Will BlackRock’s Bitcoin ETF Take the Spirit Out of the Honey Badger?

With a raft of recent announcements from big-name financial firms offering bitcoin (BTC) products, institutionalization of the biggest, most significant cryptocurrency looms. That will give urgency to this perennial, still unresolved question about its purpose.

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Is bitcoin an alternative store of value, like gold, whose price to dollars is driven by its appeal as bulwark against monetary debasement in fiat currencies? (We could call this the Michael Saylor perspective.)

Is it a payment vehicle for people who are, for whatever reason, locked out of the financial system? (The El Salvador perspective, perhaps.)

Or is it best thought of with a more open-ended mindset, viewing it as an unstoppable record-keeping platform onto which users can inscribe a wide range of valuable content? (The Taproot Wizards’ perspective.)

I like to think the answer is “all of the above.”

But if the U.S. Securities and Exchange Commission (SEC) approves BlackRock’s, or WisdomTree’s or Invesco’s newly submitted exchange-traded fund (ETF) applications  – admittedly a big “if,” given the SEC’s past stubbornness – and if it shows support for the new EDX crypto exchange from Fidelity, Charles Schwab, Citadel and other financial heavyweights, that liberal, anything-goes framing will likely get less airtime.

The financial advisors pitching these products to mainstream clients are going to want a simple story to tell. The question is: which one?

Perhaps the most honest route is just to describe bitcoin as an uncorrelated asset, whose price over time moves independently of other assets, offering more stability to a diverse portfolio of assets, preserving value when stocks, bonds or commodities are down.

But that’s going to be unsatisfying to financial advisors and their Main Street clients. While they’ve by now been well trained to think in terms of diversification and hedges against risk, there’s usually an underlying event-driven story behind it. For example: when a recession looms and projected earnings fall, the decline in value of your variable-income stock holdings will be balanced by exposure to fixed-income assets such as bonds.

This is where the “inflation hedge” story for bitcoin is usually applied. But it’s not an easy one to tell. The cryptocurrency’s losses in 2022, as inflation kicked the global economy’s butt, defied the popular, short-term understanding that an inflation hedge instrument’s price should rise when consumer price rises accelerate.

On the other hand, with a long-term perspective, the bitcoin inflation hedge narrative holds up. With a 150x gain over the past decade, bitcoin has helped long-term holders offset the ongoing depletion in the dollar’s purchasing power more effectively than any other investment that was broadly available to them.

The problem is the financial industry wants a short-term story – after all, financial professionals are typically rewarded on the basis of quarterly results. It wants to be able to say that if X does Y, then bitcoin will do Z. And it’s just not that predictable.

Nonetheless, I suspect Wall Street will gravitate toward the Saylor perspective. It needs to find a story of some sort – although many ETF investors might happily place “number go up” bets on bitcoin without caring why its price should rise, this heavily regulated industry can’t frame things as naked gambling – and the long-term store-of-value idea the most palatable one.

It’s easiest told as the “digital gold” story, one with a ready-made analogy that’s familiar to U.S. investors, the idea of an asset that can perform independently of monetary policy. (Skeptics will naturally revive the aforementioned 2022 experience, when bitcoin’s price declined while gold’s rose as expectations for Federal Reserve rate hikes grew. Wall Street’s ETF hawkers will just have to push through all that with a long-term story about buy-and-hold retirement strategies.)

One reason this matters is because the narrative will help dictate policy. If bitcoin is purely viewed as a hedging instrument for investors, it will play into the ongoing regulation push in Washington D.C. Even though bitcoin has escaped the Securities and Exchange Commission’s current dragnet, slapping the “security” label on every other crypto token – except, perhaps, ether – this framing will strengthen other regulatory positions that can, indirectly, curtail bitcoin’s usage growth, if not its price.

The most important involve privacy, know-your-customer (KYC) rules and so forth. If the establishment recognized bitcoin as a form of money – in addition to, or instead of seeing it as an investment vehicle – then the case for allowing greater privacy is stronger. But if the conversation in the U.S. is now to be even more intensely built around the store-of-value investment strategy, it’s harder for people to argue against greater KYC demands by regulators.

After all, these investment institutions, for whom compliance with such rules is par for the course, have nothing to lose from supporting that kind of surveillance. (And a lot to gain, if consumer demand is as strong as some financial institutions have suggested, even in the depths of the bear market.)

That isn’t great news for the millions who want the Bitcoin protocol to be a tool for financial inclusion or for people under oppressive systems to safely move money around.

It’s also not great for the new breed of developers working on Bitcoin-based tokens such as the non-fungible token (NFT)-like Taproot Wizards project built on the Ordinals protocol or the new BRC-20 tokens. KYC at the exchange level hinders the mainstream global reach of such innovative projects – especially if initiatives like the Financial Action Task Force’s crypto “travel rule” find a backdoor way to indirectly impose reporting rules on self-custody wallets.

But let’s take a deep breath. In the words of fans who see it as “the Honey Badger of Money,” at the end of the day, “Bitcoin doesn’t care.” The network will keep ticking along, block after block, regardless of what Washington or Wall Street want to do with investment and exchanges of its token.

Bitcoin’s protocol is unstoppable. In fact, if the ETFs are approved and mainstream investment surges into bitcoin, which would drive up the price and attract more hashing power to the mining network, the cost-of-attack security proposition behind the Bitcoin protocol – the essence of its “unstoppable-ness” – just gets stronger.

Presented with this open-source unstoppable, uncensorable protocol, innovators are going to do what they always do: innovate. So, inevitably, there will be workarounds to all of this. New ways to engage with all those other Bitcoin use cases without being ensnared in a Washington/Wall Street regulatory bind will emerge.

The big takeaway from this institutionalization thing, then, is that it marks an intensification in the ongoing cat-and-mouse battle between Bitcoin, which wants to defy labels and traditional roles, and the financial establishment, which wants to define it and thereby control it.

The eventual winner, as I see it, is the mouse (or, if you prefer, the honey badger or the sewer rat).