, is related to Metcalfe’s Law which explains how the value of networks grow exponentially, that a network’s value is proportional to the square of the number of users in the network.
As bitcoin's global use grows, it becomes embedded in the structure of society. Its use would be growing as a method of making payments. Institutions would be using bitcoins as a safe haven against the falling value of fiat money, and people, in general, would be using bitcoins in their savings accounts, as well as its use as a safe haven.
Bitcoin's worldwide use is reaching the point where it would be difficult for governments to stop its use.
Graph of the Number of Blockchain Users Worldwide
Bitcoin's acceptance and investment by major corporations is accelerating. Major corporations are major contributors to politicians and the politicians would not want to deeply offend the corporations by outlawing their bitcoin holdings.
Bitcoin has become unstoppable. It is very liquid. It is not affected by America's, or foreign countries, failing fiat money. Like gold, it is a safe haven protection against the depreciation of all the world's increasingly worthless fiat money.
By buying bitcoin, Massachusetts Mutual has shown that it believes that the concerns related to bitcoin have been satisfactorily resolved.
Massachusetts Mutual may start buying bitcoin as a safe haven purchase in order to protect its money against the dollar's accelerating loss of value. More importantly, other insurance companies will follow Massachusetts Mutual's example.
The 25 largest life insurance companies have $15 trillion in total reserves. Just the 10 largest life insurance companies have combined assets of $7.84 trillion in reserves. The cash reserves of the 25 largest life insurance companies range from $1,104 billion to $339 billion. All of them have larger assets than Massachusetts Mutual's $235 billion.
Globally, there are many more than 25 life insurance companies. Not all life insurance companies will invest in bitcoin. However, many would want to protect their reserves from the loss of purchasing power. The total assets of the life insurance companies that would decide to invest part of their reserves in bitcoin could reasonably have a total of $10 trillion in assets. In order to protect their reserves, they would need to put at least 20% of their reserves in bitcoin, and possibly more than that.
Twenty percent of $10 trillion of life insurance company funds, is $2 trillion dollars. At this time there are 14.5 million bitcoins available. That much buying pressure would bring the price of the bitcoins to $138,000. Other factors, such as increasing bitcoin investments by major institutions, and bitcoin's increasing acceptance by the public, would increase the scarcity of bitcoins and drive bitcoin prices even higher.
The accelerated fall of the dollar and the subsequent increase of bitcoin as a safe haven asset is predicated on the large stimulus payouts that will be forthcoming from Congress, and their destructive effects on the dollar. Eventually, the pandemic will subside, and further dollar destroying stimulus payouts will no longer be necessary. The country will be developing herd immunity, plus vaccines will become more available, including Johnson & Johnson's single-dose vaccine. All of this will eventually control the pandemic, and further stimulus bills will no longer be necessary.
If the only thing that was weakening the dollar was the large stimulus bills that congress has been issuing, then once the stimulus bills were no longer needed, the dollar would stop its accelerated fall.
But there are other forces that will weaken the dollar.
Because solar power and wind power are improving in efficiency to the point where they will be able to produce electricity at a cost below that of natural gas power plants, and because they are clean sources of energy, Biden plans to encourage their use.
The problem is that neither President Biden, nor the Democrats, have shown how they will pay for these initiatives. President Biden has proposed increasing taxes on corporations and the wealthiest Americans, but this would only cover a fraction of the costs.
And now there will be no constraints on the amounts they will spend. Every Congress passes a set of rules that they will use during their tenure. One rule that every legislature has followed was the Pay-As-You-Go rule, in which any new piece of spending must be paid for by less spending somewhere else. That can be overridden if a majority of the members agree that a piece of legislation can be exempt from the rule, but that takes effort, and so it helps reign in excessive spending.
The Democratic majority of the newly elected House of Representatives has exempted all climate legislation from the Pay-As-You-Go rule. Any member can introduce legislation for anything that they want that is related to renewable energy, even something such as mass transit, and they will not have to account for its costs, or even calculate its costs. They plan to switch America's energy dependence on oil and gas, to one that uses clean solar and wind for energy.
Solar and wind power have the drawback that they only produce power intermittently, solar during daylight, wind power only when there is a strong enough breeze. However, batteries can store any excess power that is produced, and then supply it during times of need. Although on excessively long periods of cloudy days, especially during winter, or long periods when there is little wind, there will not be excess power produced that can be stored.
Vanadium redox flow batteries [VRF] use two tanks of chemical fluids separated by a membrane and generate a charge by moving electrons back and forth during charging and discharging.
Unlike lithium and other batteries, VRF batteries do not degrade over time as they are charged and discharged, although the membrane does wear out and would have to be replaced every 20 years. The entire giant lithium battery[s] that service solar generating arrays, and wind turbine projects, degrade and would need to be periodically replaced in their entirety, which would be much more expensive than just changing a membrane. VRF batteries can be left completely discharged for long periods with no ill effects. They have almost unlimited energy capacity by simply changing the size of their electrolyte storage tanks. Their size can be easily adjusted to fit the needed size of battery storage capacity for each particular solar or wind power plant.
Industrial size storage batteries, appear to solve the problem of the intermittent source of renewable energy and will allow President Biden and the Democrats to proceed with their plan to make America a clean energy country.
However, switching to clean energy use in a mandated time period, instead of by natural progression, will be very expensive.
Biden's environmental plans will continue the need for the government to spend more money than it is receiving in taxes.
President Biden, who originally planned to spend $1.7 trillion over 10 years on his environmental plan, now plans to spend an upward revised $2 trillion in just 4 years. Additional funds will be needed in future years.
With his plan, within 5 years, the U.S. will have installed 500 million solar panels, including eight million solar roof and community solar energy systems. Biden also has plans for 60,000 made-in-America wind turbines, including offshore wind turbines.
President Biden wants 1.5 million energy-efficient homes and public housing units built to address a shortage of affordable housing.
President Biden wants to build 500,000 high caliber level 3 DCFC electric vehicle charging stations across the U.S. by 2030, which is only 9 years away. These charging stations can charge an electric vehicle to an 80% charge in 20 minutes. Once a vehicle’s battery is recharged to 80%, the charging speed slows down to prevent damage to the battery. To charge the battery to 100% would take an additional 40 to 60 minutes.
President Biden's plan is for Congress to pay for the construction of these charging stations. That will add to the government's costs of greening America. This added governmental spending on green energy fuel will add fuel to the dollar's fall.
In order to encourage people to buy electric cars, President Biden is going to restore the electric vehicle tax credit where buyers of new electric and plug-in hybrid cars will receive a tax credit of up to $7,500. This is more than the average tax paid by people earning $75,000 - $100,000, which is $7,390. And it is much more than the taxes paid by people making less than $75,000 a year. These electric car tax credits will offset the government's income from the taxes it receives from an equivalent number of tax-paying dollars.
A solar farm, also called a photovoltaic power station, is grids of solar arrays used to supply power to utilities. They cover large tracts of land, and it is solar farms where Biden plans to install the 500 million solar panels.
Land use for 100,000 solar panels
Source: Western Advocate
There is the problem of growing resistance to solar farms, even in California. There is also growing resistance to wind farms. People hate wind turbines because of their unsightly looks, noise, and danger to birds. There is also resistance to wind power turbines along the seashore because of the way they disrupt the view of the pristine offshore coastlines.
The Los Angeles County Board of Supervisors banned the building of wind turbines, and the San Bernadino County government, the largest county in the country, banned large solar and wind projects in much of the county.
This growing opposition has caused an almost complete standstill to new wind turbine construction in California, the state that is touted for being at the forefront of the clean energy movement, and its population for their enthusiastic backing of any clean energy initiatives.
Even in Vermont, the home state of Bernie Sanders, the biggest promoter of renewable energy among Democrats, in 2020 not only were no new wind turbine contracts awarded, the only remaining wind turbine project in the state was canceled.
All of this opposition means that Biden, and the Democrats, will have problems implementing their green deal and that it will most likely end up more expensive than envisioned.
California has also been having periods of black-outs because so many of their back up gas generated power plants, which supplied power during periods when the solar or wind generators were offline because of lack of their intermittent solar or wind sources, have been forced closed.
Eventually, more powerful and efficient storage batteries will be available for the periods when the solar/wind grids are offline. There will also be newly developed small nuclear power plants available to supply back up power as needed.
Biden did say he wanted the government to evaluate the use of small nuclear power plants as part of the clean energy initiative.
There are companies that are designing small, safe, portable, factory-built, nonpolluting, nuclear power plants. The electricity they produce will be somewhat more expensive than solar or wind power, but not by much, and they will be able to be placed in cities that have no areas available to build solar or wind power plants. They will also be very useful in remote areas such as Alaska. They can even be economically superior to the large vanadium or lithium storage batteries in some situations.
But, again, their development and use will require large governmental financial involvement.
How expensive will it be to make America a net-zero carbon emission nation? Biden and the Democrats haven't calculated the actual yearly cost of their goal of reaching net-zero emissions by 2050, 29 years from now. Neither has Europe, in which virtually every country has similar 2050 zero-emission goals. America, and Europe, and even Australia, will discover that they are going to be spending massive amounts of money in their efforts to combat global warming. They will be destroying their fiat currencies.
New Zealand is the only country that has done a cost estimate of cutting emissions to zero by 2050. They found that it would reduce their gross domestic product by 16%. For the U.S., this would be the equivalent of a cost of $5 trillion. A cost of $5 trillion every year, year after year,through 2050.
More than 100 countries, including China which is plagued with smog-choked cities, have announced they will bring their greenhouse gas emissions to net-zero within a specific time frame. America and Europe by 2050, China by 2060.
All these countries will be burdened with the high costs of implementing their initiatives and the resulting destruction of their fiat currencies.
The world has entered an era where all fiat currencies are having accelerating losses of value.
Large institutions and the management's taking care of the assets of high net worth families are aware of the fiat dollar's precarious situation.
Twenty-six percent of institutional investors believe that pension funds and private wealth management advisory firms that serve ultra-high-net-worth clients are going to drastically embrace cryptocurrencies going forward. Additionally, one-third of the hedge funds that were polled said that they were going to dramatically increase their allocation of cryptocurrencies.
Buyers are piling into bitcoin despite its increasingly lofty prices. Institutional investors, high net worth individuals, and people, in general, are increasing their buying of bitcoins. And they are buying them faster than they are being minted. In just the first two days of trading this year, 47,000 bitcoins, representing $1.5 billion were acquired by large institutions, compared to only 1,700 bitcoins that were produced. And this didn't take into account all the other buyers that were in the market. Bitcoin is facing a coming supply shortage, and the greater the shortage of bitcoins available, the more it will cost to buy them.
36 of the top 100 richest bitcoin holders bought more than $12 billion worth of bitcoins over the last 30 days, and that includes when bitcoin was above $41,000 on January 8th.
Ten percent of the world's gross domestic product [GDP] is held in offshore tax havensby the very rich. Eighty percent of the total is by the top 0.1 percent richest families in the world. They will want to protect their savings from the loss of value due to the spiraling fall of the world's fiat currencies. They would be counseled by a cadre of advisors that would be very familiar with bitcoin. They would also be very aware of the financially destructive direction in which the world's countries are heading. In order to protect their client's money, they would want to store at least 20% in the form of bitcoin.
2020's global GDP was $130.19 Trillion. Ten percent of that being held in offshore tax havens by high-net families is $13 trillion. Twenty percent of that as bitcoin is $2.60 trillion. With 14.5 bitcoins available, it would take a minimum of $180,000 per bitcoin to buy $2.60 trillion worth of bitcoins. This is just a minimum price that these upper-class families would pay for bitcoin's protection of their offshore tax-havens.
Grayscale Bitcoin Trust, which is backed with bitcoins, allows large institutions, and wealthy individuals to invest in bitcoins. Investment in Grayscale has been growing for years, but in the last three months, the number of institutional investors has tripled. That includes January 8th when bitcoin reached $41,000. Price has not been a factor.
The pace at which global currencies are losing their value is increasing. The pace is increasing at which bitcoins are being taken out of circulation by institutions, by giant corporations such as insurance companies, plus by the general public, including athletes and their followers. This is decreasing the number of bitcoins in circulation that can be bought. People and institutions will have to pay more to buy bitcoins. Institutions, and high net worth individuals/families, would buy intact bitcoins, regular people could accumulate fractional bitcoins.
It is reasonable that high net worth families, in order to protect their assets from failing fiat currencies, would add money protecting bitcoins to their savings. Because the supply of bitcoins would be continuing to drop, in order to secure the number of bitcoins that they needed, high net-worth families could pay $200,000 per bitcoin and not mind the cost. That sounds like a lot of money to pay per bitcoin, but they would only be putting 20% of their assets at risk. Plus, not only would they be protecting that 20% of their money from becoming worthless, as fiat money continued to spiral downward, the price of bitcoin would continue to climb as fiat currencies fell and that 20% investment could end up protecting their entire savings.
After President Nixon took America off the gold standard in 1971, gold was no longer pegged at a specific price and would rise or fall on its own. It rose until 1981, and then went sideways and did not surpass its 1981 prices until 2007, 26 years later.
After America went off the gold standard, economists, and government officials, announced that gold was an archaic relic that had no relevance to modern monetary global interactions. Gold was not money. It could not be used in real monetary transactions. Fiat money, based on understandings and agreements between nations, was the only real currency. The dollar became the petrodollar, which was an agreement with Saudi Arabia to standardize the sale of oil based on the U.S. dollar.
World central banks had been accumulating gold reserves, but when Nixon took America off the gold standard, this slowed down, reaching a peak of almost 37,000 tons of gold as reserves in 1973. After that, central banks started a determined selling of gold.
For the next 35 years, central banks started selling the gold in their reserves. But due to recurrent global crises, informed citizens, large institutions, and government officials realized that there needed to be a back up to their fiat currencies, and started to view gold as being the best safe haven.
Central bank's selling of gold slowed, and in 2008 central banks started buying gold again.
Now central banks have almost 35,000 tons of gold reserves. They have been buying gold at an increasing rate and their gold reserves are climbing steeply back towards their previous high near 37,000 tons of gold.
Source: Silver Doctors - World Gold Council
At a gold price of $1,850 an ounce, 35,000 tons of gold is worth a little over $2 trillion.
Until recently, banks refused any transactions related to bitcoin. They would not even allow clients to add bitcoins to their accounts. They wanted to wait until regulators approved the use of bitcoin for banking transactions.
On August 22, 2020, the Office of the Comptroller of the Currency [OCC] ruled that American banks could deal in cryptocurrency. On 21 January 2021, the OCC clarified that national banks and federal savings associations can conduct payment activities, and other banking functions, using cryptocurrencies. Banks can use cryptocurrencies similarly to the way that they use dollars.
This meant that banks could use cryptocurrencies for lending activities. This is how banks make their money. Cryptocurrency transactions are electronic, which is very efficient, and therefore, profitable. Incorporating cryptocurrency transactions as part of their activities will increase bank's profits. Already, banks are preparing to provide cryptocurrency services to their clients.
Many banks in America, and worldwide, are even arranging to provide their own form of cryptocurrency. Some writers have speculated that this would mean the end of bitcoin. But the cryptocurrencies being planned by banks would act more like regular currency, whereas bitcoin is mainly used as a store of value. Bitcoin will not be affected by bank's cryptocurrencies.
Central banks have been accumulating gold as a means of protection against the fall of the world's fiat currencies. In 2019 the Dutch Central Bank, De Nederlandsche Bank, wrote that if the world's financial system collapsed, their gold reserves would provide them the collateral to start over. De Nederlandsche Bank wrote that no matter how bad things get, a gold bar always holds value.
As a store of value, bitcoin is more effective than gold. As an electronic entity, banks would find bitcoin more efficiently integrated into their activities. Central banks have been accumulating gold in order to have a non-fiat reserve, as a protection against the declining value of fiat money. Their managers, and staff, are highly educated and would be aware of bitcoin's superiority over gold for protection against the declining value of fiat money.
In 2020 central banks started to aggressively sell gold. They could be replacing the gold with bitcoins.
On January 3, 2021, economist Alex Krüger wrote that central banks will inevitably start switching from gold to bitcoin and end up holding bitcoin as their reserve asset. This may take a number of years, or it might happen sooner if the dollar's fall accelerates.
Globally, central banks have $2.2 trillion in gold reserves. There are 14.5 million bitcoins in existence at this time. In order to exchange that much gold for bitcoins, the price of each bitcoin would be equivalent to $150,000 per bitcoin.
Gold has been used for thousands of years as a means of protection against extreme, unexpected events. Gold was held in high esteem and considered to be an essential part of the assets of any institutional safe haven savings.
In 1960 gold made up 5% of global financial assets. Global financial assets are assets that are actively managed, such as those under the management of pension funds, hedge funds, etc.
As gold fell out of favor, its percentage of the makeup of global financial assets fell. By 1980 it had fallen to 2.74%. and by the late 1980's it was below 1%, and thereafter stayed below 1%.
Source: BMG group
Gold is difficult to integrate into funds, but bitcoin easily fits in with today's digitally interactive society. People, and institutions, are becoming worried about their country's, and the world's, increasingly fragile financial stability. They will be turning to bitcoin as a means of protecting their financial security.
Over time, if the global financial system continues to deteriorate, they could become desperate to protect their accumulated financial assets. They haven't been turning to gold. Their percentage of gold has been dropping, but bitcoin, being a digital form of currency can be easily acquired and integrated into their systems, and because it would protect them from the effects of increasingly debased fiat money, they will start acquiring bitcoins. In relation to global financial assets, bitcoin could reach gold's previous 5% high as a percentage of their assets.
This would force bitcoin's price upward by a factor of 20X, or higher. That seems to be beyond belief. Who would pay that much for a bitcoin? But this would involve people, and institutions, with billions of dollars to protect, and they could be willing to pay handsomely for that protection. As for the general public, they could acquire fractional bitcoins.
2019's global financial assets were $255.1 trillion.
2020's estimated financial assets are $257.9 trillion which included
Government-owned investment funds
comprised of money generated by the government
Mass affluent families
families with funds of US$100,000 to US$1,000,000plus an annual household income over US$75,000
If the percentage of bitcoins as global financial assets reached gold's previous high, then 5% of $257.9 trillion would be $12.9 trillion invested in bitcoins.
At today's present number of 14.5 million bitcoins, that would bring the cost of each bitcoin to $890,000.
Most likely it will be years before managers of global financial assets will be bringing their assets up to 5% bitcoins. The maximum number of bitcoins that will be in circulation is 17.75 million bitcoins. The amount of global financial assets will grow over time and are projected to reach $318 trillion, or higher.
Years from now, with global assets of $318 trillion, 5% would be $15.9 trillion, and with 17.75 million bitcoins available, each bitcoin would be $895,000.
But each bitcoin would cost more than that. Many bitcoins would have been taken out of circulation by major buyers which would be keeping them as safe-havens. Even if only 2.75 million bitcoins were taken out of circulation by entities such as central banks, then the number of available bitcoins would be 15 million, not 17.75 million. Most likely even fewer bitcoins would be available.
Using 15 million bitcoins as being available, the buying pressure of the 5% of the $318 trillion global financial assets, which would be $15.9 trillion, would bring each bitcoin to over $1,000,0000.
As previously shown:
Buying bitcoins by life insurance companies would bring the cost of bitcoins to $138,000.
Central bank buying would bring bitcoin's price to $150,000.
High-net families offshore tax haven buying would bring bitcoin's price to $180,000.
Each of these separate situations was based on 14.5 million bitcoins being available for them to buy, but as each group bought bitcoins, it would mean that many fewer bitcoins were available for the other groups to buy.
Each of these situations would take bitcoins out of circulation, which would have a cumulative effect. The buying pressure behind each of these situations would not change, but because of the shrinking number of bitcoins available, the price of the available bitcoins would rise.
With three groups, each with trillions of dollars behind them, and each group determined to accumulate bitcoins, and with a declining number of bitcoins available, bitcoin's price could easily reach $200,000.
Reiterating, a price of $200,000 per bitcoin, or even $138,000 for a single bitcoin, seems, to put it bluntly, to be crazy. It would put it out of the reach of most people, and even affluent individuals would find it very expensive to even buy one bitcoin.
There are several fallacies with that argument.
Even though the basic bitcoin would be $200,000, there would be widespread use of bitcoins in fractional units. At $200,000 per bitcoin, a MilliBitcoin would be $200. A price that is somewhat high, but affordable for many people. A MicroBitcoin would be 20¢. Small, but usable. Bitcoin usage is increasingly being accepted by businesses, and these transactions can increasingly be done through the use of a person's cell phone. Millions of people, in America, and the world, would be doing bitcoin transactions every day, resulting in a huge, and growing volume of trading in bitcoins.
As families become worried about the future - people everywhere would be starting to understand that the dollar was losing its value - they could use the $200 MilliBitcoins in their savings as a way of protecting the money that they were saving from becoming worthless.
High-net worth individuals, and large institutions, would have no hesitation in buying complete bitcoins, no matter their price.
So, even at $200,000 a bitcoin, there would be a growing high volume of transactions being implemented.
But with bitcoin far above its historical high, is it a bubble ready to pop? Are people waiting for a greater fool to come along and buy it at a higher price, and if they don't, will it fall?
Commentators are starting to warn that bitcoin is in a mania frenzy like the 1630's Dutch Tulip mania or the 2000 Dotcom bubble. They say that bitcoin is in a bubble and that the bubble is getting ready to pop.
Everyone knows the story of the Tulip Mania. It is THE CLASSIC DEFINITION OF A BUBBLE, the one that all commentators point to when talking about bubbles.
It took place starting in 1634. It was a phenomenon of pure greed, the greater fool theory. And MONEY was being made. Buy some tulips today, and tomorrow sell at a huge profit. Soon everyone was involved. From chimney-sweeps to aristocrats. Eventually, a single tulip was being exchanged for the price of a house.
It lasted for three years, but then in February of 1637, it crashed. There were no more foolish buyers to be seduced. Desperate people that had lost everything threw themselves in the canals and drowned. The government did step in and outlaw all trading in tulips, but by that time the economy of Holland was in ruins.
A Satire of Tulip Mania by Jan Brueghel the Younger (ca. 1640) depicts speculators as brainless monkeys in contemporary Dutch upper-class dress buying tulips at ludicrous prices.
Source: Wikimedia Commons
The tulip mania makes a great story, but that's all it is. It took place during the Dutch Golden Age when the citizens of the Netherlands were the wealthiest in the world. They wanted to acquire luxuries such as rare paintings. Tulips also fit the definition of a rare luxury item. Tulips, especially the beautiful ones with exotic colors, were hard to develop by the methods available and were sought after by the rich merchant class. Prices rose, but people were willing to pay extra for something that was considered valuable and also beautiful.
Except for a few instances, prices weren't excessively high. They were in the range of most people. There also wasn't frenzied buying and selling of tulips involving everyone in the country. A search of the records of that time shows that the number of people trading tulips was fairly small, and was basically confined to the merchant and skilled artisan classes.
A few exceptionally exotic bulbs did change hands at 5,000 guilders, the price of an upscale house, but this was by wealthy merchants, and the cost was irrelevant to them. Chimney sweepers weren't buying tulips.
Tulip bulbs weren't traded and traded hundreds of times. Most were just bought and kept. The most number of trades on record, from one buyer to another, was only 5 trades.
When the buying did stop, it was when a great number of tulip bulbs had been planted and people realized that there was going to be an oversupply of bulbs. Because the bulbs were in the ground and not actually being bought and sold, there were only paper contracts that were in place, and those were canceled since no money had been exchanged. There are no records of anyone going bankrupt. No jumping in the canals. The Dutch economy was not affected, and the government was doing just fine, thank you.
The Dutch love satire. Songs and pamphlets were written in the late 1630s, making fun of the rich merchants. A German in the late 1700s printed the songs and pamphlets, and in 1841 Charles Mackay, using that book with its copy of those songs and pamphlets, as his source, wrote of the Delusions and Madness of Crowds, a book that was a phenomenal bestseller, but that had no basis in historical accuracy.
And we were left with what many call the tulip mania bubble, which wasn't a mania and wasn't a bubble. Today, three-quarters of the tulips in the world are exported from the Netherlands. Every year more than 2 billion tulips are exported from the Netherlands. Instead of being a bubble, the so-called tulip mania was an opportunity which the Dutch grabbed with both hands, and whose descendent's are benefiting from even today.
What about the more recent dot-com bubble, also known as the internet bubble, that popped in March of 2000? The mid-1990s was the start of a massive growth in the use of the internet. People would do their shopping on the internet. They would interact on the internet. This was THE NEW AGE. The world was entering the age of technology. Any company based on the internet was bound to succeed.
To locate something on the internet you clicked the mouse on its URL: Universal Resource Locator. If it was a company involved with the internet, the URL was followed with the symbol .com which represented that it was a commercial domain.
New companies with a .com following their URL jumped in price as soon as they started trading. Some doubling in price within hours or days.
They were listed on the NASDAQ stock exchange. The NASDAQ rose in price from 751 in January 1995, to 5,132 in early March 2000. Then the bubble popped, and in the next two years, the NASDAQ fell almost 80%. The .com companies fell even more.
Anybody that bought .com stocks at the top of the bubble would have ended up bankrupt. ?
Anybody that would have bought an equal cost number of shares of each of the .com companies just before the bubble burst ... would have a large profit.
Nevermind that there was a pile of stocks, such as Pet.com, that went to zero. There were other stocks such as Amazon that went from $67 at the height of the .com bubble to its present $3,210.
Besides stocks rising in price since the .com 'bubble,' there is a major stock market mechanism that has catapulted a person's profits higher: stock splits.
eBay was near $10 at the height of the .com bubble and is now near $60, a very respectable gain. But eBay has also had five stock splits since then, giving a person 19 shares for every one they had at the end of the .com bubble. With the present $60 per share price, their $10 would now be worth $1,140.
Several of the surviving stocks are dividend-paying stocks that would be supplying you with a nice income today.
Commentators talking about people that bought just before the .com bubble burst are really, in effect, congratulating those people on their foresight.
In reference to bitcoin, does it fit the definition of being in a bubble?
Many commentators state that bitcoin is a bubble because of its volatility. It will surge in price, and then plummet after it reaches a new high. Paul Donovan, the chief economist at UBS Global Wealth Management, has stated that bitcoin, will never work as actual money because of its volatility.
Volatility has no correlation to an asset being in a bubble. Volatility is correlated to the number of people trading a new asset class, and their understanding of that new asset.
When a new entity is developed and starts trading, only a few people are aware of it and involved in it. Many of the people involved would only have a minimal understanding of it. It would not take many sellers to cause the price to drop. If the other people owning it did not really understand what it was, and therefore had no reason to think that it was something that would hold its value over the longer term and appreciate in value, they would also sell.
If a large number of people are trading an entity, and are convinced that it is an essential entity that is here to stay, and over time will increase in value, then it's selling by a small number of people, or groups, won't have much of an effect.
This is what happened in 2017, Bitcoin was in a speculative phase with retail investors dominating the buying and selling. They had no idea what Bitcoin was. They were just buying bitcoins in the hope that a bigger fool would come along that they could sell it to. When the buying stopped, the selling started, and it fed on itself.
That has now changed. Towards the end of 2018 institutional investors, and affluent knowledgeable individuals realized that bitcoin was an extremely safe electronic, digital form of currency. The people that bought bitcoin would receive an unbreakable encryption key. Bitcoins themselves were safe because they were based on blockchain technology. Unlike fiat money, which governments can print in unlimited amounts, bitcoin, like gold, has a limited supply. Bitcoin can be used as a safe haven. This, along with its safety factor, and its use as a currency has now made it a mainstream instrument of finance.
Bitcoin's foundations are now solid. It is seen as a better hedge than gold against the world's falling fiat currencies, and as a better hedge against any resulting inflation. It now has widespread mainstream adoption, not just by savvy investors, but by the general public. Banks and businesses are increasingly accepting it. It has reached the point where it is becoming an entrenched part of the financial fabric of society.
Bitcoin's volatility could end up equalling gold's low volatility, or even go below it.
Gold's volatility is the lower gold-colored line. Bitcoin is the White Knight.
Since the 1980s, gold’s volatility has been around 20%, with a peak in 1982 at 55, and at 35 during the 2008 financial crisis. Bitcoin has fallen below gold's 1982 peak and is approaching its 2008 peak. As bitcoin becomes more stable, it could enter a volatility range in the 20s.
Even though bitcoin has a history of extreme volatility, because of its growing maturity and legitimacy as a recognized financial entity, its volatility will stabilize to a low level and will cease to be a problem.
Is bitcoin a bubble?
A bubble is a run-up in the price of an asset that is not justified by the fundamental supply and demand factors for the asset.
A bubble is an asset that trades at a price that greatly exceeds the asset's intrinsic value.
Prices have risen so high that they can not be justified by a rational analysis of likely future returns from those investments.
In all these definitions of a bubble, the asset's price vastly exceeds what a rational analysis of its intrinsic value would show it to be worth. However, the intrinsic value of an asset such as bitcoin can not be determined, because that is a judgment call.
Haruhiko Kuroda, the governor of the Bank of Japan, states that bitcoin doesn't have assets to back up its value. What he fails to take into account is that its value is in its encryption safety and its growing interactive bitcoin network which is reaching the point where so many people, groups, and institutions are using bitcoin that it will be universally acknowledged as a legitimate financial entity.
The U.S. dollar also doesn't have assets to back up its value. It is no longer backed up by a physical asset such as gold, and yet it is universally considered to be a legitimate currency. That is because the 'assets' backing up the dollar is the idea that America will protect its worth. That is not happening. It is happening with bitcoin. So people are turning to bitcoin.
Bitcoin's present price can be considered to be well below its actual value. Merchants and banks are increasingly accepting it. It is becoming more common for people to use bitcoin as a method of payment. The number of people using it worldwide is surging. Major institutions and high net-worth families are accumulating bitcoins. Thousands of executives, officers, directors, and advisors of corporations are learning about it. It is unstoppable.
Bitcoin has repeatedly been called a bubble, but each time it drops in price, it comes back and surges past its previous high. If the people, the 'experts,' that were calling bitcoin a bubble when it was $3,000 a bitcoin, had grabbed it with both hands, instead of yelling the sky is falling, they would have seen their investment rise ten times higher than its purchase price. And that was less than a hand full of years ago.
Bitcoin is not a bubble.
The dollar is collapsing. The only way to reverse that is for the government to reign in expenses and run budget surpluses for decades. That is not going to happen. The dollar will continue its downward spiral, accelerating as it goes. Long before its destruction, people, all people, will realize what is happening and turn to something to protect their savings. It used to be gold, and some of it will still be gold, and silver, but now people have a better choice: bitcoin. Its price will rise far far above its present lofty level.
There is always the chance that something negative might happen. A better asset may show up that people will turn to, causing bitcoin to fall out of favor. Countries may outlaw it, and find ways to combat it.
You should keep your eyes and mind open for any adverse contingency, but the odds of something happening to slow down bitcoin, are very remote. Instead of walking away, grab it with both hands. Your descendants will shake your hand.