Introduction
Among its many properties, Bitcoin is a virtual (digital) commodity. It has been classified as such by the U.S. Commodities Trading Future Commission (CFTC) in 2015. Regulators have publicly recognized the difference between Bitcoin versus alternative cryptocurrencies (altcoins), but the fact remains that many in our society have skipped over this important detail. As we see many new legal actions announced by the SEC to protect U.S. citizens from altcoin scams, there are clear indications that Bitcoin stands apart.
This article will help you understand the CFTC’s reasoning for its classification and cover the reasons why it is important for you to know the difference between Bitcoin and all other cryptocurrencies.
A Virtual Commodity
Since its inception in 2009, Bitcoin has captivated the world with its groundbreaking network and its status as the first decentralized digital currency. Over the years, it has gained recognition as a store of value and a medium of exchange, much like traditional commodities such as gold and silver.
One crucial aspect that classifies Bitcoin as a digital commodity is its limited supply. The maximum cap of 21 million bitcoins ensures scarcity, making it an attractive option for investors seeking to hedge against dollar debasement, inflation, and other economic uncertainties. Its value is determined by market demand and supply and is not dependent or influenced by a producer or “centralized entity.”, similar to traditional commodities.
Securities Defined
The Howey Test is a standard used by the SEC to determine whether a particular asset constitutes an investment contract and, therefore, falls under their regulatory jurisdiction. To pass the Howey Test, an asset must meet the following criteria:
Investment of Money: Individuals invest their money in a common enterprise.
Expectation of Profit: Investors anticipate profits primarily from the efforts of others.
Common Enterprise: The investment is part of a larger scheme or enterprise.
Bitcoin, as a decentralized and permissionless digital currency, does not fit within the confines of the Howey Test. Unlike traditional investment contracts, bitcoin holders do not rely on the efforts of others to generate profits. Instead, its value is driven by market dynamics and user adoption. Additionally, the decentralized nature of the Bitcoin network makes it a non-traditional common enterprise.
The Altcoin Problem
Altcoins, short for alternative coins, refer to any cryptocurrency other than Bitcoin. While Bitcoin is the first and most well-known cryptocurrency, there are thousands of altcoins that have emerged over the years, each with its unique features, use cases, and technologies.
Altcoin proponents suggest that their cryptocurrency has a higher utility or is better than Bitcoin in some way. In addition, people are often misled to believe that Bitcoin can be improved upon or that it will be surpassed by some other innovative coin or token.
The altcoin space lacks regulatory oversight which leads to the following:
1. Pump and Dump Schemes - Some altcoins may be subjected to "pump and dump" schemes. In this scenario, manipulative individuals, influencers or groups artificially inflate the price of an altcoin (pump) by spreading false information or creating hype. Once the price reaches a certain level, they sell their holdings, causing the price to crash (dump), and unsuspecting investors are left with significant losses.
2. Affinity Scams - Altcoin scams can take the form of affinity scams, where scammers target specific communities or groups of people who share similar characteristics or interests. They gain trust within these communities and then promote their fraudulent altcoins, exploiting the trust of those involved.
3. Lack of Utility and Real-World Application - Some altcoins are created without a clear use case or purpose, leading to their eventual failure or worthlessness. Without a real-world application or demand, the value of these altcoins may decline rapidly.
4. Poor Security - Some altcoin projects may have weak security measures, making them vulnerable to hacks and theft. If hackers successfully attack an altcoin's infrastructure, investors can lose their funds, and the credibility of the project may be severely damaged.
5. Abandoned Projects - Altcoin projects may be abandoned by their developers for various reasons, leaving investors with worthless or non-functional tokens.
6. Liquidity and Market Volatility - The altcoin market is highly volatile and mostly illiquid. Prices can experience significant fluctuations in a short period, leading to both potential profits and substantial losses for investors.
7. Bad Exchanges – Voyager, Celsius, BlockFi, and FTX all took user funds attempting to provide services that looked a lot like today’s banks in the cryptocurrency space. These entities operated fraudulently and have all filed for bankruptcy.
In contrast, Bitcoin functions entirely independently and operates entirely outside centralized command and control.
Global Digital Money
If you’re an American, the Bitcoin network’s resistance to change or censorship may not be something you think about as being novel or important. This is why so many people get sucked into altcoin scams and schemes. On average, Americans are accustomed to trusting a central authority for money, the financial system, and the economy. History shows countless examples of where that trust has been exploited.
With the rise of digital currencies and electronic payment systems, governments and financial institutions have been able to exert even more control over money. Money can be printed at the push of a button, creating debasement of the currency, inflating prices, and harming all who use it. Additionally, transactions can be tracked, monitored, and in some cases, restricted.
Bitcoin was born out of the 2008 Great Financial Crisis out of a concern for freedom. Once Bitcoin was set in motion, it has been tested, attacked, and fought over. It has stood up to both internal and external attacks. Countries have banned Bitcoin and have banned mining it, only to reverse course as they come to understand that it operates outside anyone’s control.
Notably, adoption abroad has outpaced the US. This is due to America’s historically stable currency, broad and liquid financial markets, and growing economy. In other words, America hasn’t had to pay attention… until now.
People are waking up to the fact that prices are significantly higher, the wealth gap has intensified, and the mistrust of central planners is at an all-time high.
Blackrock’s Bet and Coinbase's Dilemma
Blackrock, the world’s largest asset allocator with nearly $10 trillion USD under management (AUM), recently submitted its application for a spot Bitcoin ETF.1 Given BlackRock’s global stature in the asset management industry, the application signifies greater institutional adoption of Bitcoin. It should be noted that Blackrock is applying for a “Bitcoin ETF”, not a “crypto” ETF. Blackrock is partnering with Coinbase to deliver the bitcoin that will back the ETF.
Coinbase, being one of the largest and only publicly traded cryptocurrency exchanges, finds itself in a difficult position after the SEC allegedly asked it to delist all cryptocurrencies other than Bitcoin.2 Brian Armstrong, the company’s CEO, said it will destroy growth and innovation within the US cryptocurrency sector. On the other hand, this shows the regulators understand the difference between Bitcoin and altcoin cryptocurrencies. The SEC and Coinbase will face off in court to decide.
Financial Advisors and Bankers Take Note
Many financial services professionals play a crucial role in guiding their clients toward sound savings and investment opportunities. Given Bitcoin's status as a digital commodity and its potential to serve as a store of value, it can be a valuable addition to a diversified investment portfolio.
As governments continue to implement expansive monetary policies, the risk of fiat debasement and inflation mounts. Bitcoin's capped supply and deflationary nature can act as a hedge against fiat currency devaluation.
Additionally, bitcoin has relatively low correlations to traditional assets. Saving in Bitcoin and/or adding Bitcoin to an investment portfolio can enhance diversification and reduce overall risk. And, despite its short-term volatility, Bitcoin has shown impressive long-term growth since its inception.
Lastly, spot Bitcoin ETFs will create a demand shock on a fixed-supply asset.
Conclusion
It is becoming increasingly important to understand the difference between Bitcoin, the digital commodity, and “altcoins”, which are unregistered securities and are often scams. Likewise, adding a virtual or digital commodity to your savings plan or portfolio to stave off expansive monetary policies is equally crucial.
Published at Bitcoin Block Height 808,603
https://finance.yahoo.com/news/sec-accepts-blackrock-bitcoin-etf-053621595.html
https://www.ft.com/content/1f873dd5-df8f-4cfc-bb21-ef83ed11fb4d