MIKE TOWNSEND: January 10, 2024, was a landmark date in the story of cryptocurrency. On that date, the SEC approved the first Bitcoin exchange-traded funds. It did so unenthusiastically after years of rejecting applications to launch Bitcoin ETFs. Then SEC Chairman Gary Gensler had been a fierce critic, and the agency had sued many of the largest players in the cryptocurrency space for violating securities laws. But a court ruling in August of 2023 had determined that the SEC had been wrong to reject the ETF applications, forcing the SEC's hand. It marked a huge turning point for crypto. For the first time, ordinary investors could invest in Bitcoin without actually purchasing the cryptocurrency directly. By the end of last year, investors had put more than $100 billion into Bitcoin ETFs. Several ETFs that feature Ethereum, another cryptocurrency, have been launched, and ETFs tracking other digital assets are making their way to the market now. As crypto investing has gone mainstream, Washington has taken notice. No issue in the nation's capital has undergone a more dramatic 180-degree U-turn from one administration to the next than cryptocurrency.
The Biden administration, led by Gensler's SEC, was openly hostile to the crypto space. The Trump administration is taking the opposite approach, embracing crypto in an effort to make the United States the crypto capital of the world. Now, Congress is taking action, passing for the first time ever legislation to create a regulatory framework for cryptocurrency. It's been a dizzying turnaround for an industry that many people see as volatile, speculative, and riddled with scams. But Congress has clearly determined that if cryptocurrency is here to stay, it makes sense to put some regulatory structure to an investment that currently has no such structure. So what will it mean for ordinary investors?
Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend. And on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to. On today's episode, I want to take a closer look at the rapidly evolving landscape for cryptocurrency in Washington and how the changes will affect investors. In just a few minutes, I'm going to be joined by Nathan Peterson, who is director of derivatives analysis at the Schwab Center for Financial Research.
Nate is going to help us better understand the basics of the cryptocurrency world and why legislation to put a regulatory framework in place for crypto has become so important. But before we get to that discussion, here's an update on some of the other big issues I'm following in Washington right now.
First off, as I'm sure most everyone knows, the One Big Beautiful Bill is now the law of the land. President Trump signed the massive tax and spending bill into law on July 4.
There is a lot to process in this new law, but here are four big takeaways. Number one, whether you think the gigantic bill is a good thing or a terrible thing, it's an amazing and somewhat surprising accomplishment by the Republicans. President Trump got almost everything he wanted: extension of tax cuts he first approved in 2017 but were set to expire at the end of this year, a bunch of new tax cuts, big boost in spending for defense and border security, significant spending cuts in other domestic programs, and a debt ceiling increase. And he got it all by his desired deadline of July 4.
Right up to the very end, it still seemed unlikely that it was all going to come together. Even though this was always going to be a Republican-only process, with no Democrats supporting the bill, the margins in both chambers were so tight that it wasn't clear Republican leaders would be able to get all their members on board with the bill. The House passed the legislation by a single vote back in May, and the Senate, after making huge changes to the bill, needed the vice president to cast the vote that broke a 50-50 tie on July 1. Then the bill had to go back to the House, and it wasn't clear the modified version could pass that chamber. But President Trump twisted a lot of arms, threatened a lot of primaries, and got most Republicans to fall in line and back the bill, even though many had big concerns with some of the specifics. In the end, just five Republicans voted against the bill—three in the Senate and two in the House of Representatives.
Number two, the new law provides certainty on taxes for years to come. Individual income tax rates, a higher standard deduction, a higher child tax credit, those are all permanent. The estate tax exemption will rise to $15 million per person next year and be indexed to inflation in subsequent years. That exemption has fluctuated quite a bit over the last decade or so. So from an estate-planning standpoint, it's a huge win. And the president got some of his signature campaign promises enacted. Four years of no tax on tip income, no taxes on overtime hours, making interest on auto loans tax deductible, and a special $6,000 deduction for seniors. The next fight will come in 2028 when those provisions are set to expire. We'll see how it plays out in the next few years, but it wouldn't surprise me if things like no taxes on tip income and the special deduction for seniors turn out to be pretty popular, and letting them expire at the end of a presidential election year could be very difficult.
Number three, the debt ceiling is resolved for the next couple of years. The new law raises the debt ceiling by $5 trillion, ensuring that there won't be another debate on this topic until sometime well into 2027, after the midterm elections and after a new Congress will be in place and will have to deal with it. That's a win for the markets, which historically get volatile as the United States gets closer to potentially defaulting on its debts.
But the new law adds an estimated $3.3 trillion to the national debt over the next 10 years, according to an analysis by the nonpartisan Congressional Budget Office, the CBO. Within the next couple of years, our debt will exceed $40 trillion, a staggering total. That level of debt could make the bond market uneasy, as there's little evidence that the nation's fiscal trajectory will change anytime soon.
And number four, we're about to see a messaging war that starts right now and will last through next year's midterm elections. Democrats have already begun producing ads highlighting the cuts to Medicaid and SNAP, the food stamp program; the tilt of the tax cuts toward the wealthy and away from lower income taxpayers; and the increases to budget deficits and the national debt. They will use those ads relentlessly against vulnerable incumbent Republicans as they seek to recapture the majority in the House of Representatives and perhaps even the Senate in the midterms. The new law is doing badly in the polls right now, so Republicans will need to do a better job selling its benefits to voters. But Republicans also say, and several polls bear this out, that voters don't really know much about the new law. So Republicans will focus on the tax cuts and the increases to defense and border security spending.
At the end of the day, this new law will affect major policies in Washington and create legacies for the Republicans who voted for it for years to come. Whether those legacies will be positive or negative is still to be determined. While the One Big Beautiful Bill deals with trillions in taxes and spending, I'm also watching Congress race the clock on a much smaller spending issue, the president's rescissions request.
A rescissions bill comes about when the president asks Congress to rescind funding for specific things that it had already approved. Last month, the president sent Congress a request to rescind about $9.4 billion in funding, more than $8 billion for foreign aid, and about $1.1 billion for the Corporation for Public Broadcasting, which helps to fund public television and national public radio. Under the rules of rescission requests, Congress has 45 days to act on the request. The deadline is July 18. The House passed the legislation last month. The Senate was set to vote on it this week, but several senators have concerns and may try to make changes.
Some Republican senators are concerned about the size of the cuts to public television and public radio, which are important sources of emergency information in rural states. Others are concerned about ending funding for the president's emergency plan for AIDS relief, known as PEPFAR. It's a program started by President George W. Bush, and it's widely credited with saving some 25 million lives around the world since 2003.
It's possible that the Senate will amend the request by adding back in some of the funding. If they pass an amended version, it will have to go back to the House for another vote at the end of the week. If both chambers don't pass it by July 18, then the request expires, and the president may not request to rescind those funds again. This little skirmish is just a preview of the real spending battle, which is looming this fall. While the One Big Beautiful Bill deals with a lot of spending, it does nothing to fund regular government operations for the coming fiscal year, which begins on October 1. Those decisions come through the annual appropriations process.
Congress is supposed to pass the 12 appropriations bills to fund every government agency and every federal program by the October 1 deadline. If they don't, that's when we start to hear talk of a government shutdown or a temporary extension of funding known as a continuing resolution. Unlike the One Big Beautiful Bill, which could not be filibustered in the Senate, the appropriations process will require bipartisanship, since you need at least a 60-vote supermajority in the Senate to pass the bills. That's going to be tough. Democrats are not likely to be inclined to help out Republicans with funding decisions they don't agree with. A government shutdown this fall is a real possibility, though in recent years, Congress has become more willing to agree to a series of short-term extensions of funding to keep the government open and avoid the bad optics of a shutdown.
But temporary extensions keep old funding agreements in place without any review of whether funding choices made, in some cases, years ago still make sense. We'll have to see how things proceed this month and then when Congress comes back to Washington in September after the annual August recess.
On my deeper dive this week, I want to do something we haven't really done before on this podcast, and that's explore the world of cryptocurrency. I thought this discussion would be timely because Congress is on the verge of passing its first ever cryptocurrency legislation. It could be on the president's desk by the time this episode is available.
And that bill is just one of several steps that Congress and the key regulators are taking to help bring crypto into the mainstream. But cryptocurrency also continues to face a lot of skepticism. Is it safe? What role will it play in our financial system, in our economy? And what does it all mean for investors? To help me dig into these questions, I'm pleased to be joined today by Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
Nate has been with Schwab in a variety of roles for more than 20 years, focusing on option strategies in particular. But in recent years, he's become one of Schwab's go-to people when it comes to the rapidly expanding cryptocurrency universe. He holds a Blockchain and Digital Assets designation from DCAFP, the Digital Assets Council of Financial Professionals. Nate, welcome to WashingtonWise, and thanks so much for joining me today.
NATHAN PETERSON: Hey, Mike, it's great to be here.
MIKE: Well, Nate, from my perspective in Washington, as I noted at the top of the show, it feels like there was a dramatic change in attitude towards cryptocurrency about 18 months ago when the SEC approved the first Bitcoin ETFs. For the first time, ordinary investors could invest in a crypto-related product from a regular brokerage account. And I think that sparked a lot of interest among investors who had previously been skeptical about crypto. And it really caused policymakers in Washington to realize that they probably needed to put some regulatory guardrails in place for cryptocurrency. Now that's coming to pass. But before we get to legislative and regulatory efforts here in Washington, I think it'd be really helpful for our listeners to just get a grounding in some crypto basics. So let's start with the most basic question of all. What exactly is cryptocurrency?
NATE: Yeah, Mike, good question. In order to narrow down the focus of the discussion, let's just use Bitcoin. This is the world's first and most popular cryptocurrency. Bitcoin is a digital currency, as the name implies. Bit: digital. Coin: currency. Bitcoin's a peer-to-peer electronic cash system that does not require the trust of an intermediary, like a bank or a government, to send or receive money.
Mike, we're peer to peer. If you have a digital wallet, I have a digital wallet. I have Bitcoin. I can send you Bitcoin. We don't need a bank. Bitcoin was born out of the great financial crisis and was designed to address many of the issues with fiat currency and irresponsible fiscal spending. You can think of it as an evolution of money so that it's more efficient, both in terms of cost and time; secure; and deflationary.
Think of fiat currency and the inflationary impact or the loss of purchasing power over time that we've experienced with fiat currency. In contrast, we can look at the deflationary intent of Bitcoin. So in the code of Bitcoin, it is deemed that there will only be 21 million Bitcoins ever.
The code also has limitations on what's known as a halving process. So every four years or so, the amount of newly minted Bitcoins that go out into supply that are paid to the miners who do perform the mathematical computations, that number gets cut in half every four years to restrict the supply. It used to be 50 Bitcoins for every block that was mined. Now it went to 25. The next four years, 12 and a half, etc. etc. It continues to get cut in half roughly every four years. The last Bitcoin will be mined in 2140 according to the code. So you can see how this code was designed to be an antithesis to the inflationary characteristics of fiat money.
MIKE: Well that's an important characteristic, no question. I think also the fact that there are no intermediaries, no banks, no governments, that's a key point also for people interested in this as an alternative currency. But at the end of the day, you still have to have a way to keep up with what is going where and when. By now, most of us have heard the term blockchain used pretty often. Just how does that work with tracking Bitcoin transactions?
NATE: Bitcoin transactions that get recorded on the blockchain, all the data is open to the public, and it cannot be altered. A blockchain is like a public database or ledger that securely records all the transactions in a succession of blocks. So a chain of blocks of data, and it's decentralized. No single authority or person or entity oversees the integrity of this ledger. It's basically maintained by a network of computers. These miners that are receiving rewards for mining these Bitcoins, they have a vested interest in maintaining the veracity of the ledger. It's transparent. Anybody can view it. Mike, you or I can go ahead and view that as well. And it's immutable, meaning it cannot be altered. And let me explain.
The blocks of the chain contain a set of validated transactions; a timestamp that indicates when the transactions were recorded; a hash, or unique string of symbols, for identification like a digital fingerprint of the previous block; and this electronic trail or blockchain is maintained by that large network of peer-to-peer computers rather than a single source. If there's any attempt to alter this data, because each block contains the previous block's fingerprint, there's no way that it would be accepted by everyone or every node in the ledger. And so therefore the intent is that this cannot be altered. It's immutable. And therefore, you don't need to trust an intermediary.
MIKE: Bitcoin, of course, is the largest and most popular digital currency, but I recently read that there are something like 10,000 or more different cryptocurrencies out there. There are so-called meme coins, many of which are not really intended to be a serious competitor. They're just more about fun. But it raises a question about how value is created in this space. We've all heard about Bitcoin mining that you referenced, where supercomputers are being used to break the cryptology and find the defined number of Bitcoins.
But in the end of the day, how is the value created for Bitcoin and for all these other types of cryptocurrencies? I think one of the big concerns investors have with Bitcoin has been that there's just no there there. There's nothing to touch, nothing to hold, nothing to secure. So where does the value of digital coins come from?
NATE: Good question, Mike, and you're right, there's thousands of cryptocurrencies. There's thousands of blockchains in existence. And you are correct that Bitcoin doesn't have any intrinsic value. And what I mean by that is we're so used to dealing with real-world assets like stocks where you actually own ownership in a company that has cash flow, that has property, that has dividends, etc. Bitcoin doesn't have any cash flow. It doesn't have any dividends. It doesn't have any property or equipment. It's just a digital asset.
Why has it been the best performing asset over the last 16 years? It used to trade at fractions of a penny. Now it's up to $120,000. And the answer is simply, it's supply and demand. When we think on the supply side, that has been defined by the source code, as we mentioned. There's only 21 million Bitcoins that will be in existence.
So then we have the demand side of the equation, which is what are investors willing to pay for a Bitcoin? And this comes down to a larger question of what do we value? Where does anything really get a price tag?
In Bitcoin's case, there's a limited amount of it. It does have a scarcity principle to it. But it's also an idea. In a sense, it's an alternative solution to fiat currency. And its intent is to appreciate over time because of the way that it's designed to be deflationary.
Think about something like the Mona Lisa, for example, in the world. It's just wood and paint, but we deem it to be priceless. We think it's beautiful. We think it has a monetary value or that it can't even be valued, it's so valuable. Well, on the supply side, there's only one original that we know of in existence. So we know the scarcity side.
But then on the demand side just speaks to our willingness as investors or art collectors collectively that deem it valuable and are willing to pay escalating amounts for it. So this really just determines the supply and demand aspect of cryptocurrencies. And what about the other coins? All of the other coins, their value is deemed in the same manner of supply and demand.
Some cryptocurrencies don't have that cap of 21 million. Some cryptocurrencies have much more utility for gaming, for AI, or they're faster, etc. But in the end, the price of that cryptocurrency is just deemed by the investing public.
MIKE: I love the comparison to the Mona Lisa. I think if we just went to the Louvre and told everyone, "Hey, this is just wood and paint," it would be interesting to see the reaction there. Maybe the crowds would thin out a bit. Well, Nate, how do you see crypto being used in the real world today? And I think this is a key question for a lot of people. Am I going to be paying for my groceries or my restaurant bill with crypto, or is that kind of routine purchase not really what crypto is going for?
NATE: It's true. You can use Bitcoin today to purchase goods and services in the economy. You just need a digital wallet and a wallet address, and then you can send your Bitcoin there. But in reality, it's at least currently not very practical to do so. First, when you use a cryptocurrency like Bitcoin to buy goods or services, you transact with it, it's generally considered a taxable event by the IRS, which means you need to report that on your taxes. Next, the fees for buying and selling Bitcoin are still relatively high in comparison to other mediums. And the transaction times can be a lot longer than, say, just using your credit card, going to Starbucks and swiping the card, and you're good to go. So yes, are there other cryptocurrencies out there that offer lower fees, faster execution? Of course, but it's still a long way from mass adoption that the Bitcoin enthusiasts would dream of, just waking up and everybody use crypto. It's the reserve currency, so to speak, around the world. And it's accepted by everybody everywhere. And it's highly sought after.
But what's all the hype about blockchain technology or putting real-world assets "on chain" if it's not very practical to use right now? And I think the longer-term idea here is that, eventually, by utilizing blockchain technology or the movement towards what you may have heard deemed as Web 3.0. Web 3.0 is essentially blockchain technology, decentralized finance, and tokenization. And the dream is that you can transact with anyone in the world 24-7, 365, instantly, without the need for an intermediary to verify counterparty assets. And you can do so for no cost or a very low cost.
I think that's the idealistic view of where cryptocurrency or Web 3.0 is headed.
MIKE: Nate, one important piece of the crypto puzzle is stablecoins. Stablecoins are a type of cryptocurrency that is pegged to the dollar. So they're supposed to come with some guardrails and maybe offer some security. Could you lay out the differences for us and of how stablecoins fit into the big picture?
NATE: Absolutely, as the name implies, stablecoin, that refers to the price stability of this coin, and it's meant to provide the attributes of being on chain such as the speed, accessibility, security, and the value of that coin is meant to be pegged so that it doesn't experience the volatility that we see with so many other cryptocurrencies.
The stablecoins, therefore, maintain that stability through the code, and they are maintained or backed by assets, liquid assets, one-to-one, not at a ratio like at a bank. This is a 100% one-to-one peg to a liquid asset like the U.S. dollar or short-term Treasuries. But of course, there are other stablecoins that can be pegged to commodities. algorithms, cryptocurrencies, etc. For the discussions of this, let's just stick with being pegged to the U.S. dollar or highly liquid assets. These tokens are backed by those dollars or short-term Treasuries. And how would you know that that is the case since there's no central authority? Well, most of them like to have auditors, or they voluntarily submit to regular third-party attestations or audits.
And this is to help establish trust because they want the trust of the public so that the liquidity and the use of those stablecoins will then help their network, so to speak, grow. But you can think of stablecoins as tokenized dollars or dollars that are on chain, on the blockchain. Many cryptocurrency traders, Mike, utilize these stablecoins to transfer funds between cryptocurrencies that they like to trade. So if you can imagine you take your dollars, you deposit into your wallet, and you purchase a stablecoin and then use that stablecoin to purchase Bitcoin. When you sell the Bitcoin, you can either go back to the stablecoin, or if you wanted to, you could go back to the dollars. But that's going to take multiple steps, and there's going to be holding time, transaction times, etc. So by allowing those users to go back to a cryptocurrency, they can then trade other cryptocurrencies more easily. So it's kind of a platform, a pit stop, so to speak, that allows them to have that freedom to move their fronts around easily on chain. And real quick, I mentioned "tokenize." So let me just explain that to tokenize something means to create a digital representation of an asset, whether it's tangible or intangible, as a unique token on a blockchain.
MIKE: Yeah, that puts me in mind of the non-fungible tokens that were kind of a craze a few years ago. That was the whole idea that I could own some digital representation of an NBA player executing an awesome slam dunk or a bored ape or some piece of experimental art. Not many of those held their value for very long, but I think stablecoins may be able to do much better in the long run.
This has really been a great introduction to some of the basics of crypto, but I want to pivot to what's going on in Washington. As I said at the outset, I don't think there is any issue that has undergone more of 180-degree U-turn in terms of the administration's stance on it than crypto in the last seven months. The change in attitude from the previous administration to the current one really has been stunning. The president has taken a number of steps. He's established a presidential task force on digital assets.
Now both the House of Representatives and the Senate for the first time had subcommittees on digital assets. The SEC, which in the last administration seemed like it was suing virtually every cryptocurrency exchange and company, now has dropped all of those lawsuits and established its own task force. And via an executive order earlier this year, the United States is in the process of creating a strategic Bitcoin reserve, along with a stockpile of other digital assets.
I guess it will act something like the strategic reserve of oil that the U.S. has had since the 1970s, although oil is an actual thing that we can run low on. So what do you make of the strategic Bitcoin reserve? I understand it's also an idea that's kind of catching on at the state level as well.
NATE: Absolutely. And Mike, you're right. There were a few eyebrows that were raised as to why Bitcoin is considered a strategic asset by the U.S. But you know, in short, I believe it's a recognition of the potential role that cryptocurrencies or Web 3.0 may play in the way we transact in the economy in the future. And by holding Bitcoin, the U.S. is also diversifying its reserves in the event of economic instability.
Prior to the establishment of the Bitcoin Strategic Reserve, President Trump signed an executive order to strengthen American leadership and digital financial technology. And he stated that he wants the U.S. to be a leader in cryptocurrency. So this step aligns with that vision. However, it's important to note that the U.S. Bitcoin Reserve is going to be comprised only of assets that have been previously seized by law enforcement. They essentially are reclassifying the seized cryptocurrencies or Bitcoins and moving them into the classification of a strategic reserve rather than actually accumulating Bitcoin in the open market. At least that's the case for right now.
But Mike, following that announcement at the federal level, several U.S. states have either put up for consideration or have actually adopted a Bitcoin strategic reserve. So far, three states have passed legislation, Arizona, New Hampshire, and Texas. And the important note here for the crypto community, perhaps, is Texas, which basically signed into law in late June this strategic reserve.
They also became the first state to decide to use taxpayer dollars to purchase Bitcoin. So $10 million worth is what they use with taxpayers' money in order to put into this reserve. And while that's a relatively small amount, I think it's more symbolic in the sense of a move in this direction. It's one thing to designate a strategic reserve and reclassify existing assets. It's quite another to go out there and take taxpayer dollars to actually accumulate Bitcoin. And Texas also said that we're going to do a review every couple of years, and we're going to hold this Bitcoin, and we're not going to allow this fund to be used to pay for other bills. And so Texas really became a first in this initiative at the state level.
MIKE: Well, I think we're going to hear more about how the federal government is going to utilize the strategic reserve in the coming months. This is a big priority of the president. It's been a little bit on the back burner and there's a lot still to be determined about how it's going to work. But I think we're going to hear more about that.
I also want to get your take, Nate, on the legislation moving through Congress right now. First, there is the Genius Act, which would, for the first time, regulate stablecoins. Senate passed the bill on a strong bipartisan vote last month. The House of Representatives is debating it as we record this, so the bill could be on its way to be signed into law by the president very soon. The Genius Act would, among other things, create a review committee that includes the Treasury Secretary, the Fed Chair, and the Chair of the FDIC to approve the launch of a stablecoin by any non-financial institution, and it would require stablecoin issuers to hold one-to-one reserves in either dollars or other highly liquid assets like you were talking about earlier. So it really does give some structure to the stablecoin space.
NATE: Yeah, that certainly is the intention. And I do think that it's likely to help stablecoins become more mainstream and, therefore, with these regulatory payment rails, it's going to foster competition in the space. Keep in mind, there's two primary dominant players in the stablecoin space right now. That's Tether and Circle. They primarily dominate the market right now. That's likely to increase should the bill pass, should we get more regulatory clarity. And so this could set the stage for other companies, big banks, to issue stablecoins of their own. Very recently, The Wall Street Journal reported that Amazon and Walmart were considering their own stablecoins. And this could take transaction volume away from the credit card issuers since they pay so much in merchant fees every year for all the consumers that are transacting on their websites using credit cards. This could give companies like Amazon and Walmart not only lower cost in terms of the amount of money they pay to those credit card issuers, but also they can get more insight into consumer spending behavior. They can also develop reward programs, etc., and develop that relationship with their clients.
But also consider it from the U.S. government stance. So when they advance this regulation, this could embolden its position as a crypto leader. And since most stable coins are backed by the U.S. dollar or short-term Treasuries, that one-to-one ratio, this could actually help the dollar cement its dominance in the global economy as the reserve currency, so they're, in a sense, getting ahead of this technology that if they don't move now, it potentially could be a threat, at least on some level, but by moving forward with this regulation, it's actually going to help kind of solidify its dominance within the global economy.
One question that I've got around the stablecoins though, Mike, is just basically, are consumers going to want these? What's their willingness to adopt them? And how quickly are they going to do so? We are so ingrained on a day-to-day basis to go out there and just use our credit cards for everything, and we get reward points from those credit card companies, there's going to have to be incentives for these companies in order to get the consumers to basically adopt and move into this new way of transacting with the world. So that will be interesting to see just how long it takes for consumers to take it on.
MIKE: Yeah, I think that's a key question because, as you said, we're also used to using our credit cards or our phones to pay for everything these days. We'll see how quickly that can change.
The second bill I wanted to ask you about the House is also considering this week, not likely to be voted on in the Senate until this fall, but it's known as the Clarity Act, and it would create a regulatory framework for cryptocurrency generally, sort of beyond just stablecoins.
It would designate most cryptocurrencies as commodities rather than securities and give most of the regulatory oversight responsibility to the Commodity Futures Trading Commission, the CFTC, with some secondary responsibility to the SEC.
Together with the stablecoins bill, the goal is to create a real regulatory structure for products that really have been kind of a wild, wild west with limited oversight of any kind. While the specifics of the legislation are complicated, and it's going to take some time for it all to shake out, it feels like this is probably a good thing for investors in the end.
NATE: Yeah, Mike, I think I would agree with that. I mean, we know that we've had some loose definitions around the CFTC and the SEC and their role in regards to cryptocurrencies, but there's been a lot of ambiguity. So this will help with that clarity, providing that framework. And there's also going to be some consumer protection measures such as disclosure requirements and fund segregation, which should also be good for the space. So incrementally, yeah, I think this could improve investor confidence and therefore could also spur more innovation because there's an expectation that investors will take to this space, and there'll be wider adoption. I agree that it's an incremental step towards the validation of the crypto space by the U.S. government, but let's keep in mind, there's still a notable gap between the consumer safeguards that we currently have, that traditional banking provides, like FDIC, and some of the Web 3.0 companies, at least as it currently stands.
MIKE: There's no question that there's a tremendous interest in this technology, but I think there's also a lot of FOMO, fear of missing out, among investors, especially as we see Bitcoin's price crossed the $120,000 threshold last week. But for a lot of long-time investors, I think crypto still remains kind of out there, something for speculators only, something with relatively limited real-world applications. As you look at this rapidly changing landscape, what should investors be paying attention to? Why should investors care?
NATE: Well, Mike, first, there's the advancement of blockchain technology in Web 3.0. That's one thing. And it is going on, and it's moving quickly. It's another major technological shift in the global economy. It's going to alter the way that we transact with one another. But this doesn't necessarily guarantee or suggest that all things crypto are going to appreciate in price. So I think you have to be a little bit cautious when you enter in this space, especially given that there's already been some traction and a number of … look at the price appreciation on a number of these assets. There's going to be investment opportunities along the way. And I think that there's certainly going to be optimism, and there's going to be speculation. But just like the dot-com bubble, there's going to be winners and losers. And it's not always easy for investors to sort out the winners from the losers.
So I expect in the coming year, we're going to see more crypto-related corporate developments, crypto-related IPOs, investment opportunities, but we're also going to get higher volatility that accompanies that, both higher and lower. And I'd also remind our listeners that Bitcoin has historically experienced significant drawdowns ranging anywhere from 30 to 70% five times over the past eight years.
We were just down 70%, Mike, from peak to trough in Bitcoin back in 2022 when we had the bear market. So respect that volatility, that at least from a historical perspective, and respect your risk tolerance when you're investing in this space.
MIKE: You mentioned the dot-com era when, you know, at the beginning of that, seemed like just attaching ".com" to a company's name made the stock price go up. Do we have something similar going on here and have we learned some lessons from that era?
NATE: Well, I don't think we're at that extreme as the dot com, but I do see signs of speculative excess in the crypto space right now. I'll acknowledge right now we are in a bit of a technological renaissance. It's not just crypto and Web 3.0. It's artificial intelligence, robotics, quantum computing, autonomous systems. So in this regard, this shift, this technological shift, is akin to the internet.
And when you get these periods of massive shifts like this, it's natural to see massive investment, excitement, speculation. And oftentimes these periods can crescendo into an extreme until there is some sort of a corrective phase evaluation reset. And it's basically impossible to predict when that's going to occur. I'll say this specific to the cryptocurrency realm. What I've observed recently is a significant increase in the number of public companies that are adopting strategic Bitcoin or Ethereum reserves as part of their corporate strategy. There's a company out there, MicroStrategy, now known as Strategy, that back in 2020 kind of kicked this off in terms of this corporate strategy of accumulating Bitcoin, moving it to your balance sheet, as part of your corporate strategy. And the stock has done significantly well. We've seen Bitcoin appreciate substantially over the past four years.
We have this new regulation, and therefore we're seeing the frequency of more companies piggyback on this type of a strategy, and they're getting rewarded right now. But the frequency of these announcements, I mean, this is daily and weekly that I'm seeing, Mike. This gives me a little pause. This gives me a little bit of concern. I think you need to be a little bit careful, a little bit of an orange flag at this point in time. So in that regard, I think it has some hints of the dot-com speculative bubble.
MIKE: Well, Nate, we've covered a lot. There's obviously a lot going on in the crypto space. It's all moving really, really fast. So what is Schwab doing to help investors become more educated about what's going on?
NATE: Absolutely, for clients that are interested in this space and want to learn more about it, we've got several resources available. You can start by going to schwab.com/cryptocurrency. You can find a lot of fundamental educational content on crypto, blockchain, you can learn how to get exposure to the various products.
We detail the differences between many of these ETF and ETPs that have been, you know, released over the past couple of years. I also record a weekly segment that's called "Crypto Corner" that we put on the Schwab network. You can also access that on YouTube. And essentially, Mike, with this webcast, it's myself and Adam Lynch. We cover the latest developments within the crypto space. We also cover technicals on the charts for Bitcoin and Ethereum. So certainly you can access that. And as the industry moves forward, Schwab is going to continue to expand our offer.
MIKE: Nate, you've done a great job at demystifying the crypto space a bit for our listeners today. Really appreciate your insights. Really appreciate your time talking to me. How fast everything is moving, I have no doubt that we'll have you back on the podcast in the near future to give us another update.
NATE: Great, thanks so much for having me, Mike.
MIKE: That's Nathan Peterson, director of derivatives analysis here at the Schwab Center for Financial Research. You can follow his commentary and analysis at schwab.com/learn.
Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks, when we'll be focusing on the latest developments on tariffs and their implications for the economy and the markets. Take a moment now to follow the show in your listening app so you get an alert when that episode drops, and you don't miss any future episodes. And I'd really appreciate it if you would take a moment to leave us a rating or a review. Those really help new listeners discover the show.
For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript. I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.