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Goodbye, Fiat: Tesla’s Investment in Bitcoin
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Dheepa
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Hi guys, just wanted to kick off the discussion on this article with some of my thoughts. @Jacob Miller will be adding to this later today with some of his own views. The point of these discussions is for us all to bounce ideas off of one another and help each other develop more well rounded opinions so please feel free to agree with us, disagree with us and add any of your own thoughts!
For me, the sudden interest in Bitcoin, Dogecoin and any other crypto asset you can think of makes the most sense if you keep in mind that the interest was fuelled by the anti-establishment rhetoric underlying the Gamestop/Reddit saga. When Robinhood first shutdown the buying of Gamestop shares, people understandably became outraged that institutions could gate-keep the stock market from the average retail investor in such a way. A few days later, Elon Musk then took to twitter to tweet that Dogecoin was "the people’s crypto". I view both these issues as being linked because if low cost retail trading is indeed helping to “democratise” the financial markets as some argue, then the next logical step is a greater focus on cryptocurrency because it is the paradigm of financial decentralisation.
A key issue you’d need to be able to debate in an interview is whether you view the raised Bitcoin prices and increased interest from mainstream corporate players as merely a fad or here to stay. Excluding the sudden interest Musk has created in Bitcoin, I view crypto as a long lasting development for several reasons:
1. Paypal has already allowed users to buy sell and hold cryptocurrencies and has plans to introduce this to Venmo as well.
2. The EU has plans to introduce regulation i.e. the Markets in Crypto-assets regulation.
3. Blackstone has publicly voiced out that it will need to start “dabbling” in Bitcoin. The investment community tends to take anything Blackstone says very seriously.
While I think some of the traditional pitfalls associated with crypto (for example, the money laundering risk) can be mitigated through better regulation, the series of tweets Elon Musk made that led to a soar in value in Bitcoin betrays that bitcoin’s biggest problem even if accepted into the mainstream will always be its volatility. How would regulators control that volatility while still maintaining the decentralisation that is causing it to gain traction? Conversely, you could also consider what the increased backing of bitcoin means for other crypto assets. Do you think there is more scope for other assets to reach the heights that bitcoin has, or does the interest in bitcoin mean most other cryptocurrencies will be deemed obsolete?
For me, the sudden interest in Bitcoin, Dogecoin and any other crypto asset you can think of makes the most sense if you keep in mind that the interest was fuelled by the anti-establishment rhetoric underlying the Gamestop/Reddit saga. When Robinhood first shutdown the buying of Gamestop shares, people understandably became outraged that institutions could gate-keep the stock market from the average retail investor in such a way. A few days later, Elon Musk then took to twitter to tweet that Dogecoin was "the people’s crypto". I view both these issues as being linked because if low cost retail trading is indeed helping to “democratise” the financial markets as some argue, then the next logical step is a greater focus on cryptocurrency because it is the paradigm of financial decentralisation.
A key issue you’d need to be able to debate in an interview is whether you view the raised Bitcoin prices and increased interest from mainstream corporate players as merely a fad or here to stay. Excluding the sudden interest Musk has created in Bitcoin, I view crypto as a long lasting development for several reasons:
1. Paypal has already allowed users to buy sell and hold cryptocurrencies and has plans to introduce this to Venmo as well.
2. The EU has plans to introduce regulation i.e. the Markets in Crypto-assets regulation.
3. Blackstone has publicly voiced out that it will need to start “dabbling” in Bitcoin. The investment community tends to take anything Blackstone says very seriously.
While I think some of the traditional pitfalls associated with crypto (for example, the money laundering risk) can be mitigated through better regulation, the series of tweets Elon Musk made that led to a soar in value in Bitcoin betrays that bitcoin’s biggest problem even if accepted into the mainstream will always be its volatility. How would regulators control that volatility while still maintaining the decentralisation that is causing it to gain traction? Conversely, you could also consider what the increased backing of bitcoin means for other crypto assets. Do you think there is more scope for other assets to reach the heights that bitcoin has, or does the interest in bitcoin mean most other cryptocurrencies will be deemed obsolete?
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Sorry it's taken me a while to add some thoughts to this discussion! Dheepa has included a lot of extremely interesting discussion and I substantively agree with what has been said. Note that I will use some jargon here, any jargon used is linked to a fuller definition.
I'm coming at this from a slightly different angle, in many respects, due to my background in the financial markets and trading. This isn't by any means going to be a trading discussion, but having an understanding of the global financial markets in general does help bolster one's overall understanding of the relevancy of cryptocurrencies/ blockchain assets ('crypto assets') in today's world. I want to spend a little time discussing a few different angles to this before coming around to discussing its relevancy for law firms, and, therefore, candidates during applications and interviews.
Bitcoin (BTC) was, arguably, the first crypto asset to really make waves - I remember discussing it with a friend in summer 2016 when 1 BTC was worth less than $380... I forgot about the conversation before I looked any further into making an early investment. My oh my, what could have been. Anyway, enough of the trip down memory lane; the point is that BTC has come a huge way since that time, with an increase in value of over 500% since December 2020 and a staggering 7000% value increase since that conversation with my friend back in 2016. 2021 hasn't been the only bullish run for BTC, though: it was a (slightly slightly smaller, 1750%) bull run in 2017, driving the price of BTC to almost $20,000, which really put it on the map as an asset which looked to have some longevity:
BTC isn't the only crypto asset to benefit from this most recent bull run, though. As Dheepa very rightly pointed out, many crypto assets have experienced a massive bull run this year: Binance Coin (BNC) has grown over 1200%, Ethereum over 2100% and even Dogecoin (dubbed the 'meme coin' due to its namesake iconic meme character) has increased in value by over 2750%.
As Dheepa has correctly pointed out, one of the main draws to crypto assets has, since their establishment, been their inherently egalitarian nature: anyone with a laptop and the appropriate know-how can access them. They're not tied to a single economy, country or government; up to now they have never seen substantial institutional investment (although this does appear to be changing); they are inherently anonymous and are impossible to fake. This notion of egalitarianism in the context of the global financial markets is a highly novel one and - again, as Dheepa points out - is intrinsically linked with recent phenomena such as the r/WallStreetBets short squeeze on $GME and other stocks which were heavily shorted by institutional investors. I do believe that the Reddit short squeeze saga deserves an extensive discussion in its own right, so I won't discuss it extensively here - but look out for further discussion on this in the future!
One of my major 'questions' on crypto assets as a whole has been fuelled by their recent rapid proliferation, and it surrounds longevity. BTC has, without a doubt, planted its flag in the ground and the consensus is that it's here to stay. As with any asset class, though, there are only certain assets which will remain consistently prolific in the context of the global financial markets. The closest comparison would be in traditional 'safe haven' assets, notably precious metals: of all the precious metals (gold, silver, platinum, copper, palladium, etc etc), only gold and silver have remained as prolific safe haven assets. I do believe, personally, that there will come a time when the crypto asset market will be bifurcated: those assets that will remain prolific will form a new asset class which could, in the future, be every bit as commonplace as currencies and stocks; the others will fall by the wayside.
For me, there are several areas where this will affect commercial law firms and, so, applicants. Briefly, these are as follows:
- There is still some amount of contestation as to the legal classification of crypto assets. This could become the subject of extensive litigation before, and in the immediate aftermath of, future regulation.
- Following on from the above, the crypto market remains, at time of writing, almost entirely unregulated. The current legal landscape shows us that any arm of the global financial market becomes heavily regulated - it will be the responsibility of law firms to develop specialist regulatory teams in this area to advise clients of the regulatory changes which are likely to affect them. These regulatory changes are likely to cover a vast spectrum of issues from financial services to contracts and consideration; transaction processing to data protection.
- Transactional lawyers are likely to face an increasing number of major transactions being conducted with crypto assets as they partially mitigate the issues associated with international currency conversions
- Law firms as businesses may even begin to look towards accepting payment in cryptocurrencies as their use proliferates
The main issue I think that exists for bitcoin and other cryptocurrencies at least for the time being is the incredible volatility that seems to be commonplace with such assets.
For instance, a few weeks ago bitcoin dropped by around 20% and so, hypothetically, imagine if you are in a taxi and when you start the journey and it's at one price and by the time you get to your destination, the price has gone up by a significant percentage?
At the moment in my opinion it doesn't seem realistic as a currency but obviously if it becomes more stable in the next few years then that could change...
This volatility, in my opinion, is highly representative of the current liquidity in that market and its rapid expansion with more and more liquidity from different sources coming into play over the last few years (and 8 weeks in particular). It's also a borderline-unregulated market subject to significant manipulation and movement. Another minor reason for the drop in BTC specifically is that the market has piled liquidity into a variety of crypto assets as discussed and there is only so much liquidity to go round. I personally feel that there is a reasonable likelihood of a further drop in BTC market cap with the market cap of other crypto assets increasing; when that drop in market cap and value occurs, we will see institutions invest en mass into BTC at a better price, which will both drive the value of BTC into the stratosphere and also begin to stabilise the market as discussed below. That is also the point at which I think we will see a bifurcation of the crypto market, with institutions 'deciding' what assets have longevity potential and what ones don't.
Any asset is more vulnerable to vast fluctuation when its market is constantly changing in liquidity level and when there isn't a huge amount of liquidity in the market. This is because, when there is less overall liquidity, then every point of change in liquidity has a more marked effect. To contextualise this, the daily volume of BTC traded equates to something like $65bn; the currency market sees a $6.6trn daily traded volume. If you look at a currency pair like EUR/USD (Euro vs US Dollar), you'll see that it stays relatively consistent in price over the long term: in the last five years, EURUSD hasn't traded outside of a range between 1.035 at the lowest and 1.256 at the highest - that represents just a 21% range of movement. This is because EURUSD is the most liquid currency pair on the market, with arguably the highest daily traded volume. The effect of this is that the price stays relatively consistent because each change in liquidity and direction only has a very very limited effect on the market as a whole.
Tl;dr: volatility will calm as liquidity in market increases with uptake.
** the massive caveat on everything above is that I'm far from a crypto specialist, it's not an asset class that I personally take much to do with on a daily basis!
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I don't think Bitcoin (nor those others mentioned above) is going to last. It is an ideology and has the benefit of fame (or infamy), and that's evidenced in the extreme volatility. It is not the friend of governments nor banks or businesses, so I think if it is still around, it will be in spite of serious competition. It's behaving like a commodity and even as a store of value it's 🤪
I think crypto assets themselves will stay, obviously. A centrally-backed cryptocurrency is much more attractive to states (tax raising; security; tracking ownership; etc.) but that will not be attractive to commercial banks unless they are involved in the banking process - but that's almost anathema to (the ideology) of crypto. And banks won't give up their place in handling fiat currency - but surely banks shouldn't handle crypto currency as it's all about decentralisation, etc.? As lawyers do we want commercial banks to have less of a role to no role in transactions? Probably not.
I think we'll begin to see a commercialisation of crypto currency as various market makers look to be the first or to entrench their position before states - JPMorgan's JPM Coin is a good example of that, as is China's centrally-backed trials with a digital currency. I think it's only a matter of time before a consortium of national or global banks launch a digital currency which will challenge cash.
I think crypto assets themselves will stay, obviously. A centrally-backed cryptocurrency is much more attractive to states (tax raising; security; tracking ownership; etc.) but that will not be attractive to commercial banks unless they are involved in the banking process - but that's almost anathema to (the ideology) of crypto. And banks won't give up their place in handling fiat currency - but surely banks shouldn't handle crypto currency as it's all about decentralisation, etc.? As lawyers do we want commercial banks to have less of a role to no role in transactions? Probably not.
I think we'll begin to see a commercialisation of crypto currency as various market makers look to be the first or to entrench their position before states - JPMorgan's JPM Coin is a good example of that, as is China's centrally-backed trials with a digital currency. I think it's only a matter of time before a consortium of national or global banks launch a digital currency which will challenge cash.
Very interesting position and discussion points!
It will be interesting to see whether BTC retains a place in and of itself or whether it maybe marks a precursor to crypto assets of the future which will take a more centralised approach. As you say, the antithesis of everything crypto was intended as, but it's an interesting proposition.
Dheepa
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I think you might be right about other crypto-assets taking Bitcoin's place. We're already seeing the beginning of this with Mastercard's recent statement. Basically despite investing in bringing crypto on it's network, they have pointed out that many of the currently available cryptocurrencies will not be supported because they don't meet requirements on privacy, anti-money laundering and most importantly stability. I raised this point in my initial post but there really is no way to adequately regulate crypto without sacrificing the decentralisation ideology to begin with.
Seems like there's a good diversity of views over here.
I'd recommend a move away from the idea of cryptocurrencies as storage of value, which is what this discussion seems to be rolling about. There's far more value in talking about the intrinsic differences between platforms, chains and even exchanges - I'd recommend this great DeFI article for anyone who wants to learn more about decentralised finance AWAY from central banking.
I've been investing in DeFi as both a currency and a platform asset since 2015, and it opens up plenty of possibilities.
I'd recommend a move away from the idea of cryptocurrencies as storage of value, which is what this discussion seems to be rolling about. There's far more value in talking about the intrinsic differences between platforms, chains and even exchanges - I'd recommend this great DeFI article for anyone who wants to learn more about decentralised finance AWAY from central banking.
I've been investing in DeFi as both a currency and a platform asset since 2015, and it opens up plenty of possibilities.
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Will be interesting to follow Coinbase's direct listing. Points to anyone who can explain why they chose a direct listing rather than a traditional IPO.
For anyone who wants a fun read, here is their prospectus. I would actually recommend scanning through this - it gives a good insight into what these documents look like, as well as providing an insight into the risk factors facing a cryptocurrency exchange. These include the volatility of prices, regulatory changes, cyber attacks, and more.
For anyone who wants a fun read, here is their prospectus. I would actually recommend scanning through this - it gives a good insight into what these documents look like, as well as providing an insight into the risk factors facing a cryptocurrency exchange. These include the volatility of prices, regulatory changes, cyber attacks, and more.
A major risk factor to them (and to my holdings as well!) is the possibility of Satoshi's identity being revealed!
I find it incredibly interesting that Coinbase is doing this - a few reasons why I think so:
1) Coinbase is majority owned by 5 main entities - the two co-founders, and three large VC firms that have backed it since 2012. Major shareholders (Brian Armstrong, Fred Ehrsem, Andreessen Horowitz, a16z Capital etc) won't have their portion of shares diluted - in a way, it's a long term game for them all. I think their biggest fear is the uncertainty of the post-bull-run last month - with a 180 day lock-in period for traditional IPOs they would have to wait until July to take profits and to pay off their own shareholders (USV liquidated 28% of it's share yesterday for the 2022 10-year return). What would the crypto world look like in July? Looks like these main fellas don't want to guess. Andreessen Horowitz also looks like it wants to raise cash for near-term returns.
Skim some profits now, and don't wait until July when the world could be a completely different place - this seems to be a persuasive point.
2) Underwriting a world-first crypto exchange listing is not something that is, I reckon, easily done with the volatile fluctuation of cryptocurrencies. How does one use key performance indicators (KPI) and non-GAAP measures accurately for a company that is able to profit from price swings and high trading activity during those volatile +20% days? With a $100 billion valuation, one also wonders how much underwriters would be paid - painfully diluting profit share of the major holders. With a 2020 profit of $320m versus a $30m loss in 2019, liquidity also isn't urgent. Direct listing on the NYSE saves money (the NYSE is already an investor in Coinbase too lol), and Coinbase is already such an established brand that it doesn't need a long roadshow - speaking of roadshows, it would be hard to have a roadshow in the middle of a pandemic!
Also, stag-flipping on the first day of a world-first crypto exchange is ... needless to say, probably going to happen when the company's fundamentals are based on such a volatile group of underlying assets!
3) After Brian Armstrong's controversial blog post detailing Coinbase's non-political, 'laser-focused' stance towards the world (he basically tried to depoliticize his company and focus purely on growth), there is a business case that asset managers would hesitate to invest in an IPO. As we all know from our law firm interviews, for the past 2 years, ESG = profit. Blackrock, Esso, Shell, Coca-Cola - there are many investors out there that would shy away from a voraciously outspoken CEO of a $100billion company that doesn't want to get involved in activism or external politicking. Think of the roadshow - this policy would become a hot topic throughout, if the roadshow went on.
*Some thoughts on his blog post by Verge, Coindesk's update on employee satisfaction re: the post, Wired's view of BLM and political speech at the company.
After reading his blog post - I'm not sure what to make of it. I'm all for an ideologically inclusive environment, but I also believe that businesses' sole goal isn't just profiteering. I'd much rather work for a company like Mars which supports the Economics of Mutuality - an enhanced ideal of stakeholder capitalism. But I see where the investors would worry. Imagine if it all came down on IPO day that a major political event happened, and that Brian Armstrong wouldn't respond to it internally or externally - shareholders would have a 180 day rollercoaster ride while their shares remain locked in, at the whim of every investor possible (let's not forget the rise of Reddit activism and how powerful that can be!) This would be vastly different from Musk - Brian Armstrong remains ideologically untested, and very much unknown and uncertain in the eyes of investors and laypeople like us. As a person overseeing the world's most expensive cryptocurrency exchange with the assets of 43m retail users and 7,000 major institutions - this matters.
*disclosure - I have been using Coinbase for 5 years.
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Very interesting to read your thoughts on this.
I remember seeing Brian's post when it popped up on Twitter. I can't say I'm convinced it'll deter investors/employees in a way that makes a difference to the company's financial performance. If anything, I think some people will be attracted to the 'mission-focus'/the fact that he's so focused on high performance.
I do agree that it's a different question in the future though, especially if Coinbase goes mainstream. It's crazy to think some CEOs/venture capitalists now regularly post memes on Twitter and shout about dogecoin, so I've no idea how this will continue to change!
Interesting article today on why crypto unlikely to replace fiat.
www.ft.com
Bitcoin cannot replace the banks
Cryptocurrency hopes are based on a misunderstanding of how money is created
- Feb 17, 2018
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Interesting that because of Tesla's substantial investment in Bitcoin, the company's share price is affected by a fall in the price of Bitcoin: https://www.bbc.co.uk/news/business-56174404.
Elon also seems to be his own worst enemy?
Elon also seems to be his own worst enemy?
Agreed - I'd be amazed if the SEC didn't fine him for his tweets/actions tbh as it's treading extremely close if not over the line of market manipulation
Dheepa
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Apparently they are already investigating him for the dogecoin tweets (and he seems to be baiting them too). The SEC already has precedent for charging him for market manipulation on the basis of his tweets (ie two years ago when the settlement for his series of tweets on taking Tesla private resulted in him having to step down as Tesla chairman) so I really think it's just a matter of time.
"The Wolf of Deer Creek Road, CA" doesn't quite have the same ring ngl.
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Another trend that regulators have to grapple with. Was there ever a time where a post by one person could move the market by so much?
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At least he was generally carrying out in-depth analysis, rather than tweeting about doge!
