On Bitcoin, Speculation, and Real-World Utility

I make a point of watching CNBC’s coverage of bitcoin. It does a good job capturing the zeitgeist of the traditional financial world as it relates to bitcoin.

If you’ve been watching CNBC lately, you’ll have noticed that Squawk Box anchor Andrew Ross Sorkin is stuck on a particular issue: bitcoin’s real-world use as an inflation hedge versus its role as a speculative asset.

For instance, in this interview with bitcoin advocate Anthony Pompliano, Sorkin shared that he had just been to South Africa, a country experiencing high inflation, and he did not find a lot of people who were buying bitcoin as a hedge.

“I wonder if [the inflation hedge argument] is used as pixie dust to sprinkle on people who are just speculating,” he said.

It’s a seductive critique. After all, we all know people who are just speculating in bitcoin; to some degree, many of us are too!

Is it speculators all the way down?

My short answer is: No. While Sorkin’s worry is intuitive on a superficial level, it’s logically incoherent underneath.

Let me explain.

The Slopes of Speculation and Utility

I want you to imagine bitcoin in two settings.

First, imagine it’s 2009 and bitcoin has just launched. Its creators talk about it one day being a store of value and medium of exchange. Right now, however, it’s neither. 

The asset has very little value (less than $1 million), there are no public exchanges, it regularly rises or falls 50% per day, and it is hard and costly to exchange it for fiat currency. There’s no easy way to store it and nowhere to spend it. Its future looks bleak. 

At this point, every person who owns bitcoin is “speculating.” They are speculating that one day a bitcoin could be worth $1 or $10 or $100 or more; that exchanges might emerge; that people might decide to store wealth in the asset for various reasons; that an ETF might launch; and so on. There is no utility whatsoever. It is 100% speculation.

Now take another hypothetical scenario: Imagine it’s 2050, and bitcoin has succeeded spectacularly. Its market cap is north of $100 trillion, and it’s accepted everywhere as a currency. It’s the primary settlement vehicle for international trade, it’s held by most central banks as a reserve asset, and it’s much less volatile than gold.

At this point, very few people are using bitcoin for speculation; there is little appreciation potential left. Roughly 100% of the usage in this case is for “utility.”

It strikes me as unlikely that, between these two worlds, bitcoin would jump from 100% speculation to 100% utility overnight. Instead, bitcoin’s speculation-to-utility ratio would evolve as its utility improved—to 90% speculation and 10% utility, then to 80% speculation and 20% utility, and so on.

You can imagine two intersecting slopes, with speculation falling as utility improves.

Ironically, the very problems bitcoin skeptics like Sorkin see in bitcoin—its high volatility, evolving regulations, and still emergent use cases—are exactly the things people are speculating on. They—we—believe that the asset will continue to mature and its utility improve, as it has for the past 15 years.

Where To Find Utility

In the early stages of a disruptive technology, utility is found on the edges. Early cell phones were not very useful for most people; you had to carry around a suitcase and they cost $10/minute to use. But if you were, say, a member of Congress, chances are you had one: You accepted the flaws because you needed its specific utility. Over time, as the technology improved, utility grew and went mainstream.

The same is true of bitcoin.

In the very early days of bitcoin—say, its first 10 years—it was so flawed as an asset that utility could only be found at the extreme edges. There were people who held bitcoin for ideological reasons; people in oppressive regimes with no access to dollars who used bitcoin to escape tyranny; individuals operating in regulatory gray zones looking for a payments solution; and so on. I’ve known users from each of these categories; you probably have too (or at least have read about them).

But as bitcoin matured and got better—with improving regulations, more professional service providers, enhanced front-end user experiences, easier fiat convertibility, and lower volatility—utility edged toward the mainstream.

What does this increasingly mainstream utility look like?

Here’s one example: On a recent roadshow, I met a financial advisor who exclusively serves clients with more than $50 million in assets. He explained that, for these clients, the only material risk to their long-term wealth is a shock devaluation of the dollar (an event he considers unlikely, but not impossible, given rising debts and political dysfunction).

As a hedge, he holds bitcoin for all clients. He says that he’s willing to tolerate its challenges—high volatility, regulatory uncertainty—because he considers it useful as a long-term hedge.

He would not have bought bitcoin 10 years ago; it was too risky. But now that large asset managers have launched ETFs, he doesn’t think it’s going away. In other words, bitcoin’s utility has increased, and it has found a new user.

Here’s another example: In Nigeria, citizens are flocking to cryptocurrencies to flee sky-high inflation rates. Improved exchange infrastructure, along with growing concerns about the viability of Nigeria’s national currency, helped drive more than $56 billion in Nigerian crypto transactions from 2022 to 2023.

(As for South Africa, Sorkin’s claims don’t seem to hold water. According to a recent Chainalysis report, South Africa ranked second among sub-Saharan African countries in activity on centralized crypto exchanges—and higher than Nigeria on a per capita basis.)

The launch of bitcoin ETFs in the U.S. is the latest leap forward in bitcoin’s utility, representing massive progress toward mainstreaming the asset as a potential store of value.

I suspect that these use cases will continue to multiply as bitcoin continues to mature.

Bitcoin Is Right on Schedule

Bitcoin today is a $1.5 trillion asset. That sounds like a lot, but it’s not. It’s 10% the size of gold and a fraction of the size of globally dominant currencies like the dollar. There are individual companies with larger valuations than bitcoin.

The right question to ask is not whether there is speculation in bitcoin. The right question is: Is the extent of real-world use increasing over time?

I think it’s hard to look at the progress we’ve seen over the last few years, including the recent launch of spot bitcoin ETFs, and say anything but yes.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.