After the Bell: Is Bitcoin destined to be a bit of a bit player?

11 Jan 2024

It’s been a weird few days for crypto. The long-awaited decision from the US Securities and Exchange Commission (SEC) to allow bitcoin to be offered as an exchange-traded fund (ETF) was finally announced on Wednesday. Just before the decision, the SEC’s X feed was hacked, and the announcement was made prematurely. The SEC then clarified that the decision had not been taken and the hack was a hack. And then, the following day, it announced that the decision had been taken.

What is that about? As Matt Levine says in his Bloomberg column, if the hack was a kind of market manipulation, it was manipulation of a very odd kind. The market had long been expecting this move because the US courts have effectively forced the SEC to make the decision. Hence, you would expect the news to be largely in the price, so early confirmation might not have had much effect.

This is a bit like how the market worked in this case. On the back of the false news post, the price moved from $46,700 to $48,000, not a particularly big jump, but confirmation is always something, so it is conceivable that the hack was to boost the price, even if it was very brief. The price then declined to below what it was before the hack, after the denial, to $46,000. Now, after the official confirmation, it’s back up to just under the confirmation price after the quick rise and retraction.

I suspect the hack might have been for a completely different reason: the hackers were trying to force the hand of the SEC because as we all know, the SEC is doing this reluctantly since the head of the SEC, Gary Gensler, has long been in favour of reining in the industry.

Irony

If that is so, there is an irony here because the very reason Gensler is opposed to allowing bitcoin to trade in ETFs is that he is worried about the level of market manipulation in the crypto arena (!).

Exchange-traded funds allow investors to invest in assets which are typically difficult, for some reason, to reach with easy access — and exit. You buy and sell as many denominations of, say, copper as you want very quickly and easily because they are part and parcel of the international trading process. When gold ETFs were launched, they did great things for the gold price, so it is genuinely good news for the crypto industry, although the ruling only applies to bitcoin at the moment, not other crypto. But that’s coming too.

And this inadvertently raises a weakness in crypto. The desire, or desperation, if you like, of bitcoin owners to see the price rise reflects the predominant use-case for crypto at the moment, which is simply the hope the price will rise. Crypto enthusiasts get angry at this simplistic notion and point to all kinds of other use-case opportunities and possibilities. Becoming the currency of gaming could easily be one.

But for the moment at least, people are buying crypto in the hope the price will rise sharply, as it often has. Nothing wrong with that; people buy gold and shares and bonds for the same reason. The difference is that gold, shares and bonds do have utility in society beyond their investment case, (at least arguably) so the longer-term future of the assets has an underpin. Whether bitcoin has that is still a bit of an open question, notwithstanding the protestations of its many supporters.

Bitcoin’s problem

Commentators often say that bitcoin still suffers somewhat from the adage that it might be a solution looking for a problem. I think it’s a bit different. It’s not that it is looking for a problem; it’s that the problem that it wants to solve keeps changing.

At one point, the problem it was seeking to solve was cheap currency transfer, but it turns out that a distributed ledger — the accounts that specify who owns what — is comparatively expensive, precisely because it is distributed.

You could think of it this way (although this is not exactly the way it works): the cost of maintaining a ledger that all users update instantly whenever they transact is going to be more expensive than a private ledger, which is much less demanding from a data transfer point of view because that ledger is updated in a kind of mass, periodic way.

Then there was the protection-against-inflation story; the alternative-currency story; the avoiding-fiat-currency story; the finite-supply story; and so on. I’m not refuting all these reasons absolutely; a lot of them make a lot of sense to me.

But as the presenters of the Odd Lots podcasts, Tracy Alloway and Joe Weisenthal, pointed out recently, the total value of all crypto in circulation is $1.7-trillion. That seems like a huge amount, and in many ways it is impressive. But it’s only half of Apple’s value.

Crypto is fun; it does have modest use cases; I welcome it; it will be with us for years. For one thing, the price is very close to an all-time high. I’ve certainly enjoyed owning a single bitcoin and watching its value explode. But is it really worth the amount of time and energy, not to mention column centimetres, devoted to it?

Hmm, not so much. DM

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Business Maverick

Irony

Bitcoin’s problem