The financialization of bitcoin | The financialization of everything

Until the approval of a raft of spot exchange traded funds, bitcoin was an alternative to the financial system. Now it's part of the system. How does that change things?

The financialization of bitcoin | The financialization of everything

The approval of a bunch of Bitcoin exchange traded funds last this week is a massive milestone (getting approval was ten years in the making). It can also be viewed as a continuation of the trend of the financialization of everything.

Put simply, the financialization of everything means an increasingly dominant role of financial markets, companies, and market-based behavior. Back in the day, money mattered. Today, finance matters.

This is the third part of a three part series about the approval and launch of bitcoin ETFs. You can find that other two parts here:

Why the Bitcoin ETF Approval Matters, Sliced Three Ways
Here’s a quick look at the good, the bad, and the ugly in regards to the Bitcoin ETF news.
How Does a Bitcoin ETF Work? The Story of Prepackaged BTC
This post is the second part of a series and looks at the steps involved when an investor buys exposure to bitcoin through the newly launched exchange traded funds.

When you think about it, the trend to increased financialization can be seen all around. If anything, the trend only accelerated during the global pandemic. Macroeconomic policies and decisions lead to increased liquidity for many families through stimulus programs, resulting in massive flows into financial products. If anything that sped up the trend of economic activity moving from things like work and wages to financial products.

The trend of the financialization of everything (in the United States, anyway) began when the dollar was taken off the gold standard. Having a peg to a real world commodity enhanced the dollar’s store of value capabilities, but it made it harder to create more money — or start the flywheel that would eventually lead to more and more financialization.

Like everything else, the financialization of everything has its costs and benefits.

On one hand, the increased financialization of the economy has created a lot of wealth. And more recent innovations in finance have been making wealth-generation more accessible to more people.

But the financialization of everything has also caused issues with a greater concentration of wealth into the hands of firms and people creating all of these new financial products and services.

Not to mention, money does serve a purpose. If actual money is no longer a store of value than it just becomes a means of transacting. The lack of a premium for store of value affects people who don’t have assets stored in financial products. Ultimately, it affects the durability of wages and makes it harder for people to make ends meet, especially when the economy goes through inflationary lurches.

Where does financialization fit into the bitcoin narrative?

It was into this feedback-loop-context of more and more manufactured money moving into financial products that Bitcoin was born.

Over the years, bitcoin narratives have grown and changed to try to explain its role and value in an increasingly complex financial world.

A handful of the narratives with staying power:

  • Bitcoin is hard money: It’s based on a fixed supply with a planned issuance. If demand rises over time and if the supply remains fixed as outlined in the original whitepaper, then the price will rise over time. Proponents of the idea of bitcoin as hard money compare its scarcity to gold. (Also, there was some confusion on this point in Davos this week).
  • Bitcoin as a store of value: Some of bitcoin’s other properties, such as its portability, its durability, and its clear economics, and its price performance over the last 15 years made it a good option as a digital store of value for many.
  • Bitcoin as an alternative asset: If nothing else, bitcoin is its own animal. Because it is the first globally adopted asset derived from a public blockchain, and because of its founding story, bitcoin was first viewed as a fringe asset, then a sound alternative to traditional assets like equities, commodities, and real estate.
  • Bitcoin as a non-correlated asset: Until recently, bitcoin often behaved uncorrelated to the stock market, or to the tech sector of the stock market. That certainly changed during the everything bubble, which began during the pandemic in 2020. As more and more bitcoin is held in exchange funds on the stock market, it’s likely that bitcoin days of being uncorrelated are in the rearview.
  • Bitcoin as non-custodial peer-to-peer cash: This was bitcoin’s primary use case when the network was first launched. The general idea is that the primary utility of a public blockchain is to provide a ledger and wallet system that allows people to exchange value over the internet without the need for a payment or credit card company (or a brokerage).

It’s not totally clear what the new bitcoin narrative will be following the approval and excitement surrounding the bitcoin ETFs. On one hand, the ETFs open new (and massive) lines of investment into bitcoin, which for many is reason enough for enthusiasm.

A big component of the availability of bitcoin funds is that it makes bitcoin more accessible, in a way, to more people.

On the other hand, a bitcoin ETF is counter to most of the big bitcoin narratives that have pushed its adoption and innovation so far. So, it will be interesting to see how the new stories about bitcoin are formed. And how they relate to the past.

You can also see a possibility of the bitcoin space becoming so big that it starts to act like other industries. You can imagine an Apple versus Microsoft or a Coke versus Pepsi kind of situation developing.

One one side, there is the bitcoin as an alternative system crowd, and on the other side there is bitcoin as the latest financial asset. In a way, the fragmentation of the space as it continues to grow seems the most likely.

What does the financialization of bitcoin mean?

Only time will really tell how this all plays out.

Certainly, the story about bitcoin and its utility and its future has changed over the past 15 years. And likely it will continue to change and evolve as the network itself evolves — and there’s really nothing wrong with that. In fact, it’s what makes bitcoin so interesting in the first place.

So, in that context, is a Bitcoin ETF just another milestone on this long journey? Or, is it some kind of final destination — the full financialization of the world’s most alternative asset.