Please ensure Javascript is enabled for purposes of website accessibility

The Reserve Currency for the Digital Age

Bitcoin - and other cryptocurrencies - are becoming the reserve currency for the digital age. Here’s what that means - and how to profit.

When people talk about decentralized finance, or Defi (crypto), it often is in reference to Bitcoin (BTC) or Ethereum (ETH). Both are in the very early stages of becoming the reserve currency for the digital age. But there are other, less-known forms of cryptocurrency that are worth your attention - and your investment dollars.

Bitcoin is the world’s first cryptocurrency. It was created under an alias, Satoshi Nakamoto, in 2009 to democratize access to financial systems and ensure that the internet had its own embedded form of digital, peer-to-peer, money. Other currencies are created by central governments to receive tax payments and serve as an accounting method for commerce.

[text_ad]

While Bitcoin is seminal in its development and has resulted in an explosion of blockchain-based cryptocurrency projects, inherent properties of Bitcoin make it more attractive to own as a store of value but make it difficult to use to transact. By transact, I mean purchase goods and services in the economy.

BTC Barriers to Transact

  • Merchant acceptance
  • Price volatility
  • Fixed low supply
  • Ease of use vs. legacy payment systems like credit cards

Properties of Bitcoin make it more desirable to buy and hold, similar to owning commodities like precious metals.

The name “cryptocurrency” itself can be misleading to many people who are outside of the niche world of Defi. Cryptocurrencies are designed as an incentive mechanism for network validators. In layman’s terms, an embedded reward system was created to ensure that a database, where critical information is stored, is kept up to date and remains accurate. In return for keeping the information accurate, running computer servers, and performing computations, people could earn Bitcoin.

Although it is a completely novel economic system, Bitcoin (and other cryptocurrencies) were not designed to facilitate massive user adoption on a global scale. The network is truly decentralized and is not controlled by a single entity. As such, it relies on community updates, and a web of global processing power. Processing transactions at the speed and scale comparable to Visa is currently not possible on the Bitcoin blockchain.

Many projects are actively working on this premise to improve the BTC network.

Hal Finney’s Prediction

Hal Finney was the recipient of the world’s first Bitcoin transaction. If interested, I urge you to take the time to explore Hal’s background and contributions to cryptography as he passed away in 2014 from ALS.

His quote from December 30, 2010, in the Bitcoin Talk message board is astonishingly telling.

I have included the entire passage here:

“Actually there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the blockchain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.

“Bitcoin-backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin-backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.

“George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.

“I believe this will be the ultimate fate of Bitcoin, to be the ‘high-powered money’ that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as ... well, as Bitcoin-based purchases are today.”

Hal’s assessment was ahead of its time and is shockingly accurate in that it depicts the world that is being built today. New financial settlement systems are coming to market with BTC as the reserve currency.

How to Profit from the New Reserve Currency

I agree with Hal and believe this is a self-fulfilling prophecy – making BTC a form of de facto digital bank reserve. Corporations will also choose to hold a portion of their cash reserves in the form of digital cryptocurrency. This process is also in its nascent stages, as demonstrated by companies like Tesla (TSLA), further catalyzing demand for cryptocurrency.

With no sign of that demand relenting anytime soon, even given some wild price swings, I recently launched a brand new crypto advisory called Cabot Sector Xpress Crypto Advisor. The aim of this investment advisory is to not only help you, the Cabot reader, understand the world of cryptocurrency better, but to also help you profit from it!

To learn how to become a Crypto Advisor subscriber, click here.
Do you look at the current decline in crypto prices as a buying opportunity? Share your perspective in the comments below.

[author_ad]

Ian Beaudoin is the former Chief Analyst of Cabot SX Crypto Advisor.