The long-term case for bitcoin is being hit on all sides right now.
With bitcoin trading more than 65% below its peak, the debate sparked by previous down cycles about whether it can be a reliable long-term store of value will continue. Of course, one bitcoin is still worth over $20,000—and traditional reserves such as gold have had their own peaks and plunges. But the value proposition for now still lies in a series of speculative bets: that bitcoin will prove out as a store of value through future cycles; that it is a risk asset that can offer competitive returns compared with assets like stocks; or that it will turn out to be actually useful in important and sustainable ways.
What is concerning about this cycle, though, is that the world of bitcoin and crypto has evolved quite a bit since the last one, yet a crash is still happening. And this drop comes in the midst of perhaps the broadest U.S. regulatory push since crypto’s inception. One part of becoming a store of value is being very widely held, across a diversity of owners, and thus becoming less vulnerable to shocks. But bitcoin’s path there still goes through Washington.
For example, widespread ownership by individual investors might be most ensured through tax-protected accounts and retirement vehicles. Though it is feasible to own bitcoin in a retirement account, some big voices—including Treasury Secretary Janet Yellen—have urged caution against bitcoin as a retirement option for average investors. Ms. Yellen said it would be reasonable for legislation to address that.
Another major vehicle for long-term retail ownership would be a low-cost exchange-traded fund. Although U.S. regulators have approved ETFs that employ bitcoin futures, a spot-market bitcoin ETF hasn’t been approved. The Securities and Exchange Commission has said it would make a decision by July 6 on a move by the listed Grayscale Bitcoin Trust that owns bitcoin to convert to an ETF.
As for utility, bitcoin will have to vie with stablecoins—tokens designed to be pegged to the value of a currency like the U.S. dollar—such as USD Coin as a digital medium for payment or value exchange. Though stablecoins face their own big questions, a future regulatory structure could end up conferring some status to certain fully backed stablecoins. Banks—or even the Federal Reserve itself—may begin to issue and move “digital dollars” regularly.
Advocates of bitcoin say it also can be useful as a form of collateral and funding in other crypto ecosystems. But when there is volatility elsewhere in the crypto world, bitcoin gets caught in the maelstrom. Over $400 million worth of bitcoin pledged as collateral by traders has been liquidated from roughly Monday morning to Tuesday morning, according to data provider CoinGlass. Bitcoin’s 15% drop on Monday came after crypto lending platform Celsius Network halted withdrawals on Sunday. Earlier this year, the price of bitcoin sank as traders scrambled to deal with the collapse of the TerraUSD stablecoin.
Following these episodes, further regulation of cryptocurrencies, and crypto finance in particular, seems inevitable. This effectively makes any bet on bitcoin right now a bet on what the future regulatory regime for crypto will end up looking like. This is true not just for bitcoin itself, which may have a relatively settled status as a commodity, but for how it can be owned and traded, and who can offer crypto financial services under what terms. Before betting on anything in the crypto ecosystem now, investors must first ask themselves which aspects of crypto might even be legal in five years.
That is a lot of political risk for a hard-to-figure reward.
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Appeared in the June 15, 2022, print edition as ‘Regulation Lies in Bitcoin’s Future.’
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