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Get ready for the bitcoin bank.
This week, Jonathan Gould of the OCC -- a division of the U.S. Treasury -- released a public letter saying that national banks can provide custody of bitcoin and other digital assets.
On one hand, this is not really news. Banks already allow you to safeguard precious valuables: you could just go open a safe deposit box and keep your bitcoin wallet in there. But that’s not convenient if you need to see your bitcoin balance or actually transfer the funds somewhere.
With the new guidance, banks can now “custody” (or keep safe) your crypto, as if it were traditional money. This is very big news, and here’s why.
Bitcoin Goes Legit
Symbolically, the letter is significant. It acknowledges that bitcoin has value.
We all know this, but banks have been operating in a strange world of make believe: even while the price of bitcoin soars, just mentioning the word “bitcoin” will make banks run in fear. If you’re a blockchain startup, for example, good luck finding a bank that will accept you.
By confirming that banks can custody digital assets, the OCC is confirming that bitcoin has value. Why would you even bother to write such a letter, unless digital assets are valuable? You wouldn’t have to write banks about holding on to Monopoly money -- nobody cares.
The first half of the letter, in fact, does a good job of simply describing how digital currencies work, for bankers who have not yet bothered to learn.
So it serves the dual purpose of educating banks about bitcoin – which in itself is a kind of legitimacy (when you learn about something, it becomes a “thing”).
Bitcoin Enters the Banking System
But bitcoin isn’t a “thing” in the physical sense of the word, of course. There is no paper currency to hold. Fortunately, banks are good at dealing with imaginary money. (That’s kind of their business.)
The OCC letter says that banks can hold on to a customer’s cryptographic keys. In other words, they can safeguard your wallet, and the keys for that wallet. But how will you know the value of your bitcoin, unless it is somehow displayed in your bank account?
This is the critical point: as banks begin offering digital custody services, they will now need to integrate the value of those assets into your traditional bank account. This is a massive shift, because now banks will need to track the value of bitcoin (and every other digital asset or token) they hold.
From a customer point of view, you just log into your bank account and see the value of your checking account, your savings account, and your crypto account. To you, it looks just like another kind of money – which, of course, it is!
I cannot overstate how important this is. With this letter, bitcoin (and the entire digital asset market) is now integrated into the entire banking system. Some are already throwing a wet blanket over the whole thing, saying that banks are slow to move and don’t expect anything to happen overnight.
I have a different perspective: I believe things will escalate quickly.
What Happens Next
In my view, the world is likely headed for a global financial recession that is like nothing we have experienced in our lifetime.
I’ve been reading the recent research of Ray Dalio, the founder of Bridgewater Associates, the world’s most successful hedge fund. I highly recommend it.
Although we call coronavirus “unprecedented times,” Dalio points out these times are very much precedented, and in fact repeat themselves throughout history.
To that end, he has done a 400-year study of periods of financial upheaval (such as world wars), predicting that great changes are ahead, including the U.S. dollar losing its status as the world’s reserve currency, a great conflict for world dominance between the U.S. and China, and the devaluation of cash.
Whether we go that far, most economists agree that we will see massive change in the months ahead – which presents both difficulties and opportunities. One of those opportunities is to upgrade our banking system.
Once banks start holding bitcoin, then reporting on bitcoin’s price, the next logical step is to provide “on ramps” and “off ramps” to bitcoin, allowing customers to easily switch between traditional money and digital assets – in the same way you can move money between your online checking and savings accounts.
As the global economic picture darkens, investors are likely to flee to new types of assets that they believe will offer them either greater returns, or safety in a storm. If the dollar begins to devalue, and inflation begins to run rampant, investors will hear their brains telling them, “convert your dollars to things that hold their value.”
We’re already seeing a run on gold; we might expect to see a run on bitcoin (“digital gold”) follow not long after. The only reason these are not in parallel yet is because it’s still hard to buy bitcoin. Once the banks remove this barrier, expect the floodgates to open.
Humans follow the crowd. Once everyone starts driving up the price of bitcoin, as we’ve seen over and over again, more people will want in. Banks, already in hot water from all the consumers and businesses defaulting on loans, will see a way to increase deposits. Who cares if they’re denominated in bitcoin? Beggars can’t be choosers.
Mark these words: soon we’ll have the opposite problem of trying to swing the pendulum the other way. We’ll be explaining why digital assets are not the end-all, be-all of the world’s financial problems. We’ll be explaining why bitcoin is overhyped, not underhyped.
The takeaway is that I expect the world economy to sink into an extended coronavirus-triggered depression, which will run up the price of other assets like gold, collectibles, real estate, and digital assets of all kinds.
Now that banks have the OK to embed bitcoin into their systems (which is effectively what the letter allows), I expect the price of bitcoin and digital assets to rise over time, accelerated by a depreciating dollar.
I don’t know the timeline for this – maybe next week or maybe next year – but I’m moving to get my financial house in order today. Note that I’m not moving everything into bitcoin (that’s madness), but I’m diversifying into a wide range of currencies, countries, and asset types. (As always, consider our Blockchain Believers Portfolio.)
No one knows where things will go next, and we should expect the unexpected. The only thing constant is change. This week’s letter from the OCC, at this time in history, will likely change things fast. |
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| Health, wealth, and happiness, |
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| John Hargrave Publisher Bitcoin Market Journal |
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Hi Everyone,
The thing about the news cycle is that frequently enough, very big things can slip under the rug, often times because something that's perceived as being bigger happens at the same time.
In yesterday's BMJ newsletter we discussed this story, which has now seen proper coverage on Forbes. ... |
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The rest of the mainstream media haven't picked up on it yet, but I suppose that's perfectly understandable, given everything that's been going on lately.
In turn, it seems there's another bit of news that could also have tremendous implications for the world of digital assets that's may have been missed due to the Visa and Mastercard announcements. |
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This is part of a wider story that points to a much more crypto-friendly United States. The move was enacted by Brian Brooks, acting comptroller of the currency, whom we covered earlier this month in this short explanatory video.
So, banks in the U.S. are now officially allowed to custody digital assets, and the three main payment processors are all beefing up their crypto offerings. As far as fundamentals are concerned, this is about as bullish as it gets for bitcoin and the gang. |
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To the Wire
Over the weekend the provisions that were set forth in the original coronavirus CARES Act are set to expire. Back in March when it was implemented, four months of effusive stimulus seemed more than adequate.
Today however, it's quite clear that many people are still out of a job due to the rolling lockdowns and are in need of government aid for their basic sustenance.
Another thing that was present in March was a deep desire from government officials to get together, and an air of cooperation that has weakened substantially since then.
We've seen countless times how governments like to bring things like this down to the wire, and it seems that the more important the decision, the more it gets delayed.
This is precisely why most political analysts fully expect that some sort of patchwork extension is about to come out of Washington, the old politician playbook of kicking the can down road.
It's clear that Republicans are quite concerned that the current level of stimulus might be giving some people incentive to avoid going back to work, which is obviously not a very good situation. However, the evidence shows that this is probably not as big an issue as they're making it out to be.
As we can see from the results of this survey done by Morning Consult, a majority of participants are receiving less than they would from working or haven't gotten paid at all. |
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Of course, the sample size of the survey is not nearly large enough to grasp the complexity of the entire country, and the margin of error is rather wide, but at least it shows that these sort of concerns may have been a bit overblown.
Besides, there really doesn't seem to be much danger in giving people incentive to avoid working when there isn't any work to do. |
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What the Markets are Doing
Well, things are pretty hectic at the moment. While Fridays are often a bit of a mess, this Friday is understandably a lot worse than normal. Stocks were hammered in the Asian session and dropped in Europe, and the U.S. market isn't doing any better.
The bitter jobless claims data from earlier this week is obviously a major concern for many investors.
Volatility is up sharply but so are the bonds, whose yields continue to plummet. However, nothing is up quite as much as gold, which has punctured the resistance level of $1,900 and is looking to break a new all time high ($1,923 per ounce), possibly within the next week, or even today depending on how things go.
I must admit that my decision to sit and wait for a larger pullback before going in more heavily on gold doesn't seem like the best move I've made lately. Oh well, it's not the end of the world.
My crypto trading, on the other hand, has been spot on, as can be seen in my eToro account. I've basically just been watching the tech stocks as a leading indicator, buying the dips and selling the rips.
Now that the tech stocks have been cooling down, however, and it seems like fear is once again a factor that could influence markets in the next few weeks, it's a bit more difficult to implement this strategy in the short term. At least my shorts on the stock market are still intact.
The absence of a major bitcoin rally is also a bit puzzling, especially as one of the leading narratives for the current action in gold is the lack of confidence in central banks. Possibly it will join in later on, I guess we'll see.
Wishing you all an exceptional weekend. |
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Mati Greenspan Analysis, Advisory, Money Management |
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