Your retirement accounts had a horrible, no good, very bad Monday. The S&P 500 fell by more than 3 percent by midafternoon, the Nasdaq for big tech stocks by 4 percent, and the morale of people who furiously refreshed their brokerage accounts by an even deadlier 45 percent. Also, Bitcoin—the standard-bearer for crypto and the token that tends to affect and reflect sentiments about crypto as a whole—had fallen by 9 percent.
Over the past five years, there have been months when stocks and crypto have moved almost in lockstep and months when they’ve sprinted away from each other. The past 30 days have seen a gradual convergence, and maybe that will keep up for the long haul, or maybe stocks and Bitcoin will split up again.
Bitcoin had already gotten very stocky this year in ways that have nothing to do with returns relative to the market. There will be bad days for stocks that aren’t bad days for Bitcoin, but owning Bitcoin is increasingly the same thing as owning stock. The early Bitcoin boosters who wanted it to be decentral, set off from the world’s financial system, lost that battle years ago. Any belief that Bitcoin can live on its own, insulated from whatever is driving the rest of the world’s financial markets every day, now looks ridiculous. On previous market-shaking days, it was reasonable for crypto holders to steel themselves with reminders that crypto’s fundamentals were totally different from those of the stock market. That was already outdated, and it feels even sillier after the worst day for U.S. stocks in a few years turned out to be an even gnarlier Bitcoin day as a matter of percentage losses. Congratulations, Bitcoin heads, on being part of the financial system. And sorry about being part of the financial system.
Decentralization was at the core of Bitcoin’s initial value proposition, from the first white paper about the cryptocurrency in 2008. Its existence outside the infrastructure of governments and central banks was crucial. (In theory, this would allow repressed or disadvantaged people to send each other money easily. In practice, it has meant occasional day-to-day use and also a lot of use connected to crime.) But the decentralization promise has been under attack for more than a decade, as people who started out as crypto purists have realized that the only way to grow the enterprise is to make it easier to hold. Not everyone wants to manage something called a “private key,” but having a Coinbase account is easy.
So now a lot of private keys are not on flash drives but on exchanges that look a lot like stock brokerages at the point of service. Last fall, Coinbase held about 5 percent of the bitcoins in circulation. A handful of exchanges appear to have more than that. A few whales have maintained enormous holdings, but most of the people who own bitcoins (or fractions of bitcoins, more accurately) have entrusted them to a handful of companies, not any different from people who keep their stocks with Fidelity or Vanguard.
The decentralization pillar crumbled long ago, and with it went one of the big differences between owning crypto and owning stock. Decentralized crypto meant that it would be quite hard for one institution’s failure to destroy the currency’s value. Centralized crypto meant that when Sam Bankman-Fried’s FTX collapsed in on itself like a star in 2022, it weighed on whole crypto markets for a year. Crypto had no insulation from one bad actor in the market peeing in the punch bowl. Lehman Brothers comparisons were fair.
Owning bitcoins became more like owning stock last January, when American regulators approved exchange-traded funds that let financial managers take regular investors’ money and put it into Bitcoin, creating a product that tracked the crypto’s price almost perfectly. Owning Bitcoin literally became like owning stock in that Bitcoin was suddenly packaged as an equity that showed up in your brokerage account alongside whichever other stocks and funds you owned. The Coinbases of the world gave regular investors a chance to invest in Bitcoin one step removed from the cumbersome, risky mechanics of it all. The Bitcoin ETFs were a second step removed, and by removing psychological and logistical barriers to entry, they allowed billions more dollars to flow into Bitcoin. Seems good for Bitcoin prices in the long haul!
But this week has shown the flip side of making bitcoins into, basically, stocks. On Friday, at the end of a bad stock market week, investors trying to de-risk themselves pulled a quarter billion dollars out of those Bitcoin ETFs, setting up the fund managers to sell off actual bitcoins. The ETFs have made bitcoins more attractive to both institutional investors and casual retail investors who would like a little piece of the action in case hardcore, diamond-hands crypto boosters turn out to be right. But those new Bitcoin owners aren’t purists hoping to build the currency of tomorrow. They’re investors, and bitcoins are now—almost literally—just risky equities to them. When times are scary, they get out of them. Tokens that aren’t packaged in ETFs have also taken a thrashing to start the week. There’s nowhere to hide.
It’s a funny development in Bitcoin’s story. It has not become the currency of today, and it will not be the currency of tomorrow. But it also hasn’t been a fad. Bitcoin has become an even more serious player in the financial system than many of its biggest boosters ever could’ve imagined. It has just done so not by becoming a useful form of money but by morphing, essentially, into a major stock category that creates and destroys wealth in its own cycles, just like stocks. Sometimes, like now, those cycles overlap.
The big Bitcoin disciples could still wind up not just rich but ideologically vindicated. Donald Trump could win the election, and the United States government could buy up a bunch of bitcoins to pay its debts, and the price could go to the moon for at least a few minutes, and we could all pay for popcorn at the movies with fractional bitcoins. Bitcoin’s time could come, and it could be as special as its biggest promoters say.
But absent that sea change, crypto remains nothing but an asset class for the vast majority of us, and Bitcoin remains its headlining asset. Before, it was at least a different asset class, one that went up and down based on market events that had little resemblance to the news that moved stocks: an Elon Musk tweet here, some cool memes going around there, or some mangled trading by one particular hedge fund affiliated with a crypto exchange. But the traditional stock market has already become a bit more like crypto trading in spots, and now Bitcoin has become a bit more like regular old stock. That is a win for crypto’s long-term stability and a loss for the people who want it to be something unique.
