From news channels to dinner tables, cryptocurrencies such as Bitcoin are once again the center of financial discussions. The price of many cryptocurrencies — digital currencies based on top of blockchain technology — soared by 100s of percent in the last few months. Bitcoin, for example, breached its previous all-time high of $20,000 and set a new record of almost $42,000.
While the 2017 bull-run was said to be pumped by retail investors, the present one is fuelled by institutional money. Many major institutions recently joined the crypto bandwagon, investing hundreds of millions of dollars to diversify their portfolios. Retail investors too have been quick to see the opportunity and invest in their favorite cryptocurrencies.
Joel Edgerton, the COO of a San Francisco-based cryptocurrency exchange, bitFlyer USA, indicates one of the major reasons why people are investing in cryptocurrencies is that they create a fairer financial system. Edgerton, who previously worked with many major financial institutions across many countries, decided to join bitFlyer after realizing the impact blockchain and cryptocurrencies can have on the present financial system.
Edgerton is currently the COO of bitFlyer USA, a subsidiary of the largest Japanese cryptocurrency exchange bitFlyer. He explains that he joined bitFlyer over other cryptocurrency exchanges because the company’s vision and mission closely align with that of Bitcoin.
bitFlyer’s focus remains on adding value to its customers rather than working like casino exchanges that mainly vie for profits by luring new users through high-risk investment opportunities. Through bitFlyer USA, Edgerton aims to bring better values into the American crypto markets, which is currently overloaded with exchanges taking unfair advantage of its users.
As the craze and demand for Bitcoin and cryptocurrencies grow stronger, Edgerton sheds light on various aspects of cryptocurrencies by answering some critical questions about their use and adoption. Let’s dive in.
Why is Bitcoin’s demand growing so rapidly?
Bitcoin belongs to a relatively newer asset class that is still in the long-term price discovery phase. The most similar asset class to that of Bitcoin is gold, which is why Bitcoin is also often referred to as digital gold, notes Edgerton.
Bitcoin has a clear path forward as a replacement of gold, but it currently only has a market capitalization of $650 billion as compared to roughly $11 trillion of gold. So, there’s plenty of room for competition, he adds.
It is worth noting that institutional investors are together moving billions into Bitcoin. A major reason for doing so is that Bitcoin is a good hedge against government debasement of fiat currencies, i.e., the printing of more money leading to higher inflation.
Now, Edgerton states, the printing of more money is generally an advantage for asset classes like gold as a store of value. And Bitcoin exhibits similar characteristics, although in a better manner. Bitcoin’s total supply is limited, but it is more certain than that of gold. Its supply is hardcoded and defined in its underlying technology, blockchain. We know that there will only ever be 21 million Bitcoins in circulation, which makes it a great store of value in contrast to gold, whose supply is limited but not certain.
Even the price of Bitcoin, which is often considered highly volatile, is starting to get more stable as more institutional and retail investors own the asset. Stressing on this, Edgerton points toward a November 2020 report by the investment firm VanEck showing that Bitcoin’s price volatility was lower than that of 145 stocks listed under the S&P 500.
People are slowly realizing the benefits offered by cryptocurrencies such as Bitcoin. That is why more and more investors are diversifying their portfolios by investing in these currencies. It’s true that the mainstream adoption of Bitcoin is still not close but we’re headed in the right direction, Edgerton states.
How cryptos create a better financial system?
Cryptocurrencies create a monetary system that allows people to store and transact value without the need for an intermediary. They are based on top of a distributed ledger technology that operates without any centralized entity. This makes cryptocurrencies decentralized and peer-to-peer and offers many benefits over the traditional banking infrastructure and fiat currencies.
Edgerton emphasizes that digital assets and cryptocurrencies are a major innovation in finance, and they can largely change the course of our current financial system. Without the involvement of intermediaries, they are laying the foundation for a financial world that is fairer and more equitable. Besides, they are based on a transparent ledger which is secured through cryptography, making the whole system more secure and difficult to cheat or manipulate.
Adding to this, Edgerton says, “it doesn’t really seem right that our hard-earned money is working for banks rather than for us.” This is to say that unlike banks, cryptocurrencies offer users complete control over their money and they can handle their funds the way they want. No bank or central entity can use an individual’s cryptocurrencies to lend money and generate interest from it. No one can tell a user what amount they can or cannot transact in cryptos at any given time.
He says cryptocurrencies such as Bitcoin can help more people achieve independence from centralized financial entities. But that is only possible if crypto exchanges act responsibly.
What is the current state of crypto regulation?
In the past 11 years, cryptocurrencies have grown beyond what many would’ve ever imagined or expected. They’ve caused ripples of innovation throughout the financial world. At this time, they stand at a point where governments are recognizing their impact on the financial infrastructure and are taking actions to adapt to this innovation, says Edgerton.
It is a good sign that cryptocurrency regulations are evolving as governments take serious measures to create better laws governing them. Joel adds: “Some governments are moving to implement digital assets that focus on efficiency while sacrificing privacy. Others, like the U.S., are simply trying to fit digital assets into their current regulatory structure. Neither will likely be the final solution.”
Highlighting the case of crypto regulations in the U.S., he notes that it is extremely difficult to use Bitcoin as a means of payment as the IRS defines Bitcoin as an asset. Due to this definition people would have to account for capital gains taxes for every transaction they make in Bitcoin. So, for the time being, Bitcoin may only be limited to large-value purchases.
However, according to him, we are at the Napster stage of digital currencies. Napster forced music companies to change their business models to adapt to the new way people consumed music. Similarly, Bitcoin will eventually require governments to adapt to how their citizens want to use money.
He also stresses that the lack of well-defined regulations makes it more difficult and expensive for crypto exchanges like bitFlyer to serve their users. In addition, having 50 state regulators on top of federal regulators in the U.S. makes the job even more complicated. But that’s part of running a startup leveraging the potential of new technology, Edgerton asserts. He then says, “the expertise and industry knowledge in San Francisco is definitely beneficial. The high cost of doing business, not so much.”
What role do exchange platforms play in crypto adoption?
In most cases, cryptocurrency exchanges are the window through which new users get to experience the world of cryptocurrencies. Thus, it is important for exchanges to abide by all regulations while also ensuring the safety of the users and their funds, opines Edgerton.
But many exchanges fail to act responsibly. Some fail to abide by regulations while others lure new users into the crypto market by offering high-risk schemes such as a 100x leverage on crypto trades. That’s not how crypto exchanges should function.
Cryptocurrency exchanges have the responsibility of securely guiding new users in the crypto space. That’s the reason, Edgerton claims, bitFlyer spends “so much money on compliance, security, risk management, and customer experience.”
“We look out for our customers and protect them,” he says. bitFlyer significantly reduces the risks of Ponzi schemes and rug pulls by limiting the number of digital assets they list on the exchange. This was why they refused to list Ripple’s XRP when they had concerns about its authenticity. Presently, Ripple/XRP faces charges by the SEC.
Once again stressing his point, Joel Edgerton states in conclusion, “we think money should work for our customers and not for the banks. However, it is going to take time since we are still at the very early stages of this technology. We have much work ahead to explain the benefits of cryptocurrencies to people, deliver simple and safe customer experiences, and shift the power balance in finance away from banks and toward individuals. But we at bitFlyer US look forward to making this happen.”
The future of cryptocurrencies
Although their prices remain slightly volatile compared to traditional assets, cryptocurrencies offer a wide array of benefits to end-users. They have certain challenges to overcome such as regulations and day-to-day use cases, but that’s a story for every new technological innovation from the internet to AI. So, as long as innovators can make cryptos easier and more accessible for the mainstream audience, cryptocurrencies will play a major role in the world of finance.