Copying and distributing are prohibited without permission of the publisher.

Watermark

Institutional investors look set to suffocate bitcoin’s radical past

Adobestock_Blockchain_575x375_Oct20
By Lewis McLellan, Silas Brown
12 Jan 2021

The emergence of institutional money into bitcoin is the death knell for its revolutionary dreams of a decentralised economic system.

In its early years, the world of cryptocurrencies was defined by their creators: a ragtag band of financial outsiders — often libertarian, always hostile to central banks, suspicious of their tendency to print money in a crisis and fierce believers in the power of technology to change the future.

No collective was more influential to bitcoin’s creation than the Cypherpunks, a loosely knit group of radicals with ideals formed in the 1970s and 1980s. They were obsessed with privacy and worried that without sophisticated cryptography the internet would become an Orwellian nightmare. 

Eric Hughes, a mathematician who co-founded the movement, authored a Cypherpunk manifesto in 1993, which begins with the sentence: “Privacy is necessary for an open society in the electronic age.”

Hughes, who met with other co-founders monthly in the early 1990s in San Francisco, felt privacy was a precursor to a free society. Before too long, he feared, nation states would understand the importance of the internet and look to control it.

“We cannot expect governments, corporations, or other large, faceless organisations to grant us privacy out of their beneficence," the manifesto stated. "It is to their advantage to speak of us, and we should expect that they will speak... We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.”

Their influence on bitcoin is plain to see. Satoshi Nakamoto’s cultish white paper introducing bitcoin in 2008 points to crypto-creations by Cypherpunks like Adam Back as influences. The mysterious Nakamoto’s intention was not just to make online payments more efficient, but to cut out financial institutions that acted as middlemen, and in doing so, create an economic system that could operate without compromising privacy. 

Much of bitcoin’s early appeal stemmed from its commitment to the ideas of the Cypherpunks. Believers championed a decentralised currency protected from government interference and control. 

Worth its salt?

Among the early supporters still involved in bitcoin, these ideas live on. Last week Max Keiser, a pugnacious host on RT, formerly known as Russia Today, and an aggressive advocate of cryptocurrency, went on a podcast to reveal his price target for Bitcoin by the end of 2021. Right at the start, Keiser held up a box of salt and asked what salt has to do with Bitcoin. 

“The British Empire was defeated by Indians under Mahatma Gandhi because they made their own salt,” said Keiser. “Back in 2009 it was the Cypherpunks and everyone who was objecting to central bank authoritarianism who got together and said we’re going to make our money, it’s called bitcoin. It’s passive resistance and it will topple the central bank empire.”

The idea of creating an economic system that operates without central bank supervision is more radical than ever, given how reliant the global financial system has become on loose monetary policy. But that doesn’t mean it is any less popular.

Many look at the universe of negative yielding assets, and the global dependence on quantitative easing and see a failed system. For many of them, bitcoin offers the most plausible alternative.

Keiser and his ilk look at bitcoin’s rocketing market capitalisation and conclude that we are on a journey to “bitcoin maximalism” — a system where bitcoin dominates the world and is used in preference to any other currency, crypto or fiat. 

But bitcoin’s price is no indication that it is moving towards any such system. 

Bitcoin’s latest increase in value is credited to a combination of a long heralded influx of institutional cash from the likes of US insurance giant MassMutual, which bought $100m worth of bitcoin, it emerged in December, as well as the likes of Stanley Druckenmiller, Paul Tudor Jones and the payments firm Square. The most beloved is MicroStrategy, which invested nearly $500m last year. These firms, reassured by rules imposed by regulators on the cryptocurrency over the course of the past few years, have piled in. 

Whether these firms have serious price targets for bitcoin, or believe in its dubious value as an inflation hedge, is unclear, but given the famous illiquidity of bitcoin, big purchases like this can have profound effects on the price, as can their eventual exits. 

With institutional money causing price jumps, retail buyers catch a bad case of FOMO and dive into its wake.

Tokenism

But while they’re good for bitcoin’s market cap, both of these groups are looking at a bottom line in regular old fiat money. Institutional buyers of bitcoin are not buying into the idea that bitcoin is money. They certainly won’t pay their stakeholders in bitcoin. 

More importantly, the average punter taking a shot at bitcoin ownership is hoping to cash out at a higher dollar value than they put in. Very few are storing them in a way that they could actually be spent conveniently.

And then there's the government. While the US authorities may want to tax your capital gains made via bitcoin, it will certainly not accept bitcoin as payment of tax. It is extremely difficult for anything to supplant the status quo as a new form of money without being acceptable as tax.

In other words, bitcoin is becoming just another asset; just another investment opportunity and perhaps, just another bubble.

There seems to be a wilful blindness from many early supporters about why these larger institutions, billionaires and day traders are flocking to it. It is highly unlikely MassMutual is seeking to hasten the demise of fiat currency, and so surely some bitcoin advocates should be sceptical of its support. 

Arguments some new supporters make for bitcoin — that it’s a hedge of inflation or a store of value  — are also not buying into the vision of bitcoin's early supporters.

The Cypherpunk ideals of privacy and decentralisation are not dead. In fact, from regulation to capital markets fintech, they are being applied to create new, efficient systems and procedures. But none of it contributes to the downfall of central banks, nor to the disintermediation of financial middlemen.

Stripping away the rhetoric and ideology, bitcoin is a payments system, and not even a very good one. Fees and delays make it an impractical and expensive choice — hardly a competitor for Visa. And avoiding these via technical workarounds like the lightning network means compromising the distributed ledger. 

Even as a means of providing privacy, it has been superseded by younger, stealthier cousins like Zcash.

Bitcoin as a payments system already feels like a dinosaur. The future of bitcoin will likely be defined by those with the largest stakes in it, and that looks set to be institutions which see it as a store of value; a speculative asset. That may not sound like the death knell for bitcoin's latest price boom, but it delivers a pretty fatal-looking blow to its founders' revolutionary dreams. 



By Lewis McLellan, Silas Brown
12 Jan 2021