One of the best things to have ever happened to crypto long term is also proving to be one of the worst things to have ever happened to crypto in the short term
How mass adoption of cryptocurrencies, particularly bitcoin by institutional investors, is a double-edged sword that is helping make crypto more mainstream while also suppressing its price.
Bitcoin was created as a retail asset but has been corrupted by traditional mainstream financial markets in recent years.
Certain aspects of traditional financial instruments applied to bitcoin in the cryptocurrency markets are suppressing its price. The difference between equity-based assets and debt-based assets equity-based assets equity is just a fancy financial term that describes value or conveys ownership of value.
Equity is commonly used to describe ownership of shares in a company like stocks or the percentage of ownership someone might have in a company or real estate.
For example, suppose your house is worth one hundred thousand dollars, and you paid fifty thousand upfront for the house and got a mortgage to cover the other fifty thousand. In that case, you have 50 equity in the house; that 50 equity conveys the amount of value of the asset you own.
So your house in this example is an equity-based asset because there is the real underlying value of the real estate, same with stocks shares of stocks are equity-based assets. After all, the free market determines real underlying value.
So bitcoin as a new digital asset was designed to be equity-based money and accepted by the free market as an equity-based asset, as we can see from its incredible upward price movement since inception.
Over a decade ago, now that we understand equity-based assets, let’s explore a significant transition in the U.S. economy to understand better how the u.s dollar went from equity-based money to what it is today.
Before the U.S. went off the gold standard, the U.S. was an equity-financed economy meaning all of the debt borrowed by corporations outside of the financial realm was backed by real money in savings accounts.
The total dollar value of savings made by people and companies in the real economy equalled the total debt corporations borrowed to grow their businesses.
During this time, we were saving more money than we earned rather than using it to consume or buy products and services, so we consumed less than we produced.
Also, during this time, debt in the U.S. economy was backed by real us dollars, and U.S. dollars were backed by gold hence the equity-based monetary system where underlying assets backed money.
After we abandoned the gold standard, the U.S. turned to a debt-based economy and started using circulation credit or fractional reserve banking.
Instead of debt being completely backed by 100 by cash, Fractional reserve banking allows the banks to keep only a fraction of the cash and lend out the rest in advance.
For example, let’s say for every 100 you deposit into your bank account per the fractional reserve banking system, the bank only has to keep 10 of the total deposit and is allowed to lend out the rest.
This fraction of deposits banks is required to maintain known as reserves. So the ten fractions of the 100 you deposited into your bank account is held as reserves.
The fraction of deposits banks are required to maintain known as reserve requirements hence the term fractional reserve banking, and since the U.S. abandoned the gold standard, all this cash and fractions of cash banks are required to maintain is now debt-based.
When the U.S. dollar was backed by gold, cash was an equity-based asset; now, the U.S. dollar functions as a medium of exchange backed by full faith.
And the credit of the United States and two the U.S. government declares that the U.S. dollar must be used to buy and sell goods and services in the United States.
So the dollar is a loan or a note; in fact, you can see it written on a cash federal reserve note, which means the government promises the dollar has value because they have declared it has value by law.
So now that we know the difference between an equity-based asset and a debt-based asset let’s explore how wall street has treated bitcoin as an equity-based asset.
As a debt-based one and why this could potentially suppress bitcoin’s price actual demand versus artificial supply.
The prices of assets like gold and bitcoin are determined by supply and demand when the demand is high, and the supply is low. We see the price of an asset increase when the demand is low and the supply is high.
We will see the price of an asset decrease, but something is interesting going on here in the case of bitcoin. Wall Street is treating bitcoin the same way they treat gold, except in gold’s scenario, they have the market cornered and can essentially control it.
However, with bitcoin, this is not the case at all. Let’s talk about how wall street has been suppressing the price of gold for years by piling debt claims on it and how they have been potentially suppressing the price of bitcoin using the same antics.
The long and short of it with gold is that there are more paper claims to gold than actual physical gold. Sure, people can buy and store physical gold themselves; however, most of the gold people own is just a paper saying they own X amount of gold and it’s stored in some vault in some other country.
The upper hand wall street has in the gold market is owning, operating, and controlling all clearinghouses. Wall street controls most of the gold in the world, and by wall street, I mean all of the global banks, the central banks, and the LBMA or (London Bullion Market Association) control most of the underlying collateral of gold.
Not individuals so as people want to redeem their actual gold, Wall Street and banks can pretty much trade with each other and fulfil any demand because they control the actual supply of gold.
There is currently more paper claims to bitcoin than actual bitcoin with gold. With the introduction of leverage margin and futures trading and EFTs in the cryptocurrency market, wall street is applying old debt-based activity to an equity-based asset.
And instead of wall street owning, operating and controlling the supply of bitcoin in the event of a run on bitcoin, there absolutely will not be enough bitcoin to fulfil demand because most bitcoin is stored in wallets off of exchanges and out of circulation altogether.
So basically, for every actual bitcoin that exists on the blockchain, ten people or 50 people or hundreds of people could have a claim to that same bitcoin through ETF lending, borrowing, leveraging or simply by leaving their bitcoin on the exchange.
Hundreds of people could be watching the same bitcoin on their Coinbase Gemini Binance or kraken App, thinking and believing that it’s theirs when in reality, with one the development of crypto ETFs, two the allowance of margin and leverage trading for cryptos.
And three a lack of transparency and oversight over how many times cryptocurrency can be lent and relent to several people throughout several exchanges. There is an artificially higher supply of bitcoin in circulation.
If there is a real demand for bitcoin like the hundreds of people who bought and are holding, and looking at the same bitcoin on their account.
If all that real demand is being met and satisfied with an artificially inflated supply of available bitcoin, what is the actual price of bitcoin?
It should be much higher if you create an artificial supply of something which wall street has done with gold and is now doing with bitcoin.
All that’s equal, the asset price will be suppressed, and instead of wall street owning operating controlling the supply of bitcoin in the event of a run on bitcoin, there absolutely will not be enough.
So imagine a scenario where wall street has largely shorted bitcoin, meaning they expect the price to go down, but then the price goes up, and wall street is forced to close their positions regardless of the price of bitcoin.
That could be a problem if you had big intermediaries like Coinbase, Binance, or Bitfinex with lots of open leveraged short positions experiencing a classic run on the bank for bitcoin, and there’s not enough of the underlying collateral to deliver.
The bitcoin price could spike significantly, similar to the GameStop short squeeze situation. Still, on a global scale, these big institutions would be desperately trying to find collateral that they ultimately wouldn’t be able to get because it simply does not exist.
And if or when a short squeeze occurs, bitcoin holders would have the last laugh. That is why it’s essential to make sure you are transferring your cryptocurrency off of exchanges to hold it safely in a cold storage hardware wallet.
The Crypto Underworld : https://bit.ly/3HAHDLU