Interview with Dr. Daniel Diemers
(first published by Handelszeitung Switzerland on 23.12.2020; in German)
By Marc Bürgi
on 23.12.2020
The record chase brings back bad memories: Since the spring, the value of Bitcoin has roughly quintupled; last weekend, the cryptocurrency was worth more than 25,000 dollars – more than ever before.
The ups and downs have been part of Bitcoin since the digital money was launched in 2009: The boom was always followed by a crash.
Paypal accepts Bitcoin
However, the current bull market has a somewhat different effect. More and more banks and companies are investing in the cryptocurrency or trading it.
The payment service provider Paypal, for example, has been offering its customers “trading” with the cryptocurrency since November. The news that Paul Tudor Jones and Stanley Druckenmiller, two of the best-known hedge fund managers, bought Bitcoin also caused a stir recently.
“Bitcoin has become respectable,” believes Swiss blockchain expert Daniel Diemers. In an interview with “HZ”, he explains the reasons for the cryptocurrency’s new popularity – and says why he continues to believe in the “Bitcoin success story” despite some reservations.
More and more institutional investors are buying Bitcoin. What is behind this development?
Daniel Diemers: In the past, it was mainly people fascinated by the technology who invested in Bitcoin. Institutional investors, on the other hand, are interested in returns. And many of them have now discovered Bitcoin as an attractive asset class.
The decisive factor for this was a change of mind among regulators. Just a few years ago, Bitcoin was toxic to regulators, and banks with banking licenses were not allowed to do anything with it. That has changed dramatically, not least in the US. But in our country, too, Bitcoin has become acceptable and respectable, even among bankers.
Bitcoin is perceived differently?
There has been a transformation; I can now buy Bitcoins from banks and trade them on exchanges. The term “digital gold” best describes Bitcoin’s new status. Banks are responding to it. Gold has always been in demand, even in times of crisis. And Bitcoin has similar characteristics. It is seen as a store of value.
« In recent years, we’ve seen corrections of 60 to 80 percent from value. This is massive, and could happen again.»
How will Bitcoin develop in the near future – will a “crash” follow the high again?
I would never rule out a correction. Bitcoin has been really established since 2017, if you look at the volumes that are traded. Since then, there have been several corrections.
The value once reached $17,000, and then fell back to $3,000. In June 2019, Bitcoin rose again to 13’000 dollars, only to fall again to 4900 dollars by last March. Now we are back in a bull market. In recent years, we’ve seen corrections of 60 to 80 percent in value. This is massive, and could happen again.
Institutional buyers are looking at Bitcoin as a very normal investment. And at some point, they will convert bitcoin into other currencies. If some big investors sell their holdings, it will trigger a correction. Bitcoin is still very small as an asset class, that’s the main problem.
It is still a young market.
The market capitalization is only 400 billion dollars. And in recent months, another $12 billion or so has flown into Bitcoin.
That corresponds to about three percent of the total potential trading volume of Bitcoin – which is not very liquid anyway. That such an influx would drive prices up seems logical.
Is this lack of liquidity a problem?
It is a problem, but it can be solved without having to change the protocol behind Bitcoin. By institutionalizing trading, Bitcoin becomes more liquid. Today, price discovery is done very informally and is still in its infancy.
There are big investors who are active and are setting up big deals. But now professional providers are entering the market. This is because there is money to be made through price discovery – “matchmaking” and “market making”.
You have already mentioned one disadvantage of Bitcoin, the transaction costs are high. Another problem is energy consumption. Bitcoin will never become a sustainable investment.
Here’s the thing. The design of Bitcoin cannot be changed easily. The numbers are crazy – Bitcoin’s power consumption exceeds that of entire countries. This power consumption will also prevent some institutional providers from investing in Bitcoin because it is not compatible with the trend towards sustainability.
Could Bitcoin be displaced by new cryptocurrencies – for example, the Diem currency launched by Facebook?
That seems unlikely to me. Today, there are about 4000 “coins and tokens” that have similar characteristics to Bitcoin. However, only 30 or 40 of them are popular.
Bitcoin today is an investment. Facebook is taking a different approach with Diem. The group wants to create a means of payment that can be used to pay within Facebook’s ecosystem. It’s a different application. This also applies to the “stable coins” that central banks issue. I don’t think a replacement of Bitcoin is imminent.
Other cryptocurrencies avoid high power consumption through new technical processes. But many advocates of Bitcoin consider the high power consumption inevitable, although they regret it.
Bitcoin is a success story. The protocol underlying Bitcoin has never been hacked, and the blockchain has always been online. It is always there, and it works.
« Bitcoin is a success story. The protocol underlying Bitcoin has never been hacked, and the blockchain has always been online.»
Bitcoin has been associated with crime and cyberattacks in the past. Have these problems eased?
The reservedness towards Bitcoin also comes from this era, when the cryptocurrency was equated with illegal platforms on the darknet.
Today, when you trade Bitcoin as an institutional investor, you are subject to the laws of the financial world. For example, there is a requirement to identify customers. When they sign up with a crypto exchange, they must submit a passport copy. Larger amounts can only be traded legally today. The non-transparent or criminal transactions of the past no longer occur today.
The scene has changed. For example, Kraken in San Francisco, one of the oldest crypto exchanges, recently got a banking license. Of course, Bitcoin is still used for criminal purposes. But it’s the same with regular money.
And cyberattacks – Is Bitcoin still vulnerable to hackers?
This problem still exists. Of the largest crypto exchanges in the world, the majority have already fallen victim to hackers. These are manageable amounts, $20 million, $50 million, $100 million – they are not attacks like when Mount Gox, the Japanese exchange, perished from a cyberattack.
Because exchanges make so much money, they put the losses away and paid off customers. Fortunately, this worked. If larger amounts were involved, that wouldn’t be possible.
You see a need for action.
Cybersecurity needs to get better. Because Bitcoin is digital, the temptation for cybercriminals is very high. But the institutionalization of the market also increases security.
New players like banks are bringing in more expertise in IT security. Some crypto exchanges are dreaming of an IPO. And if crypto exchanges are traded on normal exchanges one day, they cannot afford such attacks to happen.
Daniel Diemers is a blockchain expert and co-founder of SNGLR Group, a boutique firm specializing in exponential technologies. He is also a startup coach at Innosuisse and sits on the board of InCore Bank.
This is a non-authorized translation by SNGLR with the friendly support of deepl
All rights reserved by the author and the publisher
