CrypTalk Ep 2 – Bitcoin is dead, long live Bitcoin!

In this episode of CrypTalk, BizNews’ Ross Sinclair speaks to Gaurav Nair of Jaltech, an alternative investment fund, about the creation of Bitcoin, how Bitcoin can be used, and details about this slump in the crypto market relating to earlier crashes and how the markets rebounded in the past. For more information about Jaltech click here.

Guarav Nair on the origins of Bitcoin

An anonymous person named Satoshi created Bitcoin and at the time there was a group of people who knew each other through the Internet known as the Cypherpunks. Satoshi created Bitcoin as a reaction to the financial crisis that happened in 2007/ 2008. Seeing all the banks being bailed out, seeing what happens when there’s a system, the financial system, controlled by elites. It was a bit of a reaction to that. In the white paper that Satoshi wrote, they explained that it could be a payment mechanism, and that was its primary use case initially. However, it’s grown to be much more than that. After a few years of building up Bitcoin and interacting with it, upgrading it and sorting out some problems in the initial period, Satoshi then disappeared and actually the Bitcoin that was in Satoshi’s wallet has  never been spent. And so that left the Bitcoin community without a leader, which on the one hand may be seen as a negative thing, but also it means that they had to figure it out for themselves. And there isn’t any one person who could derail the project now.

 On not having an individual personality tied to the project

Exactly right. So it comes with pros and cons. If you compare it to the Ethereum network,  one of the founders, Vitalik, is still very well known and still comments on it. And I think on balance, the Ethereum network benefits a lot from it, from his leadership as thought leader, etc. It’s largely outside his control. But some people would argue that if he suggests something, it generally happens. But the whole community has to actually agree. They need to reach consensus. So it comes with pros and cons. But I think Bitcoin itself – and what it’s trying to be – benefits from not having a leader anymore, from being totally decentralised.

 On the use cases of Bitcoin and whether it qualifies as a volatile asset

As I said, the first use case for Bitcoin was to be a payment network. This would be a payment network outside the control of any single government or set of individuals or institutions. And so it would also be much more efficient. So if you consider making a payment internationally, you have to use the SWIFT network. It takes a couple of days usually, and it often costs, you know, 50 to 100, 200 dollars. And it’s slow and expensive and also controlled by the US government. Of course, many countries either rightly or wrongly have ended up on the wrong side of the US government. They’ve been sanctioned and they can’t use the Swift network anymore and they are effectively cut off from international trade. The Bitcoin network is decentralised, no one controls it, and so anyone can use this network. It is in fact much faster. It takes a few minutes, in the longest case, maybe half an hour, to process payments and it is quite cheap to process as well. Of course Bitcoin’s so volatile and if you want to make a $1,000 payment to someone today, that might be 5% of a Bitcoin. But as you send it across, the person receiving it might only receive $800 if the price of Bitcoin has dropped or might receive much more. And so that limits its use a bit to use it as a payment network because you want something a bit more stable. So the Bitcoin community has built something on top of Bitcoin called the Lightning Network, and the Lightning Network is even cheaper and faster and it uses Bitcoin as its base to actually process payments. And what we’ll probably see is some fintech companies that will actually send dollars or something stable using the Lightning Network in the future. They’ll probably convert Rand to Bitcoin, send it, and then Bitcoin back to dollars all in the space of a few seconds. And hopefully the Bitcoin price has moved that much. So it should help with the stability.

The other is and I’m sure you’ve heard of this. It’s the kind of the store of value argument. We know that the US government printed a lot of money and inflation now is coming home to roost. It’s the highest it’s been in 40 years in the US. Bitcoin cannot be printed as well, the schedule at which it’s issued is already present and it eventually caps out at 21 million in Bitcoin over a period of time. And so what this means is that it can’t be inflated away. And when you have one asset that can’t be inflated and an asset that is inflating – Bitcoin being the asset, that can’t be inflated dollars that can be inflated away. What you should see is you should see that the value of Bitcoin should go up as the dollars are being inflated. However, we’ve seen that this hasn’t happened. We’ve seen that if anything, the value of Bitcoin has dropped drastically. And potentially that’s because Bitcoin is still quite a new asset. It’s only about 12, 13 years old now. And so it could be that while people are still adopting this asset, people are coming in and out of it, etc, it doesn’t really have the price stability that you’d want to see. So this could be a use case for the future. Previously, people thought this was a big use case. And if and when we go into a period again of lots of printing of money internationally, and if Bitcoin is more mature by then, it could be the case that Bitcoin will hold its value really well against all these other currencies.

Why is it often described as a digital gold?

Exactly. And that speaks to an overlapping and third use case, which is to be a better version of gold, to be digital gold. Gold, of course, is also seen as an inflation hedge. But we also see that the gold price doesn’t follow inflation exactly. If there’s a war, then the price of gold jumps up, but the reason that Bitcoin is called digital gold is that it shares some characteristics with gold. You’ve got to work hard and mine it to get it out of the ground. So Bitcoin has an analog, you can’t just print it at will. There’s a finite supply with gold. You don’t know what that is, but there’s only so much in the earth that we can get at. But however, it’s better than gold in some ways. It’s quite easy to secure Bitcoin because you can just save it on a hard drive and put it in a vault. However gold, the more of it you have, it takes up more and more space. The security infrastructure could be much more expensive as well as transporting it is very difficult. With Bitcoin, of course, it’s very easy. You can send it electronically, you can carry it in a piece of paper. So people say that Bitcoin is better at being gold than gold itself.

Cryptocurrencies have been used quite a lot in the Ukrainian war. How have they helped?

That’s a great point. So that’s another use. It speaks to the payment network use that no one controls as a payment network. And so it means that actors like Russia, they can also use it. No one can ban them from using it. However, it’s also being used to deliver aid to the Ukrainians. When banking infrastructures are working, like during a war, it’s still possible to send Bitcoin and other cryptocurrencies. A lot of funding has been raised in this way. What we also see is that in regimes with dictators, with resistance groups, they also raise money. In this way. It’s because the dictator can cut the resistance group off from the banking sector, but they can’t cut them off from Bitcoin. And so it’s had lots of use and also it’s also had uses for charities that don’t have any banking infrastructure where they’re going into. Again, cryptocurrencies can be used. And what we’ve also seen is that with cryptocurrencies, you can bypass borders quite effectively. Cryptocurrencies are often called the money of the Internet, and as we know it, the Internet borders are much less meaningful. Just because you can bypass borders doesn’t mean it’s compliant with the law, which allows exchange control rules in South Africa. However, there’s been many stories out of the Ukraine of people who have taken their life savings, converted to Bitcoin, and there’s a way to convert your Bitcoin key into a phrase of 24 words. And they then memorise those words and they’ve just walked out with their savings in their head. And even if they’ve been stopped by Russian soldiers, it’s not evident to anyone that they had anything precious. And then when they get to Poland or wherever, they’ve actually managed to carry all their savings with them and then, you know, hopefully try to carry on and salvage their life from there.

The cryptocurrency markets have been in a bit of a slump at the moment, but this isn’t the first slump that these markets have faced before, and historically they bounce back quite aggressively. Do you think this is going to be the case once again?

There have been many, many slumps because it’s a new asset class. You know, it’s highly volatile. When investors are interested, it takes relatively little money to move the price. And that’s been the case even more so in the past. And over time, as the asset class has grown, it’s become harder and harder, but it’s still very volatile when we compare it to something like the US stock market. I mean some of the crashes that Bitcoin has gone through have been insane, insane crashes. You’ve had Bitcoin go in 2013 from $200 to one and a half thousand dollars back to $200. And there’s been many of these up and down, sometimes 90% down. The most recent one was in March of 2020 when we went into the COVID pandemic, Bitcoin went down in one day from $8000 to $5000. And then in May last year we had another famous 50% drawdown where Bitcoin went from $60,000 to $35,000. And as we know, we’re currently sitting at somewhere around the 20, $21,000 mark as we speak right now and I guess that the thing that’s reassuring is that a lot of the price action doesn’t have to do with the fundamentals of crypto. It isn’t the case that the Bitcoin chain went down. It isn’t the case that someone managed to break the encryption that the chain uses… that there was a chain breaking bug. It seems much more to do with two things. Two big events. The first is, as we know, because of the pandemic, the US government created a lot of stimulus. They print a lot of money and that led to a lot of inflation. And now because of that inflation, the Federal Reserve is raising interest rates. As the cost of money, which interest rates are, increases, investors have to sell some assets. Assets to pay interest become more attractive compared to riskier assets like tech stocks and crypto assets are seen as extremely risky. And so they sell some of that. And so it’s this macroeconomic picture that has led to a lot of investors taking their money out of crypto funds. That’s the macroeconomic picture. And simultaneously, we’ve had an event that happened about a month ago now, where one of the Stablecoins broke its peg. And what’s happened is that aside from that shaking a bit of confidence, there were investment funds and other companies that were exposed to this. And now the effects of that are starting to come out where these companies have now become insolvent, or it seems likely that they’ll become insolvent. There’s a hedge fund, Three Arrows Capital and another company called Celsius, which was basically acting as a bank, taking deposits of crypto and paying interest. It seems like they’re both in trouble and sometimes there’s knock on effects where now that they’re insolvent or in trouble, they’re not paying the other companies that they owe. And so as that is happening, what these companies do is they sell off collateral they have, which adds more selling pressure to the crypto market. So both of these have caused the price to really drop. And we saw some big drops over the weekend. The price has come back a little bit, but as I say, it has less to do with crypto and more the macroeconomic environment. And what we’ve seen is that these are these crypto funds that failed, they considered centralized finance because it’s a fund. And that’s where we’ve seen failures. But what we haven’t seen fail is the decentralised finance side. The decentralised finance is these financial programs that are built on blockchains, and they’ve been running quite smoothly. And so that’s why I say that this has more to do with outside of crypto than really any of the fundamentals of crypto.

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