Commentary on Political Economy

Thursday 11 January 2024



Bitcoin ETF

Taking a step back here, there is something really cool about what Bitcoin has accomplished, in some ways much cooler than Satoshi Nakamoto’s original vision for it. The original vision of Bitcoin was that it would be “electronic cash,” a way for people to send payments to each other without involving a bank or other intermediary. Fifteen years later, I mean, there has been some progress along those lines; some people sometimes do pay for some goods and services using Bitcoin. But it has not exactly taken over the world of payments. El Salvador made Bitcoin legal tender and required all businesses to accept it, and even there it is not that widely used. In big developed economies, despite years of crypto proselytizing, people still much prefer fiat currency and traditional banks.

And yet the price of Bitcoin has gone from zero in 2009 to $46,000-ish today, not on widespread adoption as a payments mechanism, but because people — lots of people, crypto evangelists but also regular retail investors and quite traditional investment strategists at big institutional investment firms — view it as a “store of value.” Which means that they think its price will go up, or at least not go down, robustly and for the long term. They buy Bitcoin at $46,000 not because they plan to use it as digital cash, but because they think other people will buy it at $47,000, or $470,000 or whatever. 

Which is why people buy Apple Inc. stock, or Treasury bonds or oil futures or whatever: They think other people will buy them, so the price will go up. You know what Keynes said. But those things have cash flows or industrial uses; those things are claims on economic activity. Bitcoin is just a thing a guy made up 15 years ago. Its function as a store of value is almost purely self-referential: Not “this is worth $X because other people will buy it for $X because other people will buy it for $X because … [etc.] … other people think its cash flows have a present value of $X,” but “this is worth $X because other people will buy it for $X because other people will buy it for $X” all the way down.

Bitcoin is an astonishing social technology. It would, in the abstract, be useful for the world if there was just an entry in a computer database that we all agreed was valuable just because, with no reference to any underlying commodity or series of cash flows or industrial activity. Just a number that was valuable. And so someone invented it. Traditionally currency works sort of like that: The US dollar is this sort of social technology; it has value because it has value, not because it has cash flows. But there’s a whole ton of complex and long-standing social technology that goes into that; the US has a government and an army and an income tax and a debt stock and a trade balance, which help to preserve the value of the dollar.

Bitcoin expresses the thesis that it would be good to have a valuable database entry without that, just something was valuable because people on the internet voluntarily agreed it was valuable, with no government or army or taxes or anything else. And it worked! That did happen. It has value due to a broad voluntary market consensus based almost entirely on itself. In some sense that consensus is fragile — if a thing is valuable only because people think that it is valuable, it could stop being valuable when they stop thinking that — but in another sense that is true of any social fact: The dollar is valuable, the King of England is the King of England, the US is a liberal democracy, etc., exactly as long as those facts command social consensus. Bitcoin got to what seems like a pretty robust consensus in 15 years. That’s just neat.

Anyway, as expected:

US regulators for the first time approved exchange-traded funds that invest directly in Bitcoin, a move heralded as a landmark event for the roughly $1.7 trillion digital-asset sector that will broaden access to the largest cryptocurrency on Wall Street and beyond.

The Securities and Exchange Commission, whose three-part mandate includes investor protection, authorized funds from industry heavyweights BlackRock, Invesco and Fidelity to smaller competitors including Valkyrie to begin trading Thursday.

The approvals mark a rare capitulation by the SEC following opposition that lasted for more than a decade, ever since Tyler and Cameron Winklevoss first proposed a Bitcoin ETF in 2013. BlackRock Inc.’s surprise application last June, followed by an appeals court ruling that called the denial of a different application “arbitrary and capricious,” triggered a blistering rally in the cryptocurrency amid speculation that US regulators would finally give their blessing to the structure.

There is something pure about this, as Bitcoin news. A Bitcoin ETF is vastly less useful, as a payments mechanism or a way to supplant the traditional financial system, than just buying Bitcoin: Instead of an alternative peer-to-peer payments system in which everyone can hold their Bitcoins directly and transfer them to each other without middlemen, this is a crypto thing that you can hold in your traditional brokerage account and not use for payments at all. But it is more useful as a store of value: You can hold it in your brokerage account, where you hold your stores of value. You don’t have to mess around with an alternative financial system; you can just isolate the store-of-value component of Bitcoin and hold it directly. And so the price of Bitcoin ran up in anticipation of the ETF approvals, because everyone expected that the ETFs would lead to more people holding Bitcoin as a store of value. Which is the best reason for Bitcoin to go up.

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