May 03, 2023
Welcome to Wednesday! Today we look to an old company's take on a new thing. Plus, why are there so many transactions on Bitcoin now?
Today's newsletter is 1,382 words, a 5-minute read.
🏦 1 big thing: Moody's view on the future of money
The future of money will be increasingly virtual, though a new research report suggests digital currencies are likely to remain bit players in the journey over the next decade, Axios' Pete Gannon writes.
Why it matters: A report out today from Moody's Investor Service underscores how nearly 15 years since the crypto industry was born, the world has clearly embraced digital technologies in money.
- But trust in money backed by central banks, and the systems in which it is entrenched, continues to thrive, according to the report.
State of play: People are increasingly leaning on cashless transactions in their day-to-day lives, a trend exacerbated by the COVID-19 pandemic.
- In the U.S., 80% of payments in 2021 were made digitally (without cash), up from 69% in 2016, according to Moody’s.
- In the European Union, where cash payments are more popular, digital payments grew to 41% of all transactions last year, up from 21% in 2016.
- In China, only 1-in-10 in-store payments are now made with cash, a micro-trend driven by the popularity of mobile payment apps like WeChat and Alibaba’s Alipay.
Yes, but: Fiat money held in bank accounts is "by far the most prevalent form of digital money today," the analysts note.
Zoom in: Despite the wave of digitization, Moody's does not expect unbacked cryptocurrencies, like bitcoin and ether, to gain traction as a form of payment over the next 10 years, largely due to their volatility.
- Among digital assets, they see the use of Central Bank Digital Currencies (CBDCs) steadily increasing, with a smaller pickup for stablecoins.
- But both will only moderately chip away at the share of digital payments using money held at banks, they predict.
Between the lines: Access to credit, for everything from homes to cars to supporting businesses, is one main reason why policymakers will likely limit the use of CBDCs, despite their benefits.
- Those include connecting underbanked populations to the financial system and enabling faster payments, the researchers wrote.
- Banks, which provide the overwhelming majority of credit, rely on deposits to back the business of extending loans.
- An unchecked rollout of CBDCs, the analyst note, could have a negative impact on those deposits, or at least on their "stickiness" within specific banks — the impact of which we just witnessed with the failure of Silicon Valley Bank, Signature Bank and First Republic.
Meanwhile, user-friendly technologies like digital wallets — such as Google Wallet, Apple Pay and Alipay — and innovations like tokenized deposits using distributed ledger technology, are likely to support the dominance of commercial bank money into the future, Moody's found.
Of note: Despite the pessimistic outlook they painted for crypto in the medium-term future of money, the analysts did give a nod to crypto's staying power in the final sentence of the report.
- "The market capitalization of all crypto assets has increased by more than 60% year-to-date to $1,330 billion as of 20 April 2023."
- "Despite the recent scandals and setbacks, cryptocurrencies will likely play a role in the future digital money ecosystem," they said.
🎃 2. Charted: Bitcoin transactions
Bitcoin's confirmed transactions are exploding, but it's not because people are buying cappuccinos in Dubai with satoshis, Brady writes.
- It's because new experiments are running on the Bitcoin blockchain enabled by a 2021 upgrade called Taproot that is eating up block space.
Why it matters: From the perspective of some, it's bringing new functionality to the oldest blockchain. To others, it's a stress test enabling Bitcoin to experiment with how it will handle outsize real demand, if such demand ever comes.
In the weeds: Every transaction has to be paid for in bitcoin, which goes to bitcoin miners. More transactions mean more revenue, so miners must like these new products.
Driving the news: The Ordinals protocol enables individual satoshis (the smallest unit of a bitcoin) to be inscribed with specific information, such that it can, for example, be used to track the ownership of a non-fungible token.
- A developer created a new token standard that can run on Bitcoin. It's mainly been used for memecoins because it's not possible to associate tokens on Bitcoin with smart contracts that can do more sophisticated things.
Of note: The seven-day moving average is on par with the best days of 2017 right now, but if the boom in transactions continues that won't last.
The bottom line: This stuff is the new hotness so it's trading like crazy, as new hot things do.
🤷 3. Resolving the bet over bitcoin $1M
Balaji Srinivasan lost his bet that bitcoin would go to $1 million each in 90 days. In fact, he so decisively lost that he gave up on the bet halfway through and paid up to his counterparty.
- In fact, he threw in an extra $500,000 to show there were no hard feelings.
Why it matters: The point of the bet was never to make money. The point of the bet, as Srinivasan has explained in a follow-up video and blog post, was to draw people's attention to what he calls "the fiat crisis."
What they're saying: "I spent my own money to send a provably costly signal that there’s something wrong with the economy," he wrote in his blog post.
The details: So he made the bet with Twitter personality James Medlock. Medlock put up 1 BTC against a million USDC stablecoins from Srinivasan.
- The idea was that if bitcoin hit $1 million each within 90 days, Srinivasan would get the bitcoin. If it didn't, Medlock would get the USDC.
- It didn't. It's about 50 days in and BTC price has barely moved.
So they closed the bet early. Srinivasan sent $500,000 in USDC to Medlock, $500,000 to the charity GiveDirectly and an extra $500,000 to Bitcoin's team of developers.
- The proof of each contribution can be seen in Srinivasan's post.
- "I’ll pay off some debt, build a nice cat house for my neighborhood feral, and invest in a much better investment than BTC, namely low-fee index funds,” Medlock told Quartz.
Zoom out: The key to understanding this story is to get what Srinivasan was saying about BTC price.
- One way for bitcoin to shoot up in price (the way that it mainly has) is for a lot more people to want bitcoins. If more people want it, that increases the demand, and that bids the price up in the economy, relative to other goods and services.
- The other way, however — and this is what Srinivasan expected — was for dollars to lose value against everything else. Under this scenario, not only does the price of bitcoins spike, the price of everything spikes.
😬 The second scenario would be terrible for everyone.
In short, Srinivasan does not believe that the U.S. economy can support infinite government debt and that the only way out of it is to print lots of dollars to pay it off, debasing the currency.
- Some segment of the American public has worried about this for a long time. In the 90s, billionaire Ross Perot made a surprisingly strong third-party run for the presidency on this message, when the debt was roughly a tenth of what it is now.
What we're watching: Srinivasan hasn't given up on making his case that monetary policy in the U.S. is too loose (but he admits he got the timeline wrong).
🏎 4. Catch up quick
💰 5. White House proposes Bitcoin tax
The White House wants a federal tax on Bitcoin mining.
- Specifically, President Biden wants miners in the U.S. to pay the feds 30% of their cost of electricity. It's called the Digital Asset Mining Excise tax, Brady writes.
"Cryptomining does not generate the local and national economic benefits typically associated with businesses using similar amounts of electricity. Instead, the energy is used to generate digital assets whose broader social benefits have yet to materialize.... There is little evidence of benefits to local communities in the form of employment or economic opportunity, and research has found that minor increases in local tax revenue are more than offset by increased energy prices for firms and households."
This newsletter was edited by Pete Gannon and copy edited by Carolyn DiPaolo.
Thanks for being here! Don't forget that we love it when you forward this missive to others! —C & B