Bitcoin’s Rise Challenges Wall Street: Embrace or Resist?
Jamie Dimon dismisses it as nothing better than a “pet rock,” the late Charlie Munger, longtime lieutenant to Warren Buffett, deems it “massively stupid,” and US Senator Elizabeth Warren regards it as a great tool for terrorists, drug dealers, or fraudsters (Bloomberg). Despite the criticism, Bitcoin is demonstrating resilience and longevity. Its recent surge, reaching record levels like $40,000, $50,000, and then $60,000, underscores the unwavering demand across diverse demographics.
Even as traditional Wall Street figures, like Vanguard, continue to resist embracing the volatile cryptocurrency, others, such as Bank of America’s Merrill Lynch and Wells Fargo & Co., are gradually succumbing to the pressure by offering limited access to Bitcoin exchange-traded funds (ETFs). Michael Novogratz, the billionaire founder and chief executive officer of Galaxy Digital Holdings Ltd, emphasizes that public belief in its value persists despite criticism from influential figures like Jamie Dimon and Elizabeth Warren. He states in an interview on Bloomberg TV, “Doesn’t matter what Jamie Dimon or Elizabeth Warren, his good buddy, said. A lot of people believe there’s value here.”
This persistent demand presents a dilemma for the investment industry. Some firms, like Vanguard, maintain a cautious approach, while others, like Bank of America and Wells Fargo, are giving clients what they want by providing access to Bitcoin ETFs without endorsing them outright. The influx of funds into these ETFs is substantial, with approximately $8 billion in net inflows, primarily led by investment giants Fidelity and BlackRock. Michael Novogratz stated “Wall Street will embrace whatever will raise them money so that doesn’t let you know whether it’s good or bad.”
However, the surge in demand and the rapid rise in Bitcoin’s price pose potential risks. Concerns range from scams, such as “rug pulls,” to market risks due to high leverage, warns Jimmy Su, chief security officer at Binance. As the self-described “degen” traders chase the rally, they are loading up on borrowed funds to help max out trading profits after such leverage all but dried up with the demise of crypto lenders like Celsius almost two years ago.
The cumulative open interest in Bitcoin derivatives, with the potential for leverage up to 100 times, has surged by nearly 90% since October on centralized exchanges. This increase has propelled it to the highest level observed since the onset of 2022, marking a period when the previous crypto bull run came to an end, as reported by CCData. Crypto exchanges such as Binance, OKX, and Bybit are all witnessing a notable spike in open interest, reminiscent of levels not witnessed since the peak of the 2021 bull market, according to CCData.
Additionally, the loan book at Ledn, a platform that lends money secured by Bitcoin collateral, has rebounded to levels last witnessed before the collapse of the FTX exchange in late 2022, according to Mauricio Di Bartolomeo, the co-founder of Ledn. Consequently, many anticipate that a reversal, to some extent, of the recent rally is more a matter of when than if. CME Group’s digital asset products are concurrently registering record volumes, reflecting the increasing interest from Wall Street investors seeking traditional avenues to hedge their risk.
Despite these risks, the legitimacy conferred by new Bitcoin ETFs marks a significant shift in the perception of cryptocurrencies on Wall Street. This contrasts with previous crypto cycles driven by speculators and risky products that eventually collapsed. The current wave of investors includes a broader demographic, with Baby Boomers and older individuals entering the crypto market for the first time.
While hope and hype have historically fueled crypto bull markets, the entrance of traditional financial institutions and the approval of Bitcoin ETFs by SEC Chairman Gary Gensler add a layer of irony to the crypto narrative. The founder of Bitcoin, Satoshi Nakamoto, envisioned it as an alternative to mainstream finance, free from centralized regulation. Michael O’Riordan, founding partner of Blackwater, an ETF consulting firm, remarks, “With Bitcoin ETFs, the opposite has happened. Satoshi would be turning in his grave.”
The market’s future remains uncertain, and the recent renewal of the digital asset market is not without its complexities and contradictions. Yet, the enduring presence of Bitcoin suggests that, for better or worse, Satoshi’s creation is thriving over 15 years after its inception, even as the identity and fate of its enigmatic creator remain unknown.
