Mar 24, 2021
Despite the growing interest in investing in Bitcoin (BTC) from large corporations and institutions, US Treasury Secretary Janet Yellen recently criticized the volatility of the cryptocurrency, a shortcoming that has already been condemned by many crypto skeptics.
“I don’t think that bitcoin… is widely used as a transaction mechanism,” Yellen told CNBC, “To the extent, it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting
transactions and the amount of energy that’s consumed in processing those transactions is staggering.”
At the same time, the increasing number of Bitcoin-friendly companies could bode well for the cryptocurrency – or could it not?
This year, bitcoin has already received more attention than probably ever before. Since the electric car maker, Tesla, started accepting Bitcoin, more businesses have started looking into doing the same. Tesla’s founder, Elon Musk, became an advocate for the coin when he changed his bio on Twitter to simply one word: Bitcoin.
But what does corporate interest in Bitcoin entail? Is it gearing the coin closer to becoming a serious digital currency, or is it creating a breeding ground for conflict?
Blessing or Curse?
Bloomberg’s blockchain engineer, Elaine Ou, pointed to Bitcoin’s original purpose in her column: The cryptocurrency was designed to keep dependence on organizations low. Bitcoin has always invoked its fundamental traits of decentralization and anonymity.
“Bitcoin was designed to minimize reliance on corruptible human organizations. In the early days, each user was expected to run their own copy of the software, which would serve as a wallet, miner, accountant, and auditor. As long as everyone independently verified new transactions, the network would remain secure against censorship and counterfeit spending.” Ms. Ou wrote.
But Ms. Ou mentions two points that put at least one of these characteristics into question. On the one hand, numerous small investors do not keep their coins themselves; on the other hand, some 43 million users rely on crypto exchanges like Coinbase. It is not likely, with an eye toward growing corporate participation in bitcoin, that “corporate finance departments are managing their own funds,” Ou wrote.
Bitcoin – a social construct like the money?
It’s also important to remember that Bitcoin is not a physical coin. Bitcoin, like fiat money, is a social construct, ” A medium of exchange has value if people accept it for things of value,”
Ou explains in her article, “Acceptance doesn’t have to be voluntary; in the U.S., we have legal tender laws.”
“In the absence of government coercion, Bitcoin nodes support the network’s consensus rules by engaging in economic activity. The power to control the protocol is held by those willing to take
Bitcoin in exchange for goods, services, or release from ransomware.” She added.
Interest is growing on the part of companies and institutions
Large corporations like Tesla “will have far more influence over the Bitcoin protocol than it does by merely holding $1.5 billion worth of BTC.” Earlier this year, Tesla famously converted $1.5 billion into Bitcoin.
Aside from corporate interest, there is curiosity from the institutional side too. Traditional financial houses are now working on strategies to participate in the crypto space – including MasterCard and Bank of New York Mellon.
Bitcoin’s price needs stability
One of the biggest shortcomings that keep many institutional investors and corporate companies from using cryptocurrency as a medium of exchange is its high price volatility. Recently, this rather negative trait was put on display again when Bitcoin and other crypto coins dropped after US Treasury Secretary Janet Yellen’s statement.
Should a cryptocurrency become a sovereign currency that can be used in conventional banking (or even overthrow it), price stability is crucial. Ou says that bitcoin’s price stability can only come from being on a lot of institutional balance sheets. Without stability, adopting Bitcoin into the modern world would not be possible.