The writer is senior counsel at Wilkie Farr & Gallagher, co-founder of the Digital Dollar Project and former chair of the US Commodity Futures Trading Commission
Bitcoin’s price is bouncing around $50,000 giving it an aggregate value near $1tn. The digital currency is increasingly part of the modern financial landscape. The venerable BNY Mellon is now handling bitcoin, Mastercard is integrating it into its payments systems and Tesla bought $1.5bn of bitcoin for its corporate treasury.
Understanding this phenomenon requires separating two queries: what is bitcoin and what is it worth? First, bitcoin is a decentralised, digital representation of value that functions more or less as a medium of exchange, a unit of account and a store of value. It runs on a decentralised peer-to-peer network of computers that validate and log transactions on a permanent, public distributed ledger, known as blockchain. In some ways, bitcoin is not unlike the collective composition of Wikipedia.
From the start, the internet enabled the sharing of information globally, instantaneously, and from person to person. Now bitcoin is part of the latest internet wave using technology to move valuable things — such as money — just as quickly and directly.
Supporters believe bitcoin’s design provides a technological solution to the age-old verification problem of ensuring that unique items of value are sent only once to a valid recipient. Instead of trusted, central authorities, bitcoin uses a decentralised, rules-based, open consensus mechanism. They argue that this innovation will expand access to financial services, ease remittances, reduce the cost of global economic activity and strengthen individual privacy.
Critics argue that this is all hype and technological alchemy. To them, bitcoin is highly volatile and speculative, performs no socially useful function and, worse, can be used to evade law or conduct illicit finance. They see its heightened valuation as a fever and a bubble akin to the 17th century “tulip mania”.
There is no shortage of opinions on bitcoin. For some, it is a technological revolution, a highly appreciating asset, a hedge against monetary depreciation and a rebuke to the existing financial system. For others, it’s a fraud, an object of manipulation and a way to separate the unsuspecting from their money.
However, there is one thing that bitcoin is not. It is not a government construct. It is a social one. It bears no sovereign imprimatur, travels on no government payment rails and settles no government obligations. Perhaps most crucially, it is not subject to government monetary control. This freedom from central bank devaluation may be what most excites its champions.
That leads to the other question: what is bitcoin worth? Of course, the opposing views of its utility stir opposing views of its value. Fortunately, forums exist to resolve those competing views. In fact, since 2017, regulated bitcoin US futures and options marketplaces have aggregated liquidity, distributed bids and offers, matched buyers with sellers and settled trades in both cash and physical bitcoin. The total volume of open bitcoin futures hit $18.9bn earlier this month. This deepening pool of trading liquidity provides essential price discovery and allows both sides of the debate to express their opinion of bitcoin’s worth.
The launch of regulated US bitcoin futures initially faced scepticism — especially from central bankers concerned that it would “legitimise” the currency. Now they allow investors to conduct price discovery, transact in transparent and orderly markets and establish fair market value.
Bitcoin’s beauty may be in the eye of the beholder. Yet, one need not be a bitcoin “maximalist” to take comfort knowing that its worth is increasingly determined, not by the government, but by active give and take in well-regulated and liquid markets. This alone may be cause for some to deride bitcoin. For many others, it’s a reason to “HODL” — that’s bitcoin slang for go long.
