Its been hyped since conception as a disrupter, a grass-roots currency backed by and beholden to no sovereignty for its value. Created by anyone with the technological capability to mine its possibilities, bitcoin has become a medium of exchange, increasingly accepted as cash. It has become a store of value, trading as a commodity on global exchanges. And now it has become a coin of the realm, adopted by El Salvador as its official currency.

El Salvador. Not the U.S., China, the European Union, India, or in fact any member of the G7, G8, or G20, not an economic power or exporter or a developed or wealthy nation. We would expect a groundbreaking change to come from such major players, and perhaps only after much deliberation, negotiation, and diplomacy, as with the creation of the euro, for example.

El Salvador is a country of only 6.5 million people, with another 2.5 million living abroad, due to many years of poverty, corruption, and war. After several decades of economic dependence on exports--first of indigo (dye) and then of coffee--El Salvador has been trying to recover by diversifying its economy. Now, the country exports more textiles, toilet paper, plastic lids, and flavored water.

Still, its economy depends most on remittances, on money sent home from Salvadorans living abroad: in a real sense, its major export is its labor force. In 2020, those remittances totaled about $6 billion, or about 25 percent of the nations GDP. And, according to the Salvadoran government, the ease of remittance transactions from abroad is a prominent reason to adopt bitcoin as its currency.

To launch this effort, the Salvadoran government is spending about $225 million, including distribution of $30 worth of bitcoin to everyone who adopts the governments official e-wallet app. Transactions of all kinds, and, presumably, all transactions can then be paid for using the app. This assumes, of course, that users have a smart phone and can afford internet access.

According to the Wall Street Journal, 80% of all citizens are skeptical, especially as the government will be privy to all transactions through its distributed wallet and app. Many are concerned about bitcoins volatility as a commodityit was down 17 percent in the day after El Salvadors announcementand thus its value. Many are concerned about potential hacking. And, as taxpayers, many are concerned about the governments large investment in the currency.

Bitcoin is not entirely new to El Salvador, with an estimated 35,000 current users, and the country has not used a currency of its own since 2001, when it adopted the USD as the official currency. But the Salvadoran government is the first to officially adopt a cryptocurrency as its legal tender.

Bitcoin famously evolved as a peer-to-peer currency, neither minted nor managed by any sovereign economy. Theoretically and historically, both were critical to controlling an economy and thus protecting its ability to generate wealth, so governments from earliest recorded history have hastened to do so.

The creation myth is well-known: in 2008, a paper appeared from an as-yet unidentified author, then an open-source app appeared, and the mining began. It spread globally, although not without pushback and attempts at regulation. China has outlawed cryptocurrency mining, for example, and others have tried to regulate and/or tax its use.

One major concern is that cryptocurrencies can be owned pseudonymously, that is, ownership is assigned to a bitcoin address, not a name. Thus, there is fear that cryptocurrencies can be quite conveniently used to move money by everyone from traffickers to terrorists to corrupt bureaucrats, easily evading regulated currency flows and traceable bank accounts, to say nothing of taxes.

This bottom-up currency (r)evolution has wide appeal to manyfrom academics to anarchists to venture capitalistsfor political, social, economic, and just practical transactional reasons, but because it happens outside of sovereign control, it has not, so far, appealed to governments. It is in keeping that the first government to officially embrace it operates with little global or even internal economic power. El Salvador has little to lose by ceding its currency sovereignty, especially since that sovereignty has been limited to choosing the US dollar.

Will the adoption of cryptocurrencies by other sovereignties accelerate now, or will this prove to be a misguided attempt at economic empowerment? The most developed economies, with the most to lose, will almost certainly be the last to the party, if indeed it continues. And if bitcoin fails as a sovereign currency, will that hasten its end or enhance its insurgent appeal?

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Bitcoin bound | Columns | northstarmonthly.com - The North Star Monthly

Sep 25th 2021

DIVERSIFICATION IS BOTH observed and sensible; a rule of behaviour which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim, wrote Harry Markowitz, a prodigiously talented young economist, in the Journal of Finance in 1952. The paper, which helped him win the Nobel prize in 1990, laid the foundations for modern portfolio theory, a mathematical framework for choosing an optimal spread of assets.

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The theory posits that a rational investor should maximise his or her returns relative to the risk (the volatility in returns) they are taking. It follows, naturally, that assets with high and dependable returns should feature heavily in a sensible portfolio. But Mr Markowitzs genius was in showing that diversification can reduce volatility without sacrificing returns. Diversification is the financial version of the idiom the whole is greater than the sum of its parts.

An investor seeking high returns without volatility might not gravitate towards cryptocurrencies, like bitcoin, given that they often plunge and soar in value. (Indeed, while Buttonwood was penning this column, that is exactly what bitcoin did, falling 15% then bouncing back.) But the insight Mr Markowitz revealed was that it was not necessarily an assets own riskiness that is important to an investor, so much as the contribution it makes to the volatility of the overall portfolioand that is primarily a question of the correlation between all of the assets within it. An investor holding two assets that are weakly correlated or uncorrelated can rest easier knowing that if one plunges in value the other might hold its ground.

Consider the mix of assets a sensible investor might hold: geographically diverse stock indexes; bonds; a listed real-estate fund; and perhaps a precious metal, like gold. The assets that yield the juiciest returnsstocks and real estatealso tend to move in the same direction at the same time. The correlation between stocks and bonds is weak (around 0.2-0.3 over the past ten years), yielding the potential to diversify, but bonds have also tended to lag behind when it comes to returns. Investors can reduce volatility by adding bonds but they tend to lead to lower returns as well.

This is where bitcoin has an edge. The cryptocurrency might be highly volatile, but during its short life it also has had high average returns. Importantly, it also tends to move independently of other assets: since 2018 the correlation between bitcoin and stocks of all geographies has been between 0.2-0.3. Over longer time horizons it is even weaker. Its correlation with real estate and bonds is similarly weak. This makes it an excellent potential source of diversification.

This might explain its appeal to some big investors. Paul Tudor Jones, a hedge-fund manager, has said he aims to hold about 5% of his portfolio in bitcoin. This allocation looks sensible as part of a highly diversified portfolio. Across the four time periods during the past decade that Buttonwood randomly selected to test, an optimal portfolio contained a bitcoin allocation of 1-5%. This is not just because cryptocurrencies rocketed: even if one cherry-picks a particularly volatile couple of years for bitcoin, say January 2018 to December 2019 (when it fell steeply), a portfolio with a 1% allocation to bitcoin still displayed better risk-reward characteristics than one without it.

Of course, not all calculations about which assets to choose are straightforward. Many investors seek not only to do well with their investments, but also to do good: bitcoin is not environmentally friendly. Moreover, to select a portfolio, an investor needs to amass relevant information about how the securities might behave. Expected returns and future volatility are usually gauged by observing how an asset has performed in the past. But this method has some obvious flaws. Past performance does not always indicate future returns. And the history of cryptocurrencies is short.

Though Mr Markowitz laid out how investors should optimise asset choices, he wrote that we have not considered the first stage: the formation of the relevant beliefs. The return from investing in equities is a share of firms profits; from bonds the risk-free rate plus credit risk. It is not clear what drives bitcoins returns other than speculation. It would be reasonable to believe it might yield no returns in future. And many investors hold fierce philosophical beliefs about bitcointhat it is either salvation or damnation. Neither side is likely to hold 1% of their assets in it.

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This article appeared in the Finance & economics section of the print edition under the headline "Just add crypto"

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Why it is wise to add bitcoin to an investment portfolio - The Economist

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Bitcoin was trading nearly 4.2% higher on Thursday morning.

The price was around $43,965 per coin, while rivals Ethereum and Dogecoin were trading around $3,115 (+6%) and 22.3 cents (+6%) per coin, respectively, according to Coindesk.

Dapper Labs closed a $250 million funding round, the company behind NBA Top Shot and the Flow blockchain said Wednesday.

TIGER WOODS, AUTOGRAPH, DRAFTKINGS LAUNCHING EXCLUSIVE NFT COLLECTION

Coatue led the raise, according to Coindesk, which also included Andreessen Horowitz, Googles GV and Version One Ventures. According to a source familiar with the deal, Dapper Labs received a $7.6 billion valuation.

"Weve proved the concept, which is why our investors are so eager to partner with us," Roham Gharegozlou, CEO of Dapper Labs, told CoinDesk.

Ethereum, Bitcoin and Dogecoin were up early Thursday. (iStock)

In other cryptocurrency news, the New Jersey Bureau of Securities (NJ BOS) has once again postponed the date when it will enforce a ban on the creation of BlockFi Interest Accounts (BIAs), BlockFi announced on Twitter Wednesday.

The ban was initially supposed to go into effect July 22, but was delayed until Sept. 2. There was an additional delay to Sept. 30, announced earlier this month. The ban has now been postponed yet again, this time to Dec. 1, following "ongoing discussions" between the two parties, BlockFi said.

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BlockFi said it is in "active dialogue with regulators" and "firmly believes that it is lawful and appropriate for crypto market participants."

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Bitcoin, Ethereum, Dogecoin all higher early Thursday morning - Fox Business

Ethereum and bitcoin.

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Big-money investors are shying away from the bitcoin futures trade and pivoting instead to ethereum futures as expectations for the world's largest cryptocurrency soften, JPMorgan analysts wrote in a note on Wednesday.

In September, bitcoin futures on the Chicago Mercantile Exchange have traded below the price of an actual bitcoin, the analysts noted.

"This is a setback for bitcoin and a reflection of weak demand by institutional investors that tend to use regulated CME futures contracts to gain exposure to bitcoin," the analysts wrote.

Under healthy demand, futures usually trade at a premium to actual bitcoin. This happens because high bitcoin storage costs and the juicy yields available for passive crypto investing push up futures prices, according to previous JPMorgan research.

That dynamic makes the current weakness in futures especially bearish for bitcoin, the analysts wrote.

Meanwhile, institutional investors have begun steadily pivoting to ethereum since August. The 21-day average ethereum futures premium rose to 1% over actual ether prices, according to CME data cited by JPMorgan, showing a "strong divergence in demand."

"This points to much healthier demand for ethereum vs. bitcoin by institutional investors," the JPMorgan analysts wrote.

Ether prices have fallen 3% in the last month while bitcoin has fallen 10%.

Last week, JPMorgan's crypto guru - who also co-authored the note on institutional demand - told Insider that he expects ethereum to keep declining as it faces growing competition from the likes of solana and cardano.

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Big investors are dumping bitcoin futures and pivoting to ethereum: JPMorgan - Markets Insider