Receive the latest updates for free
Simply subscribe to the Cryptocurrency myFT Digest and get fresh content delivered directly to your inbox.
The writer is a software developer and the author of “Popping the Crypto Bubble”.
Do you remember when cryptocurrencies were hailed as a possible replacement for traditional finance? It seems that history has taken a different route. With Bitcoin now exceeding $85,000 and effectively doubling in value over the last year, we are confronted with what can be termed the “institutional legitimacy paradox.”
It’s intriguing to note how history has unfolded. Initially designed as a peer-to-peer electronic currency system that aimed to remove financial intermediaries, Bitcoin is now predominantly traded through funds overseen by those same entities it set out to bypass.
The significant drop in cryptocurrency values two years ago reaffirmed the doubts of skeptics, including myself, who argued that crypto investments were merely speculative bubbles fueled by easy capital and pandemic-related hype. The spectacular failure of FTX, coupled with rising interest rates, seemed to mark the end for crypto’s mainstream aspirations.
Yet here we are in 2024, observing what can only be described as a strange revival.
This resurgence is distinct from past peaks of Bitcoin. This time, both retail and institutional investors are rallying, with UK pension funds and asset managers in the City starting to test the waters with cryptocurrency investments. BlackRock’s Spot Bitcoin Exchange Traded Fund has attracted billions, raising concerns about its shift towards “respectability.”
Instead of exploring cryptocurrencies’ revolutionary potential, the financial sector’s engagement with them seems more focused on generating fees from what ultimately is speculative trading, undermining the original concept of disintermediation.
Moreover, regulatory bodies have failed to implement essential safeguards to address issues related to transparency, manipulation, and systemic risks. We currently find ourselves in a vulnerable situation, characterized by fragmented and inconsistent oversight among differing institutions, lacking coherent guiding principles for policy.
It is crucial for organizations to understand and harness virtual currencies. Bitcoin’s ambitious vision of a financial system without reliance on trust has been distilled into a mere entry in the ledger managed by the Depository Trust & Clearing Corporation, a major clearinghouse for nearly all stock transactions in the U.S. Thus, technologies once intended to bypass traditional systems have morphed into just another product controlled by the establishment.
The ramifications for pension funds and their future beneficiaries, including those of us who aspire to retire someday, are concerning. Despite a modest allocation to cryptocurrencies at present, precedents are being established. Trustees face growing demands to incorporate crypto into a “modern” investment portfolio.
This is in spite of the fact that the foundational aspects of cryptocurrencies remain unchanged. They continue to lack cash flow generation, possess no intrinsic worth, and are predominantly influenced by retail market sentiment.
More alarming scenarios could lie ahead. With a new U.S. administration promising deregulation, we could find ourselves in a situation where past misdeeds of FTX appear minimal by comparison.
Without substantial oversight, institutional investors might create intricate financial instruments that combine and recombine digital assets into synthetic products, introducing both financial and technological risks in obscure ways.
The next downturn in the crypto market, which is likely to occur, may affect retirement funds and institutional portfolios in unprecedented manners.
The current upswing in cryptocurrency value doesn’t lend credibility to their intrinsic value; rather, it highlights a more unstable reality. The financial sector’s embrace of cryptocurrencies seems to be an unending endeavor to convert speculative fads into fee-producing products.
