Bitcoin Simplified

If you’re struggling to understand bitcoin, we break down why it’s been rallying, bitcoin developments over time, and how these might transform Wall Street.

Please note that VanEck has exposure to Bitcoin.

I personally did a deep dive on bitcoin in early 2017, determined it was “real” and then stopped paying close attention to the industry until 2021—a little bit of a Rip van Winkle situation. I can’t believe how much has changed in the past six years! I tried to communicate this to a friend a couple of weeks ago and recommended a bitcoin podcast to him that I thought was easy to understand. But to him, it was Ancient Greek. So, here’s a jargon-free update about recent developments to the best of my abilities.

What Has Led to Bitcoin’s Rise?

The first answer is that more and more investors are buying bitcoin. Even if you haven’t opened an account at a crypto exchange, you can increasingly buy bitcoin on apps that you may already have on your phone. Cash App from Square has over 50 million users1, PayPal has 429 million active users2, and Venmo now offers a credit card product that lets you earn up to 3% back in Bitcoin. This has broadened access beyond the large crypto exchanges such as Coinbase which has over 100 million users globally.3

Second, institutional investors have been buying bitcoin. A U.S. public company (MicroStrategy) holds about $4 billion in bitcoin,4 and Elon Musk’s Tesla added Bitcoin to its balance sheet in 2020. Tesla continues to be one of the top Bitcoin holders among publicly traded companies. Well-known investors are speaking in its favor, which facilitates bitcoin’s legitimacy.

And if one wants to be bullish, bitcoin’s total market value is about $513 billion (almost $27,000 per coin as of June 6, 2023)5, compared to Tesla at $694 billion6 and gold outstanding at $12 trillion.7

Many of the millions of individual and institutional investors that own bitcoin most likely own it primarily as a store of value or a form of digital gold. They want to own a currency that has limited supply, not “paper” money, whose supply governments are increasing without limit.

But What Has Changed Since 2017?

The first thing worth mentioning is that you can now earn interest on bitcoin and other cryptocurrencies. The ability to lend or stake crypto for a yield will attract many people to the crypto world, as they offer a potentially high-yield alternative to government bonds, bank deposits and gold. Accessing this income stream is technically difficult and not without risks, but it is clear how this can and probably will become available to more investors.

From its early days, crypto enthusiasts believed that Wall Street could be rebuilt better and cheaper using a completely secure technology that wasn’t controlled by a single party.

The conceptual building block that would enable the building of a new Wall Street is the ability to build logic into software—the “smart contract.” Something like, “Pay Jane X if Jane delivers Y to Jack.” The delivery of Y would have to be verified independently. “If” is the key word in that sentence because it means there are several moving parts. “If” logic has been around since probably the first lines of software—but making a network that is unhackable and reliable is another thing entirely.

In 2017, there wasn’t much built using this concept; The concept of a smart contract was widely celebrated, but no one knew whether it would be actually applied. The only thing happening was people trading bitcoin and other coins on unregulated exchanges, just like one could trade sneakers on eBay, but that activity didn’t require smart contracts.

Now there has been progress in the build-out of an independent, reliable data infrastructure to support smart contracts. Remember, using the “if” logic in finance usually refers to a price. Well, that price better be reliable! And data problems are rife on Wall Street. This data infrastructure isn’t fully proven, but a lot of important progress has been made. Firms valued in the billions of dollars are directly addressing this problem.

In sum, I believe the emergence of lending and staking digital assets as an alternative to traditional fixed income and rapidly developing data infrastructure suggest growing chances that a new digital asset Wall Street is being built—and that we are still in the early days of that.

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