Bit by bit, the world’s leading cryptocurrency has been going mainstream, in ways that its pseudonymous creator or creators, identified as Satoshi Nakamoto, would not approve of. On Sunday, the first-ever Bitcoin future began to trade on the Chicago Board Options Exchange. Bitcoin is on a bull run, having appreciated 16 times over this year, and futures speculators will try to short it, exposing the currency to unanticipated pressures. The Chicago Mercantile Exchange will start trading Bitcoin futures on December 18 and last week, Bank of America was granted a patent for a cryptocurrency exchange system for businesses. These are attempts to fit Bitcoin into the formal financial system, exactly what it was designed to avoid.
Bitcoin was a radical political intervention which has rapidly turned into one more financial instrument, now fully deployed with a derivatives market. It was launched in 2009 out of disgust for Wall Street bailouts, as a peer-to-peer payments system built on privacy, and immune to the artificial forces that affect fiat currencies —tinkering by central banks and ideologies of politicians. But efforts began immediately to absorb the disintermediated Bitcoin into the bank-mediated system it was supposed to bypass, with the establishment of coin exchanges, Mt Gox being the best known — for going belly up. The cryptocurrency flourished on the “dark web” inaccessible to normal browsing, and gained notoriety for being used to pay for illicit pornography, weapons and drugs. But even there, it was disintermediated by traditionally structured escrow services, which should have been legacy.
And now, thanks to the massive appreciation seen by Bitcoin this year, the banking system and markets want a piece of the action. A currency created specifically for anonymous payments has become just another market instrument, and is probably forming a gigantic bubble. In the case of a fiat currency, depositors and investors would look to banks and other fee-collecting intermediaries to police the system and cushion the shock of volatility. But since Bitcoin is designed to cut them out, they have no responsibility and may simply leave Bitcoin owners to the mercy of market forces. Satoshi Nakamoto, who wrote the Bitcoin code, mysteriously disappeared from the internet in 2011 and probably isn’t around to help. As a payment system, Bitcoin has a disappointingly small footprint. As a financial instrument, it has just turned into a vehicle for an electronic gold rush accelerating towards a terrific crash.