Bitcoin is a special-interest group

A lot of people's wealth now depends on mass adoption.

Art by GPT-4. Prompt: “men in suits with sacks of gold, standing on the steps of Congress and looking up at the Congress building”

(Financial disclosure: I still own the same modest amount of Bitcoin and Ether that I bought way back in 2017.)

I thought I didn’t have anything else to write about Bitcoin. It turns out I thought of one more thing to write!

Bitcoin is a thing you can own and trade. But beyond that, no one really seems sure what it is, exactly. It was conceived as a means of payment, but almost no one really uses it to pay for anything. Some people think of it as an inflation hedge — a sort of digital gold, insurance against the collapse of fiat currencies. Others think of it as a sort of tech stock — the basis of a future flowering of decentralized finance and other crypto applications. Still others believe it’s just a worthless fad or ponzi scheme. (There are also some less plausible notions, such as the debunked idea that Bitcoin is a store of energy.)

But as I’ve watched the crypto world over the last couple of years, it has dawned on me that Bitcoin now has one more function: as a special interest group.

Whatever the reasons that people value Bitcoin, the fact is that it’s certainly worth a whole lot. The original cryptocurrency’s value has climbed over the past year, and is now back up to over $800 billion:

Source: CoinMarketCap

$0.84 trillion is not an enormous amount of wealth compared to gold (total market cap of ~$13.8 trillion as of this writing) or the U.S. stock market ($46 trillion). But it’s enough to create a whole class of people all over the world for whom Bitcoin is a major source of wealth, or even their main source of wealth. And people with wealth want to protect it and grow it.

Thus, Bitcoin’s increase in value has created a natural constituency for policies that will pump up Bitcoin’s price even more in the future. If you think about it, that isn’t particularly unusual. People who own real estate are always trying to pump up its value with local politics. Shareholders like it when the government enacts business-friendly policies. Wealth always creates its own constituency, and always will, whether you call this “capitalism” or something else.

Bitcoin, though, is a different sort of asset than real estate or stocks (and crypto as a whole is subtly different from Bitcoin itself). We’re pretty well aware of the political-economic effects of real estate and stocks, since these have been around for a long time. But since Bitcoin is new, it’s interesting to think about what kind of things Bitcoin owners might to pressure governments to do.

My basic thesis is that the recent institutionalization of Bitcoin, especially the SEC’s approval of Bitcoin ETFs, fundamentally changes the political economy of cryptocurrency.

Bitcoin’s value comes from people thinking of Bitcoin as an asset class

Let’s think a little harder about where Bitcoin’s $840 billion in value comes from. Obviously, it comes from demand — since the amount of Bitcoin is in limited (though not yet fixed) supply, the more people that want Bitcoin, the more they have to bid up the price.

The original idea was that Bitcoin demand would come from people using it as a payment system — a “medium of exchange”, to use the econ term. In this telling, the people who grabbed and held some Bitcoin early on would be the big winners in terms of dollar wealth. Imagine if we decided to start using orchids as our form of money; everyone would need orchids to buy stuff, so they’d swap their dollars for orchids. If you owned a bunch of orchids when that happened, you’d get a ton of dollars.

There was always a strange logic to this idea. If Bitcoin owners think dollars are going to be worthless, then why should they cheer when they can get more dollars for their Bitcoin? Remember that every trade has two sides to it. If you buy your Bitcoin at $1000 and then sell it for $50,000, all you have now is a giant worthless lump of fiat currency…right? At best, you can hope to sort of execute a double trade, where you exchange Bitcoin for dollars and then quickly swap the dollars for some real asset like real estate before the great fiat crash happens.

But anyway, this is a bit of a moot point, since Bitcoin’s adoption as a means of payment was always incredibly unlikely to happen. Bitcoin is set up to be deflationary in value in the long run — the supply of Bitcoin will eventually be capped — which means that people will tend to hoard it instead of spending it on things. People like to use money that depreciates slowly and predictably over time (like the U.S. dollar), because that sort of money is something they feel OK giving away in exchange for a pizza or gallon of gasoline.

That’s theory, but the practice has worked out just as theory would predict. El Salvador tried adopting Bitcoin as legal tender, and no one wanted to use it. At this point, even most of the hardcore Bitcoin boosters realize that the only way that Bitcoin is going to be used as a payment system — outside of a few specialized applications like ransomware, drug markets, or illegal cross-border remittances — is if fiat currencies simply stop existing. If the dollar, the euro, the yen, the yuan, the rupee, and all other government-sponsored currencies collapse, then perhaps Bitcoin will see wide adoption as a payment system simply because there will be no better alternative around — kind of like when gold coins were used as payment during periods of government breakdown in the distant past.

Barring that, Bitcoin will gain value only by a very different means — through widespread demand for Bitcoin as an investment asset. In other words, the more people in the future who decide that Bitcoin is a good way to save their money, the more the people who own Bitcoin today will get richer and richer.

Here is how the great Matt Levine sums it up:

In big developed economies, despite years of crypto proselytizing, people still much prefer fiat currency and traditional banks [to make actual payments]…And yet the price of Bitcoin has gone from zero in 2009 to $46,000-ish today, not on widespread adoption as a payments mechanism, but because people — lots of people, crypto evangelists but also regular retail investors and quite traditional investment strategists at big institutional investment firms — view it as a “store of value.” Which means that they think its price will go up, or at least not go down, robustly and for the long term. They buy Bitcoin at $46,000 not because they plan to use it as digital cash, but because they think other people will buy it at $47,000, or $470,000 or whatever…

Bitcoin is an astonishing social technology…Bitcoin expresses the thesis that it would be good to have a valuable database entry without [usefulness as a payment system], just something was valuable because people on the internet voluntarily agreed it was valuable, with no government or army or taxes or anything else. And it worked!

This is why the U.S.’ authorization of a Bitcoin ETF this past week is such a big deal. By making it easier to buy and own Bitcoin, it increases the number of people who will hold Bitcoin. Right now, about a quarter of Americans own some Bitcoin. But somewhere around 60% own stocks. If Bitcoin ownership becomes as common as stock ownership, demand for Bitcoin could soon soar.