Opinion
Crypto going mainstream could amount to a kiss of death
Summary
- Its hollow value stands exposed while its rebellion power weakens. It is no longer an insurgent idea that challenges state-run monetary systems, but just another asset.
Two big things have happened in the crypto world this month: a public validation and a semi-private snub. Both of them bode poorly for its future. The official validation came in the form of the Securities and Exchange Commission (SEC) approval of a Bitcoin ETF, which will make it easier for speculators to invest in this cryptocurrency. The slight came at this year’s World Economic Forum (WEF), which I attended, and where Bitcoin—or any crypto, really—was clearly on the outs. Last year, crypto was everywhere in Davos. This year, the star of the show was artificial intelligence (AI). Crypto, like me, didn’t even know about all the really good parties, much less get an invitation.
These may seem like contradictory developments: On one hand, a Bitcoin ETF legitimizes crypto as an asset class. On the other, the annual jamboree of the elite establishment has all but banished the crypto community. Both are indicative of the fact that, as an asset class, crypto has gone fully mainstream—which means it has peaked.
Crypto has defied expectations thus far. Its price soared even though it was never clear what its value was. As Eugene Fama, the father of modern finance, recently said: “Unless it becomes a widely used medium of exchange, Bitcoin should eventually implode. The alternative is that all I learnt from monetary theory about how currencies acquire value is meaningless."
He has a point. Cryptocurrencies don’t pay dividends, and a currency that is not backed by a government has no intrinsic value, because it has no claim on real assets. The technology may have worth as a way to facilitate payments, but that is not enough to justify its current value.
True, any specific coin is in finite supply. In theory, this should make it a hedge against the dollar. But many things are finite supply—Franklin Mint collectibles, for example—and no one thinks they are worth billions of dollars. Besides, it is hard to argue that even Bitcoin, the most established of these coins, is a good hedge of anything when it is so volatile. It is much more volatile compared to the dollar (the asset it is meant to hedge) or the stock market, which is a better inflation hedge.
Investing in crypto to hedge dollar risk is like flooding your house to insure against the chance of a fire.
The best use-case appears to be in the black market or in a country with a failing currency. That was always the appeal. Crypto was edgy and rebellious, something outside the mainstream, and maybe it could be used as insurance against the remote chance the entire US economy would fail (but not so completely that it wouldn’t be able to provide the computing power to access your digital wallet).
In this sense, crypto going mainstream is a kiss of death.
Bitcoin is now a regulated asset that can be bought on an exchange. So what’s the point now? There is nothing edgy or rebellious about an SEC-approved ETF.
And the market is slowly imposing its brutal reality. The price of Bitcoin has fallen with each step toward the financial mainstream. The first CBOE Bitcoin futures started to trade in December 2017; the Coinbase IPO was in April 2021, and now there is a Bitcoin ETF. For a normal asset, you would not expect the price to fall, since each of these developments should attract new buyers and improve liquidity. But the opposite happened.
The recent decline of about 20% is being blamed on technical reasons or high fees and bankrupt FTX selling its assets. But the price of crypto falls every time it becomes more accessible for two reasons. First, being traded on public markets means more information is incorporated into its price, and markets are saying it is not worth much. Second, the very fact that crypto is now a mainstream asset changes its initial value proposition: It is no longer part of an ‘outsider’ asset class that could overtake a major government function.
Bitcoin’s price may never implode, as Fama predicts, and there might even be a few more price spikes ahead. But this is no longer the Bitcoin of 2021. And its decline since being traded on public markets does appear to validate the efficient-markets hypothesis that made Fama famous. Going mainstream has revealed its true value. Now it is just another asset class, about as exciting as a bond fund, just more volatile and with far less ability to diversify its risk.
Speaking of mainstream: What could possibly be more ordinary than being snubbed at the WEF? Crypto has gone from being hailed as the solution to all our problems to just another dull asset.
I didn’t necessarily know where all the best parties were in Davos, but I can pretty much guarantee that crypto wasn’t invited. Next year, crypto, if I’m invited back, you can be my plus one. ©bloomberg
