Straight to the point

Is Bitcoin back from the dead? A year ago, Bitcoin — and “crypto” in general — was in a parlous state. A series of major scandals, including the FTX collapse, had investors running scared and regulators on a warpath. The Securities and Exchange Commission (SEC) launched numerous full-bore attacks on crypto companies, and even blamed crypto for a short-lived banking crisis last summer. The public perception of digital assets was also in the toilet, and politicians, fearing reputational contagion, wanted nothing to do with them (this was in stark contrast to early 2022, when a third of the US Congress took money from a certain Sam Bankman-Fried).

Critics, not unreasonably, said crypto had failed to offer compelling use-cases, beyond speculation. They said it was a cesspit of money laundering and terrorism (its involvement in the latter tends to be vastly overstated). They said it was dangerous for the environment. They said it could never become part of the financial system, because key financial players on Wall Street would never accept it. Some even dared to bid a valedictory “Sayonara”, as they have hundreds of times before now.

Yet today, Bitcoin is trading at around $70,000, above its previous all-time-high of about $69,000. The world’s premier cryptocurrency now has a market cap greater than silver, and many expect it to reach parity with gold within a few months. Meanwhile, the rest of the crypto market, which slumped along lifelessly for much of 2023, isn’t far behind.

So, what’s going on here? What sparked Bitcoin’s resurrection? The truth is there are five principal reasons behind its revival, the first of which may seem rather obvious…

1. You can’t kill Bitcoin

It’s awfully difficult to eradicate something like Bitcoin. Its network is peer-to-peer and decentralised, with roughly 18,000 public nodes working to validate and maintain the network daily, and they work independently. There isn’t a central point of failure or vulnerability for someone or something to stop. It’s a self-perpetuating system. And, more importantly, Bitcoin has tremendous latent support in the world: there are more than 100 million Bitcoin holders globally and, characteristically, they do not respond to political pressure. Since its emergence 13 years ago, Bitcoin has purred along efficiently, steadily growing, even in the face of massive competition and numerous hacks (particularly to exchanges and individual wallets).

This resilience isn’t directly connected to price; Bitcoin can be resistant without the price going up. But the price is based on this sense of permanence. It’s a function of everyone knowing with certainty that the Bitcoin code can’t be changed and that the issuance of new Bitcoin isn’t a political matter. Unlike fiat currencies, which are subject to central bank issuing more or less of a currency depending on the economic circumstances, the issuance of Bitcoin is predictable. That’s a unique selling point in a world where everything, even money, is increasingly politicised.

2. The arrival of ETFs

Though the Bitcoin industry takes pride in its outsider status, it has long sought mainstream support, whether from regulators or blue-blood institutions. This January, after 10 years of trying, it hit the mother lode, winning SEC approval for Bitcoin exchange-traded funds, or ETFs. These vehicles, which helped to popularise gold in the 2000s, allow everyday investors to buy into Bitcoin as if they were purchasing a conventional stock. There’s no need to own the underlying asset or to store it oneself.

This convenience is propelling a whole new generation of customers to buy into digital markets via trusted names such as BlackRock and Fidelity. Recently, daily inflows to 10 approved ETFs averaged more than $1 billion, and analysts expect more than $200 billion in trade for Bitcoin in the next couple of years. If so, crypto will have a strong underpinning, helping it to weather regulatory storms and inevitable crises. And the Bitcoin ETFs are just the start. Many expect regulators to approve Ethereum ETFs in a few months and that, eventually, wealth managers will allocate up to 5% global savings to digital assets. Bitcoin is the gateway drug: once people hold Bitcoin in an ETF, the thinking goes, they’ll move on to more exotic digital asset investments later.

3. Regulation works

People in crypto tend to hate regulators and regulation, believing that people and institutions should be able to transact freely. They complain about regulatory interference in general and particularly about the type of intervention we’ve seen over the past year from the SEC. The lack of new legislation governing crypto in the US has led to a series of arbitrary enforcement actions by that agency, leading to a deep sense of mistrust across the Bitcoin ecosystem.

However, regulation can also be a useful tool for industries seeking acceptance. The trial and prosecution of Sam Bankman-Fried last November created a sense of clearing-house, of past failures being put to bed. Finally, many Bitcoiners believe, we can all move on. Meanwhile, the EU passed its comprehensive MiCA legislation regarding crypto, creating greater regulatory certainty within the bloc and showing other jurisdictions the way forward.

4. Elite approval

If you want a cast-iron indication of the new mood around Bitcoin, look no further than Donald J. Trump. Back in 2021, Trump said that Bitcoin was “a scam” that undermines the dollar’s place as the world’s reserve currency. But now he says, if he’s re-elected, he wouldn’t seek to ban it. “I have seen there has been a lot of use of that,” Trump said recently. “I’m not sure that I’d want to take it away at this point.”

Nor is Trump the only high-profile convert. BlackRock CEO Larry Fink has also U-turned, recently backing an Ethereum ETF to go with his company’s Bitcoin ETF. Even, the Financial Times and the New York Times, liberal institutions that have routinely amplified the routine criticisms of Bitcoin, are noticeably more accommodating these days, running approving articles to go along with all the jeremiads. (That said, central bankers, who have the most to lose from Bitcoin becoming serious money, are still lockstep against Bitcoin, even in the face of ETF mania.)

5. The world is going to end

The less palatable reason for Bitcoin’s rise is that it’s a hedge against very bad things happening. Bitcoin is “disaster insurance” in a world where traditional monetary mechanisms break down. People buy it because they don’t trust central banks. That’s why more than half the adults of Turkey, to take one example, own Bitcoin: because they think it will hold its value better than the Lira.

In this way, Bitcoin is the strangest of exotic assets: its price is both an indication of financial health in capital markets, but also an indicator of deep unease with the current social settlement. On the one hand, the mainstream approval of Bitcoin arguably makes us safer because capital markets are broader-based and people are diversifying into new categories. On the other, its resurgence shows that many people are concerned that the conventional financial system — and, by extension, the broad social system it is based on — is going to fail. They want to “exit” and find something that isn’t controlled by a few dozen middle-aged white men in suits. They want decentralisation away from narrow elites controlling our lives, whether it’s Wall Street, the Federal Reserve or Big Tech.

Having said that, the demise of today’s financial system, long foretold following the 2008-9 financial crisis, hasn’t happened yet. For now, we have the curious situation of mainstream financial institutions marketing the hell out of an asset that was once created to outrun and destroy them. The question is whether this uneasy situation continues indefinitely. Will the mainstreaming of crypto mean it’s sanitised of political and social meaning; that it becomes just another financial asset? Or will Bitcoin’s success lead where hardcore Bitcoiners have always wanted to go? For now, we don’t know whether the promises of global financial revolution made by some of Bitcoin’s more Jacobinical founders will materialise. But, even as it takes another tumble, with some of the new investor funds from early this year going into reverse, we can be sure of one thing: reports of its death were greatly exaggerated.

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Source: UnHerd Read the original article here: https://unherd.com/