Recently regulatory action in the cryptocurrency industry has many thinking a long-anticipated government crackdown is gathering steam. But — what if the crackdown is actually clearing the path for more Wall St. involvement?
In early 2017, Bitfinex’s well publicized USD banking issues were the first signs of renewed U.S. government interference in the cryptocurrency space. It was followed by the closing of darknet behemoth AlphaBay, and then more recently, the subsequent shutdown of BTC-e and the arrest of one of its alleged operators in Greece.
These events have left some in the industry with the distinct impression that something bigger is afoot. Is this forceful remolding by the U.S. government part of a bigger game plan?
The Wall St Plan to ‘Embrace, Extend, Extinguish’
The theory is that, despite their best efforts, Bitcoin has refused to die — and now efforts to kill it have moved on to regulatory bottlenecks and attempts to subvert the direction of the industry from the inside.
This is something Blockstream employee Alex Bergeron touched upon recently, tweeting out a series of thoughts surrounding a hypothetical Wall St. plan to ‘Embrace, Extend, Extinguish’ cryptocurrency.
— Alex B. (@bergealex4) March 13, 2017
But what if that theory is off the mark? This is purely speculation, but what if the actions of the U.S. Justice Department are part of an agenda to allow Wall St. to get a foothold in the cryptocurrency markets?
If this were the case, what would we expect to see happening?
We may see some kind of legislation that provides a barrier to entry, such as New York’s BitLicense. This regulation makes it near impossible for any small startup to offer services to an American clientele due to the high cost of entry; the cost of a money transmitter license equates to about $1 million USD per state. It has seen Bitcoin startups flee New York and many companie stop doing business with New York-based customers.
We may also expect to see the mainstream media doing an about-face in their coverage of Bitcoin.
— Beautyon (@Beautyon_) June 1, 2017
Need a New Generation of Investors
But more tellingly, we might also notice a trend of diminishing investment or participation rates in the mainstream asset classes. The big elephant in the room in this sense is the retirement of the baby boomer generation.
Traditionally, as people leave the workforce, they draw down their sharemarket portfolios in order to fund their retirements. While the crisis of 2008 had a large negative effect on many boomers, the desired effects of Q.E. was to reflate the markets in order to promote the “wealth effect” — boosting stock and real estate values in order for investors to feel confident in their assets and future, as such conditions are conducive for further spending.
For boomers, these reinflated portfolios will need to be liquidated in the coming years. From this, the question being asked is: Who will the buy the assets from the boomers?
Nick Hubble, editor of Jim Rickards Strategic Intelligence newsletter puts it bluntly:
“There simply aren’t enough young people to buy all those investments which retirees plan to sell.”
Hubble puts forth this sentiment in the belief that a large scale slowdown is coming, and it very well might be.
How About… Millennials?
But there may be another facet to consider, however speculative.
While it is true that the baby boomers are the largest generation to ever retire en masse, it is also true that the current “millennial” generation is not investing in the kind of numbers their parents’ generation did.
Business Insider cited a 2016 bankrate.com survey lamenting that “just one in three millennials have money in the stock market”, adding that “the main reason so few invest is that they can’t afford to.”
This would seem to be a flow-on effect from the 2008 crisis, where trillions of dollars in paper wealth evaporated as stock and real estate markets tanked, first in the U.S. and later in Europe. Job markets collapsed. Salaries were lowered. Part time work became normal. Society was scarred by the experience and naturally, sentiment surrounding investing changed.
This manifested itself by turning society from spenders into savers. BankRate noted that “62 percent of millennials will save more than 5 percent of their income this year, an increase from 42 percent in 2015”.
And while affordability was the main reason for staying out of the stock market, not understanding stocks, feeling investing was risky, and not trusting stock brokers or brokerages were others.
Crypto May Be the Answer to Wall St’s Problems
These should be red flags for Wall St., considering not only the amount of fines the industry has been issued in since the crisis (over $300 billion), but also the fact that by and large Wall St. makes its money by extracting fees from investors. That is why such technical jargon is used in the markets, and why most regular people feel lost when learning the ins and outs of trading.
Further, products like mutual funds extract large fees from customers whether the portfolio ends up in profit or not. Of the portfolio managers that do return a profit, very few are able to replicate that for even a few years running.
The wildcard in all of this is “crypto” — with an exciting, dangerous reputation, global 24/7 markets, low barriers to entry and the possibility of gains that are multiples of anything seen in stocks, often over very short periods. Stories abound, spread via both social media and mainstream outlets, of amazing “get rich quick” stories with headlines that make audiences salivate: “$100 in bitcoin in 2010 now worth almost $73 million”.
While many early adopters were attracted to Bitcoin for its economic attributes, the explosion of popularity in “#Crypto” has seen millions of people the world over buy in, looking to make their fortune.
It stands to reason then that “Crypto” is not only an economic reaction to the financial crisis, but also a generational one.
With the millennials expecting everything to be instant — Tinder for dating, Netflix for entertainment, Twitter for news and Facebook for friends — ‘Crypto’ is the dream of instant wealth.
As such, the market cap of all cryptocurrency has ballooned to over $144 billion in a few short months. It should be expected that Wall St. would want to be a part of it.
If so, we will probably see leading exchanges being acquired by large Wall St. players. Businesses like Coinbase, who are onboarding 33,000+ users per day, are likely U.S. based targets.
— Alistair Milne (@alistairmilne) August 16, 2017
For most Bitcoiners the entrance of institutional money, which would be the presence of such Wall St. institutions, is seen as the holy grail, and would take the bitcoin price to the metaphorical “moon”. But with it would likely come the much-feared hand of government.
SegWit activation on Bitcoin might be, "The Final Battle of Bitcoin". The State was always assumed to be the biggest, "Final Boss" of BTC.
— Beautyon (@Beautyon_) May 18, 2017
In order to combat this, or at least to keep the industry decentralized and independent from the tentacles of institutions such as the ‘Vampire Squid’ (the name famously given to Goldman Sachs by Rolling Stone’s Matt Taibbi), the need for decentralized exchanges may be of paramount importance.
I am far more exited by the long term effects of HodlHodl, CanCoin and LocalBitcoins than I am about any Cargo Cult Bitcoin exchange.
— Beautyon (@Beautyon_) May 8, 2017
What Happens to Cryptocurrency After That?
In the end, only time will reveal the inclinations of the large Wall St. institutions. There is no doubt that they have plans for many eventualities.
But, as an industry preceded by its less-than-stellar reputation, if cryptocurrency as a whole can survive and the current investing and demographic trends continue, Wall St. may be incentivized to cross the divide.
By then however, the forward thinkers in the ecosystem may have already routed around them.
What do you think of this theory? Let us know in the comments.
Images via Wikimedia Commons, Pixabay