Revenge of the crypto bros

Well, it finally happened. Bitcoin hit $100,000 this week, which caps (for now) a stunning run since Trump won the presidential election. On November 4, Bitcoin was about $67,000. So, in a month, it is up more than 50%, which in aggregate amounts to more than $700 billion dollars. The total market cap of Bitcoin is now 2 trillion dollars; The total market cap of all digital currencies combined is nearly 4 trillion dollars.

Of course, given how volatile Bitcoin tends to be, I have no idea what the price will be by the time you read this. Could be up 15% or down that much. That extreme volatility is one reason why so many for so long have dismissed Bitcoin, and the entire crypto-currency universe, as pure speculation, no better and perhaps worse than a Las Vegas roulette wheel.

Whatever the price in the short-term, the rise of digital assets is an unalloyed positive trend that gets inordinate criticism. And with trillions of dollars now invested in Bitcoin and several other digital assets such as Ethereum, it is highly unlikely that this is just a bubble or a fad that goes away. It is increasingly clear that these assets represent a new global currency (albeit one without a clear use at present), a new store of value, and a new mechanism to process and validate digital financial transactions. No, these aren’t some utopian assets as earlier proponents claimed. Crypto offers a new channel for money to move seamlessly and securely, even as a small number of speculators profit enormously.

Most of us pay little attention to cryptocurrencies, and when we do, it raises an eyebrow. Crypto has long been in bad odor, with the highly publicized implosion of FTX and the rise and fall of Sam Bankman-Fried, along with numerous instances of global shenanigans, including lost or stolen coins, failed exchanges and countless instances of Bitcoin and crypto used in dark-web transactions for drugs, money laundering and extortion. There is also the unfortunate fact that many in the United States most visibly touting digital assets and Bitcoin are the epitome of bros: brash, male, young and as stereotypical as extras in The Wolf of Wall Street.

Conflating crypto with its most unsavory advocates and its most sketchy products is a mistake. Yes, all the various accusations have merit. Yes, even Gary Gensler, the outgoing chair of the SEC who has shaped the past four years of regulation with his animus toward the industry, was not wrong when he said that the crypto world was rife with “Hucksters. Fraudsters. Scam artists. Ponzi schemes. The public left in line at the bankruptcy court.” However, that doesn’t mean, as Gensler alleged, that the public needs protecting, or that crypto assets would “undermine the well-earned trust the public has in the capital markets.”

In fact, the “public” (whatever that is) has largely stayed on the sidelines. A relatively small number of investors and speculators have dominated the space. There has been no fraying of public trust in markets, even as Bitcoin and other coins have soared and fallen. Nor has scorn from established financial and regulatory voices dented the gradual ubiquity of these assets.

A key aspect of Bitcoin which is largely invisible to Americans is that the millions around the world, many of them of quite modest means, have flocked to Bitcoin in particular as a hedge against their own erratic government policies that devalue their currency and shrink the value of whatever savings they have had. In fact, the vast majority of Bitcoin holders (estimated at more than 100 million people globally) own less than 1 Bitcoin.

One of the earliest champions of Bitcoin, Wences Casares, explained to me years ago that his goal was to create a currency that couldn’t be stolen from hard-working families, the way the Argentine government had routinely wiped out his family’s savings through repeated mismanagement of the budget and currency. Americans have been largely free of these concerns, but for citizens of most countries around the world, that is an immediate risk, which Bitcoin has helped ameliorate. It is issued by no government and does not require any central bank or global currency exchange. That is what makes it so suited for illegal trade in drugs and goods (and for those blackmail and extortion schemes perpetrated by hackers). But it also makes it perfect for protecting life savings from greedy or incompetent governments.

A great read from 2017 | Captains of Finance Dismiss Bitcoin at Their Peril: The technological revolution has been slow to arrive in finance, but it is surely coming.

The frequently repeated criticism of Bitcoin is that it is a solution in search of a problem. At the New York Times DealBook Summit that I attended this week, both Ken Griffin of Citadel and Jerome Powell, chair of the Fed, repeated variants of that line. Powell may have put it best when he said, “People use Bitcoin as a speculative asset… It’s just like gold, only it’s virtual, it’s digital. People are not using it as a form of payment or as a store of value. It’s highly volatile. It’s not a competitor for the dollar, it’s really a competitor for gold.”

Gold, however, has historically been a solution to a problem: the human desire for an asset that retains some value even when everything else falls apart. Gold has no intrinsic value, except for the fact that humans across time and cultures have ascribed value to it and its supply is relatively limited. The same is true for Bitcoin. Its software protocol limits the total supply to about 21 million bitcoins, nearly 20 million of which have already been mined. The scarcity is what creates value, and the software is what enables security. There is no clear commercial use case for Bitcoin (yet), other than as digital gold for the 21^st century. And that is use case enough.

Gold was not traded based on the savoriness or lack thereof of its miners or traders or holders. You wouldn’t dismiss having gold in the late 19^th century because Deadwood was filled with men and women of ill-repute. You wouldn’t refuse to hold gold because Wall Street speculators often tried to corner the market and distort the price. The same holds true of Bitcoin and its strange and often undesirable bedfellows.

As for other digital assets, Ethereum is a viable tool for authenticating transactions that large banks such as JP Morgan and its Kinexys program use. Stable coins, which track the U.S. dollar, now represent trillions of dollars of global transactions. Many central banks, the Fed included, are exploring creating their own digital currencies. Bitcoin is digital gold, but many of these other digital currencies and protocols do indeed solve for a problem efficiently, quickly, and with much less cost and friction.

Only a few hundred years ago, countries began using paper currency. For decades in the 19^th and into the 20^th century, these “fiat” currencies were distrusted. They were pegged to the gold reserves held in national vaults, which was the only thing that gave them value in the eyes of traditional financiers and ordinary citizens. Then, with the Great Depression onward, those paper currencies were gradually detached from gold and left as paper promises only as good as the governments issuing them. For many, that is the original sin of the modern financial system, a world built on paper promises.

Digital currencies and Bitcoin are the logical next iteration here. In an increasingly digital world, a currency that isn’t paper and isn’t backed by government guarantees was all but inevitable, as was the backlash. How digital currencies and Bitcoin will evolve remains highly unclear. That they will evolve seems fairly certain. Scorning or dismissing them won’t change that, but it will prevent them from being taken seriously. That is a mistake. These instruments are here to stay and they are only growing more systemically important.

Watching Bitcoin soar and crash is a distraction from a deeper reality: while the solutions these currencies provide are still nascent, and many specific attempted uses have failed (and will fail), this isn’t some grand tulip bubble. We are witnessing the birth pangs of a new form of exchange, one that has just as much a chance of unlocking human potential as it does of enriching a few nefarious speculators. It would be lovely if we could have one without the other, as it would be for so much of human history and human nature. As it is, we have this messy mix, diamonds in the rough, you get the drift. So pay less attention to the bros, and pay more attention to the flows.