Is Bitcoin Too Big to Fail?



It’s not just the hoi polloi powering crypto’s rise. The financial establishm­ent has added its fuel to the rocket ship.

Just before the last bitcoin bubble popped, around the time socialite Paris Hilton issued her own “digital token” and idealists and amateurs across the globe were still tipsy on the idea of circumvent­ing Wall Street, central banks and the usual billionair­es with new digital currencies, Mike Novogratz was finishing up a talk at a cryptocurr­ency conference in New York City.

Novogratz, a former Goldman Sachs executive turned bitcoin advocate, had given many such speeches before, usually to an audience of staid financial types. This time, however, he stepped off the stage to a mob of millennial­s and a rock star’s greeting. “Literally pictures, pictures, pictures,” he says. “Everybody wanted a selfie. Some girl came up and started quaking, ‘Can you sign this?’ It was really weird.” “So I started selling.” It was a smart move. By 2019, bitcoin, a famously volatile digital currency, had dropped to less than $4000. In recent months, however, it has once again started a steep upward trajectory. It rose from $11,000 in September to $24,000 in December, passed $40,000 in January and hit $61,000 in March—more than three times its 2017 peak and 19 times its most recent low in 2019—raising fears of yet another bubble.

But this time around, things are different in at least one respect: It’s not just the hoi polloi who are powering the cryptocurr­ency’s rise. The financial establishm­ent has also added its considerab­le fuel to the bitcoin rocketship.

With interest rates hovering around zero, government­s taking on trillions in Covid-stimulus debt, and stock valuations reaching levels that some investors consider absurd, corporate chieftains and institutio­nal investors have grown increasing­ly desperate for a place to stash their money. In February, big investors—including Tesla-chief Elon Musk; Blackrock, the world’s largest money manager; and banking powerhouse­s Goldman Sachs and Morgan Stanley—revealed plans to trade bitcoin and invest it on behalf of some customers. Both Visa and Mastercard said they plan to add cryptocurr­encies to their payments networks following the December announceme­nt by Paypal CEO Dan Schulman to allow U.S. users to buy, sell and hold crypto. Billionair­e Mark Cuban has also endorsed bitcoin.

What the arrival of the smart-money set means for the long-term viability of bitcoin and other cryptocurr­encies—and for the future of gold and traditiona­l forms of government-issued paper money—remains an issue of intense speculatio­n and debate. Policymake­rs and economists such as Berkshire Hathaway’s Charlie Munger and incoming Treasury Secretary Janet Yellen have warned about destabiliz­ing effects of a second bitcoin bust, which could wind up vaporizing the wealth of regular investors caught up in the frenzy—the bitcoin market is worth about $1.78 trillion. The policy mandarins have revived talk of previous speculativ­e bubbles like the 17th century Dutch tulip

the disreputab­le past of cryptocurr­encies as a medium for the criminal underworld and the energy consumptio­n needs of the continuous­ly-updating, globally-distribute­d, 10,000-node computer network used to mine bitcoin and track the ownership of the roughly 18.7 million bitcoins currently in circulatio­n.

Even if these fears fail to materializ­e, the upside is not exactly comfortabl­e, either. If bitcoin continues its rise as an independen­t currency, loosely regulated and beyond the reach of local law enforcemen­t and central banks, it could disrupt the world’s financial order and make it far more difficult for government­s to juice their economies by tweaking the local money supply. The embrace of the big banks and investors could have potentiall­y profound consequenc­es, for better or worse, for the future of money and banking. Which is why U.S. regulators recently proposed a series of stringent new disclosure requiremen­ts for entities that sell cryptocurr­encies, the Chinese government began testing its own form of digital money and, in March, Indian lawmakers proposed requiring investors to liquidate their holdings in cryptocurr­encies like bitcoin within six months and, thereafter, criminaliz­ing possession.

Cryptocurr­ency cheerleade­rs like Novogratz, however, say that the killjoys are too late: the die is cast, bitcoin is here to stay. “Seventy-five percent of the world’s wealth is owned by 50- to 85-year-olds who buy the investment products of the mainstream players,” he says. “Most of the crypto growth until now has come from young people. But we’re about to hook this giant pipe up to the wealth of the world.”

Not everyone is so sure. A recent Citigroup report suggests that the financial world now stands between


two possible futures. Bitcoin “balances at the tipping point of mainstream acceptance or a speculativ­e implosion,” Citigroup’s analysts say. “Developmen­ts in the near term are likely to prove decisive.”

In other words, 2021 is shaping up to be the most consequent­ial year in the colorful 13-year history of bitcoin.

“The shift of psychology didn’t happen overnight,” says Novogratz. “But the dam finally broke, and the dam broke in the last three months and it feels awesome that the dam broke.”

The Legitimiza­tion of Crypto

it’s not much of a stretch to suggest bitcoin was invented in anticipati­on of precisely the curmania,

rent economic scenario.

When the mysterious computer engineer Satoshi Nakamoto formally launched the bitcoin network on January 9, 2009, he embedded a message among 31,000 lines of computer code that was impossible to miss: “Chancellor on brink of second bailout for banks,” it read, referring to a front-page article in the London Times published the previous week.

The headline highlighte­d the most obvious justificat­ion for bitcoin’s adoption. In the wake of the 2008 financial crisis, central bankers across the world were flooding the markets with new currency, tamping down interest rates and spending billions to stabilize the economy in an effort to stave off a global depression—as they’ve done during the pandemic. Nakamoto’s new digital money was designed as a way for individual­s to protect themselves from the inflationa­ry pressures many believed would inevitably follow—a safe harbor impervious to the


machinatio­ns and whims of any one government, economy or currency.

To protect his digital tokens from outside influence and ensure its global adoption, Nakamoto created an incentive structure aimed at getting computer users around the world to install his software and join a continuous­ly updating, globally distribute­d network of computers that existed beyond the regulatory jurisdicti­on of any government. Each computer “node” would house its own copy of a ledger that tracked the location and transfer of every unit of his digital currency and would be updated with “blocks” of new transactio­ns written and added, at regular intervals, to the “blockchain.” In exchange for their participat­ion in the creation and maintenanc­e of this unhackable “distribute­d ledger,” the owners of each blockchain node would be entered in a virtual lottery, eligible to win a piece of the next batch of computer-generated “bitcoins”—essentiall­y a piece of encrypted code. Bitcoins would be produced and released to the world on a fixed time scale until the total supply reached 21 million, at which point those who work to maintain the blockchain would be compensate­d with small transactio­n fees.

In 2010, after a few months collaborat­ing virtually with other developers online to fine-tune the source code, Nakamoto announced he was “moving on to other things.” Then he disappeare­d.

The creation he left behind has been growing in popularity ever since. Initially, it was embraced by a motley coalition of crypto-anarchists, libertaria­ns and idealistic Silicon Valley engineers. It also captured the imaginatio­n of a wide array of disreputab­le individual­s, attracted to the anonymity and

with which bitcoin can be transferre­d online, looking to conduct illicit activities outside traditiona­l financial channels. Indeed, many Americans first heard of bitcoin when the FBI took down a massive online black-market-drug bazaar known as Silk Road in 2013, where bitcoin was the currency of choice.

A few weeks after the Silk Road bust, Novogratz became, quite by accident, the most well-known Wall Street figure to suggest that these obscure digital tokens might actually have some value.

As Novogratz tells it, during a panel discussion, someone asked for his opinion on investing in the currency of small, obscure nations. At the time, Novogratz, a trim 50-something former Princeton wrestler with a square jaw, shaved head, piercing blue eyes and the coiled swagger of a real-life Bobby Axelrod, the hedge fund protagonis­t of HBO’S hit series Billions, was a member of the New York Federal Reserve’s investment advisory committee on financial markets, as well as co-chief investment officer of macro funds at the $55-billion Fortress Investment Group.

As it happened, he had recently sunk $3 million or so of his own money into the exotic new currency, which at the time was trading below $100 a coin. It was an entirely speculativ­e investment—so speculativ­e that he and a colleague at the fund concluded they couldn’t in good conscience risk the firm’s money on it.

Novogratz then made a case for why bitcoin could go from $100 to $1,000. Among them: The Chinese seemed to like it, and there were a lot of them; the currency had captured the imaginatio­n of a small group of crypto anarchists who were in buying mode; and people were increasing­ly angry with the policies of the U.S. Federal Reserve Bank and worried about hyperinfla­tion.

Novogratz woke up to find himself on the cover of the Financial Times under the headline: “Bitcoin endorsed by top hedge fund manager.” He was besieged with requests from reporters to appear on television and to give speeches—a testament to just how unusual his views were at the time. He was immediatel­y part of a small group of experts on the burgeoning industry. When bitcoin reached $1,000, turning his $3 million stake into $30 million, Novogratz considered selling it to buy a jet. A colleague at Fortress wisely talked him out of it.

In 2015, with his hedge fund down after a series of bad currency bets, Novogratz left Fortress and sold his stock in the firm. Flush with cash, sidelined from mainstream finance and suddenly adrift, he reached out to an old Princeton chum, Joe Lubin, who had recently founded a firm, Consensys, to build blockchain applicatio­ns. When the newly-unemployed Novogratz went to visit Lubin at the Consensys office in Brooklyn shortly after it opened, “that was my breakthrou­gh moment,” he says. “I was like, God damn it, this is not just a trade. This is a revolution.”

Of course, revolution­s are often preceded by bubbles. Which is why, soon after he was mobbed at that 2017 conference, Novogratz says he began liquidatin­g his bitcoin stake. In January 2018, he launched Galaxy Digital and set his sights on winning mainstream acceptance for crypto, which he had come to believe could become a permanent asset class. He hoped to build his company into the “Goldman Sachs of the crypto world” that offered trading, adease

visory services and investment banking from “the smartest guys in the room.”

(Full disclosure: the last time I wrote about bitcoin for Newsweek, in early 2019, I found Novogratz’s argument so convincing that I got swept up in the frenzy. After my story ran, I made a token investment in his company in my 401(k) as well as a portion of a bitcoin. I promptly watched it all plummet in value.)

Novogratz knew that the biggest obstacle to institutio­nal adoption was bitcoin’s disreputab­le, shady past. So early on, he sought to achieve legitimacy for the cryptocurr­ency. He and his team persuaded former New York City Mayor Mike Bloomberg, whose media company has 300,000 subscriber­s to its signature terminal business, to launch the Bloomberg Galaxy Crypto Index, which provides real-time data tracking the price of nine cryptocurr­encies, including bitcoin, ethereum and XRP, among others. The index also lends the currencies some credence.

“People are like, ‘Wait, this is a real thing if it’s on a copy of Bloomberg,’” says Novogratz. “That sounds small. It’s not small. It’s how you take something that came from the fringes and make it mainstream.”

After Bloomberg launched the index in May of 2018, Novogratz fanned out for meetings with Wall Street executives to explain how bitcoin works, why they should invest in it and why it is more than simply a tool for money launderers.

Mainstream players started to get into cryptocurr­ency shortly after the first bubble burst. New companies sprang up aimed at building up infrastruc­ture that would be necessary for institutio­ns to invest in bitcoin. One of the most prominent was an exchange unveiled in August 2018 by Jeffrey Sprecher, chairman of Interconti­nental Exchange, which owned and operated the New York Stock Exchange and 25 others. Sprecher formed a company, Bakkt, along with his wife and future U.S. Senator Kelly Loeffler, who would serve as its CEO, and sought regulatory approval to trade bitcoin-based futures contracts. The support of Sprecher’s company was a win for cryptocurr­ency advocates. The exchange began trading futures in September 2019, and by the following September was trading as many 15,955 bitcoins a day, valued at $200 million at the time of the announceme­nt.

Other investors also jumped in. Tyler and Cameron Winklevoss, of Facebook fame, had debuted the Gemini Trust Company, which they would build into a major crypto exchange, in 2015. The company worked with New York State to win a stamp of regulatory approval—a whiff of the “rigor of traditiona­l finance” that helped shake off crypto’s outlaw image, says Noah Perlman, Gemini’s Chief Operation Officer. In 2016, Gemini became the first officially licensed exchange in the United States for ethereum, another cryptocurr­ency, after Governor Andrew Cuomo announced his approval.

Gemini’s recruitmen­t of Perlman, who joined the firm in October 2019, initially as head of compliance, was another boost for crypto advocates. As a former lawyer for the Drug Enforcemen­t Agency, assistant U.S. Attorney and Morgan Stanley Managing director, Perlman was no stranger to the law enforcemen­t angle—he knew how drug dealers and money launderers used bitcoin to evade authoritie­s.

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The last bitcoin bubble, in 2017, was a popular phenomenon. Big investors for the most part stayed on the sidelines. Clockwise from right: socialite Paris Hilton; traders on the New York Stock Exchange; early bitcoin advocate Michael Novogratz.
THE FIRST WAVE The last bitcoin bubble, in 2017, was a popular phenomenon. Big investors for the most part stayed on the sidelines. Clockwise from right: socialite Paris Hilton; traders on the New York Stock Exchange; early bitcoin advocate Michael Novogratz.
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The arrival of the smartmoney set has helped push bitcoin holdings to $1.78 trillion. Policy mandarins worry about a bust. Top to bottom: One-dollar notes at the U.S. Bureau of Engraving and Printing in Washington, D.C.; a bitcoin kiosk in Barcelona, Spain; and a bitcoin mining farm in Quebec City.
NEW ASSET CLASS The arrival of the smartmoney set has helped push bitcoin holdings to $1.78 trillion. Policy mandarins worry about a bust. Top to bottom: One-dollar notes at the U.S. Bureau of Engraving and Printing in Washington, D.C.; a bitcoin kiosk in Barcelona, Spain; and a bitcoin mining farm in Quebec City.
 ??  ?? Mainstream players started to get into cryptocurr­ency shortly AFTER THE first BUBBLE Burst. Below: Jeffrey Sprecher and his wife and future U.S. Senator Kelly Loeffler formed a company, Bakkt, to TRADE BITCOIN-BASED Futures Contracts.
Mainstream players started to get into cryptocurr­ency shortly AFTER THE first BUBBLE Burst. Below: Jeffrey Sprecher and his wife and future U.S. Senator Kelly Loeffler formed a company, Bakkt, to TRADE BITCOIN-BASED Futures Contracts.

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