Blockchain Series: Bitcoin - is it a method of payment or a store of value?
Satoshi Nakamoto's original Bitcoin white paper was titled - "Bitcoin: A Peer-to-Peer Electronic Cash System". In 2010, Laszlo Hanyecz spent 10,000 BTC (worth around $40 at that time) to buy two pizzas. This transaction is widely regarded as the first where Bitcoin was used to make a payment for goods or services. On March 24th, 2021, Elon Musk tweeted - "You can now buy a Tesla with Bitcoin". Within a few days the price of BTC was flirting around the $60K mark. Fast forward to January 2022. 1 BTC is priced at around $36K. Today's price represents a 11% drop in the last 5-days and approximately a 29% drop in just the last 1 month.
The extremely high volatility of this asset presents a challenge for Bitcoin to be used as a peer to peer payment solution. Consider the following scenarios:
As we can see, the high volatility of Bitcoin makes it a better product for store of value (if you are long BTC) rather than as a peer to peer payment system. The high volatility also makes Bitcoin an ideal candidate for short-term arbitrage opportunity. If you are long BTC, you can purchase it at $36,000 with hopes of selling in the future for a profit. If you are short BTC, you can sell your Bitcoin at $36,000 with hopes to buy it back when there is a dip.
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What types of cryptocurrencies are useful as peer to peer payment systems?
While BTC, ETH etc., have high price volatility, there are cryptocurrencies that provide stability (and they are aptly named Stable Coins). In theory, Stable Coins are supposed to pegged to a reserve asset such as USD or gold and provide 1:1 parity with the reserve asset. Pax Gold (https://paxos.com/paxgold/) as the name suggests, is pegged to Gold and every Pax Gold token is backed by 1 ounce of Gold (and this can be verified on the Etherium blockchain). In the case of USD stable coins, to achieve this 1:1 parity with the reserve asset, the underlying investments would need to be in US dollars, money-market funds and very short-term treasury instruments. However if the underlying investments are in illiquid assets (no matter how investable they are), that parity could be lost and potentially if there was a run on the cryptocurrency, there could be a risk of default. Popular stable coin examples include Tether (USDT) and USD Coin (USDC), Binance USD (BUSD), Maker (DAI) etc., It is to be noted that federal and state regulators have started taking interest in these stable coins and how they are backed. SEC chief Gary Gensler (very conversant with blockchain and crypto, previously taught blockchain course at MIT) has suggested that Stable coins will likely need to be regulated.
Despite these growing pains, increased regulation can be a good thing (especially when it comes to protecting investors). Stable coins do solve a needed use case - traditional forms of payment are slow or expensive (ACH takes days, credit card and wire transactions are expensive) and in a digital economy, there will be several use cases for using stable coins to fund investments or purchases and to also be used in making distributions. whether Stable coins continued to sponsored by banks or private companies, we are likely to see an increase in regulation in the near future.
Author Bio
Sanjay Raghavan works at Roofstock as Head of Structured Securities and co-lead for Blockchain initiatives. Roofstock is a market leader in the single family rental space, having facilitated over $3 billion in SFR transactions. Previously, Sanjay was a banker at a lower middle market boutique where he structured and sold income or income-oriented structured and corporate finance transactions. Sanjay has an MBA from the Wharton School, University of Pennsylvania.
Disclaimer: This article is for for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security or investment product, nor does it constitute an offer to provide investment advisory or other services?by Roofstock Inc., or its affiliates.