Alternate currency that never was
The irony is delicious. Bitcoin, biggest of the cryptocurrencies, was heralded as a technology that would set us free from the sclerotic institutions of a fetid financial system: central banks, commercial bank oligopolies, bought-and-paid-for regulators.
Instead, as an alternative medium of exchange, bitcoin has gone nowhere. It has thrived only as a speculative asset. In that capacity, trading in bitcoin is being pulled slowly into the very edifice it was meant to pull down.
It started in December when two big exchanges, the CME Group and the Cboe Global Markets, launched bitcoin futures trading operations. This week, the assimilation continued: Goldman Sachs, most prestigious of the major Wall Street banks, announced it would do likewise and is looking into the direct trading of bitcoin. The New York Stock Exchange is reportedly setting up an online platform for buying and holding bitcoin.
Why would major institutions support the trading of an asset with no intrinsic nor aesthetic value, no government backing, and is a nearly useless medium of exchange? Only one reason: clients are asking for the service.
This is fine. Goldman and the New York Stock Exchange facilitate trading wherever there is demand for a market. Are credulous cryptocurrency investors going to get hurt? It seems likely. But so long as bolstering the market does not increase systemic risk, that is not a problem for the public or regulators to worry about.
As of now, bitcoin is too small to pose a systemic risk. Its market capitalisation is $156bn, half what it was in December, before some of the froth blew off. To the degree the market is rational, figure this will eventually be at zero, and there will be no systemic risk whatsoever.
That said, major financial companies getting in on the trading of a nonsense asset is disquieting. It is just the kind of speculative activity, unrestrained by common sense, that one would expect to see at a market top. Don’t worry about bitcoin. Worry about everything else. London, May 9