By Peter Eberle
President Joe Biden issued an “Executive Order on Ensuring Responsible Development of Digital Assets” on March 9, which might finally provide much-needed clarification from the federal government regarding the future of cryptocurrency for U.S. investors.
President Biden’s executive order was more of a policy overview, but a promising move toward transparency. President Biden called for a broad review of digital assets, including cryptocurrencies. “We must protect consumers, investors, and businesses in the United States,” said President Biden. “We must support technological advances that promote responsible development and use of digital assets.”
We believe investors are best able to express their investment views in markets that are transparent, secure from manipulation, and open to innovation. Given this, the Biden Administration’s straightforward mission statement is positive for crypto investors and the markets.
Are Cryptocurrencies Still an Unproven Technology?
The White House cites surveys stating that 16 percent of adult Americans have invested in, traded, or used cryptocurrencies. According to the same Pew Research Center survey, men ages 18 to 29 are likely to say they have used cryptocurrencies. Overall, 86 percent of Americans say they have heard at least a little about cryptocurrencies, including 24 percent who say they have heard a lot about them. According to the survey of U.S. adults, 13 percent say they have heard nothing at all.
Cryptocurrency is no longer a new or niche technology. The government is moving to assess the risks of this tech in the same way that they are studying the risks of Google, Facebook, and others trading personal user data.
Barriers to Broader Adoption Across U.S. Investors
Over the past few years, the price of bitcoin has increased primarily because of some early adopting public entities putting bitcoin on their balance sheets, including Tesla, Mass Mutual, and most recently, the Canadian division of KPMG. At least 26 publicly traded companies hold bitcoin, but one of these companies owns more than half of all cryptocurrencies on corporate balance sheets. Many would guess Tesla, as it accepts bitcoin as payment, and CEO Elon Musk is an aggressive bitcoin promoter.
However, the biggest corporate crypto holder is MicroStrategy. The $3.6-billion company owns 121,044 bitcoins, a crypto hoard roughly 2.5 times larger than its nearest contender, Tesla. MicroStrategy’s bitcoin is now worth approximately $4.4 billion, which is about 25 percent more than the company’s market capitalization.
Many CFOs are reluctant to add bitcoin because of regulatory uncertainty, unfavorable accounting treatments, and some tax reporting concerns. We believe that clear regulation in this space will lead to greater adoption of bitcoin as a treasury asset for public and private companies, and an investment for endowments and pension funds. When these investments are made, the potential price impact is enormous.
Here are some examples of funds that might come into the market:
- CalPERS manages the largest public pension fund in the United States, with more than $469 billion in assets under management as of June 30, 2021.
- Apple Inc. (NASDAQ: AAPL) is among the companies with the most cash reserves in America. Apple has nearly $200 billion in cash and marketable securities as of May 22, 2021.
This sizable potential demand, coupled with bitcoin’s limited supply, is why some analysts believe $500,000 to $1,000,000 per bitcoin is possible before the decade’s end.
President Biden’s Executive Order
While President Biden’s executive order is a welcome relief to investors and entrepreneurs, it is just a first step.
Overall, President Biden’s executive order is:
- An order to study, not an order to make rules or laws;
- A call for coordinated action across the government on financial crimes, such as money laundering, terrorist financing, and sanctions evasion;
- An acknowledgment that digital assets are essential to the competitiveness of the U.S. economic system.
At the same time, his executive order is not:
- A ban on crypto;
- An announcement that the U.S. is imminently issuing its cryptocurrency to compete with stable coins;
- A ban on crypto mining, nor is it a preference for less-energy-intensive crypto mining technologies such as ETH 2/Proof-of-Work.
Some sectors of the industry will be fearful of potential regulations. Still, any measure that protects investors and eliminates potential fraud will only boost confidence in cryptocurrency and allow the industry to grow. As we saw with Uber and other disruptive technologies, innovation still happens while regulations are being designed.
The wheels of government regulation move slowly, and this executive order is the first step of many on a long road. It’s important to remember that Dodd-Frank was signed into law in 2010, and the work required under that has still not been completed.
President Biden’s executive order is an essential first step toward a government approach to managing the benefits and risks of digital assets. While the executive order does not have immediate implications, that the federal government is taking steps to create an organized approach to digital assets is sure to be welcomed by the cryptocurrency industry.
Peter Eberle is President and Chief Investment Officer of Castle Analytics LLC, a digital-asset-focused investment management firm in the San Francisco Bay Area. For important disclosures, please see http://www.castlefunds.com/disclaimer.
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