Cryptocurrency: Widespread Institutional Adoption Will Continue

When I wrote my column about cryptocurrency this past October, everything looked rosy: Bitcoin, the biggest and most beloved crypto, was trading at roughly $60,000, up 107% from its price of $29,000 at the end of 2020 and well over 700% from the end of 2019. The Securities and Exchange Commission was reviewing multiple filings for Bitcoin future exchange traded funds (ETFs), a once unthinkable affirmation by traditional financial institutions. Celebrities like Tom Brady and Matt Damon were on television ads pitching online trading platforms that allow everyday investors to pour their dollars and cents into digital currency. Got plans to see a Lakers game at the Staples Center? Not anymore. As of Christmas 2021, the Lakers play in the Arena.

My point: a few months ago, everybody loved crypto.

Well, the financial Cassandras are back at it again. Bitcoin's current price - it's now hovering around $20,516, down from its high of $68,990.90 in 2021 - has people panicking. It's too volatile, they say. It's not regulated. Bitcoin mining is destroying the environment. Cryptocurrency isn't an investment, "it's a religion," investment guru Mark Mobius complained. Option trader turned author Nassim Taleb compared Bitcoin to a contagious disease. Just what we want to hear in a pandemic.

You know what I think? Everyone should calm down. Take a deep breath and relax.

I get it. There's a lot of volatility with cryptocurrency. The day-to-day spikes and dips of Bitcoin are enough to get your heart pumping faster, particularly if you're watching the price closely all the time. Still, you should expect volatility when you have an asset class that's gone from zero to nearly a trillion dollars in market cap in about 13 years. Translation: It's new. That's why it's called a nascent asset class. Everyone - financial institutions, the Internal Revenue Service, analysts, investment pundits - is still trying to figure out what its true value is.

That said, I'm not the only bull on crypto: Goldman Sachs analyst Zach Pandl noted in early January that if Bitcoin keeps taking market share from gold, the digital currency could hit $100,000 over the next five years. Legendary Legg Mason investor Bill Miller announced that 50% of his net worth is now in Bitcoin and related crypto industries. Even longtime Bitcoin critic Kevin O'Leary - a.k.a. "Mr. Wonderful" of "Shark Tank" - now says that cryptocurrency makes up more than 10% of his investment portfolio. For all the doom-and-gloomers, there are plenty of celebrities and millennials as well as reputable investors who have poured their money into Bitcoin, despite all that volatility.

Let me remind you: Part of the reason for the volatility is that cryptocurrency isn't governed by any single country or agency. No central authority can step in to intervene on substantial price fluctuations as happens with, say, equities trading on the New York Stock Exchange or Nasdaq. Instead, the price moves - 24 hours a day, seven days a week - as a pure reflection of investment moving in and out.

And Bitcoin isn't the only cryptocurrency that saw a dip toward the end of 2021. The market capitalization on the overall crypto market was about $1.7 trillion in mid-March, compared to $3 trillion in November 2021, according to CoinMarketCap. That's not pocket change. Think of it this way: Elon Musk's Tesla (TSLA) has a market cap of around $1 trillion. Imagine that company's value disappearing in a matter of months. That's enough to shake the uninformed investor.

My guess is that the price drop at the beginning of 2022 is related to a couple of factors. For one, I'm sure there was some end-of-year profit taking by people who have had their portfolios dinged by losses in other investments. Remember the madness over GameStop (GME)? It's down over 80% from its high of $483 last January. AMC Entertainment Holdings (AMC)? Also down roughly 80% from its high in June 2021. Bitcoin, for all the noise of late, was still up over 70% for the year as of Christmas 2021. That kind of profit could certainly offset a few losses. And who doesn't love a little stocking stuffer to boost their fund's return?

I also think that the price drop and volatility are equally related to a profound sense of FOMO - the fear of missing out - when it comes to crypto. After all, the U.S. government provided investors with a lot of liquidity to speculate in the market during the pandemic. And when those investors see a price acceleration of 30 or 40 or 50%, they might decide to take some profits.

In my mind, these wide bands of trading are normal for a disruptive asset. That volatility is part of the maturation of Bitcoin as an asset.

Remember: Bitcoin isn't a stock. It's a finite asset. Part of what makes Bitcoin so valuable is that there is a limited supply of coins. While the central bank of a sovereign government like the U.S. or China can print as much money as it wants, there's a finite supply of Bitcoin: 21 million tokens, to be precise. This set amount is why many people talk about Bitcoin as a hedge against inflation in the same way they talk about gold as a hedge against inflation. In fact, Bitcoin is often referred to as "digital gold" for that reason: That finite supply should help Bitcoin retain its value over time.

Many of you probably saw the headlines at the end of 2021 proclaiming that 90% (or 18.89 million BTC) of Bitcoin is already in circulation. That may make you think that you don't have a chance to be involved or that we're running out of Bitcoin. After all, Bitcoin-mining operations, like BitNile, a Nevada-based firm that I'm involved in, earn rewards in the form of Bitcoin tokens for verifying transactions across the massive, decentralized blockchain network. And we're certainly not the only player in the mining business.

Don't worry. The world isn't going to run out of Bitcoin any time soon. Bitcoin creator Satoshi Nakamoto (whoever that may be) designed the digital currency so that the size of the rewards for crypto mining decreases over time. That remaining 10% supply is predicted to last until the year 2140.

What makes Bitcoin even more valuable is that the total number of tokens - that 21 million - is probably much smaller than we think. By some estimates, nearly 20% of all mined Bitcoins have been lost. I'm talking about all those stories you hear of people who have thrown away hard drives with their Bitcoin private keys on them. One guy in England is threatening to dig up a landfill to retrieve a hard drive he lost in 2013 with his mining haul of 7,500 BTC on it. I'll let you do the math on what that would be worth. And you thought losing your house keys was annoying.

As for complaints that crypto mining requires excessive energy consumption, I always ask, "As compared to what?" How much energy do you think it takes to run the data centers at Google or Amazon? How much CO2 is pumped into the atmosphere from delivery vehicles and trucks and planes constantly moving products around the world? When we measure the energy cost of fiat currency, do we account for the cost of printing the currency or the emissions from armored cars delivering the cash? Crypto mining uses energy - a lot, I know - but it's also an easy target.

The reality is that there's more and more innovation and green technology in the crypto-mining world, certainly more than I've ever seen in the oil-and-natural-gas industry. There are wind and solar farms powering mining operations. One company is taking the excess natural gas from oil-and-gas farms that would have simply been burned off in the past and funneling that energy back into its system to power the mining computers. Ecuador plans to use geothermal energy - power derived from volcanoes - to fuel its data mining. Even my operation in Michigan uses the excess heat generated from its computers to keep the building warm in the cold Midwestern winters. Nothing is wasted. It's a win-win.

The knocks against cryptocurrency tend to be overreactions because it is so new and so disruptive. I'll say it again: Cryptocurrency represents a profound change. On some level, it reminds me of the transformation of the brokerage industry. For generations, stockbrokers collected a minimum commission, a percentage of the par value of the shares traded. Then along came computerized trading platforms and discount brokers with low-cost commissions. Today many brokerage firms are commission-free. I bet most brokers in the 1960s would never have believed commissions could go to zero.

Cryptocurrency represents a similar kind of seismic disruption. It's part of the new iteration of the Internet - often called Web 3.0 - that aims to make it more open sourced, decentralized and transparent. It's going to take time for people to get used to this kind of change, as it always does. We once wouldn't have dreamed of putting our credit cards online. Now everyone from the pizza shop to Amazon has our data.

Bitcoin has already proved its ability to ride through tough stretches. China banned all cryptocurrency transactions last year, but the market quickly adapted, showing that one nation's resistance couldn't stop a currency that is both digital and decentralized. Rather, the ban only reinforced the need for a currency that isn't controlled by a specific nation, as the world's fiat currencies are. Cryptocurrency, China perhaps unwittingly revealed, isn't the problem. It's the solution.

The U.S. has become the dominant miner of Bitcoin ever since China effectively "canceled" all cryptocurrency mining back in September 2021. It's in U.S. government's best interest to take the lead on its regulation going forward.

Honestly, though, I try not to look at the day-to-day shifts because I'm not a speculator. I'm in it for the long haul. Bitcoin's market cap will continue to grow, from $1 trillion to $2 trillion to even $10 trillion. We'll continue to see widespread institutional adoption. As a result, the price will eventually stabilize. For now, I'm the kind of investor who sees the downturn not as a reason for panic, but as just the opposite: a buying opportunity.

Disclaimer: Milton "Todd" Ault III serves as Executive Chairman at BitNile Holdings, Inc. an NYSE American listed diversified holding company. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of BitNile, Inc. They also do not purport to reflect the opinions or views of this media publication.


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