I share the FT's general anti-boosterism of cryptocurrencies. Situated as they are, however, at the meeting point of money, platforms, tech and the state, I think there is room for distanced investigation. Here, a quick initial look at a crypto-related topic. It broadly relates to the development of a more comprehensive cryptocurrency-denominated set of financial interlinkages.

The Financial Times notes two SEC applications to form proxy bitcoin funds—funds that allow retail investors, in theory, a way to invest in bitcoin short of holding cryptocurrency outright. The first is a crypto ETF from KKM, which proposes to buy shares of crypto-related businesses:

Crypto companies        KKM Fund
Assets      Liabilities Assets      Liabilities 
───────────┬─────────── ───────────┬─────────── 
Crypto     │Shares      Shares in  │ETF shares  
           │            crypto     │            
           │              platforms│            
           │              miners   │            
           │              providers│            
           │              payment  │            
           │                       │            

The second is a structured note from JPMorgan Chase, which offers a specific list of companies whose shares it would purchase:

Crypto companies                            JPM Fund
Assets               Liabilities            Assets               Liabilities
────────────────────┬─────────────────────  ────────────────────┬────────────────────
Crypto              │Shares                 MicroStrategy       │ETF shares
                    │                       Square              │
                    │                       Riot Blockchain     │
                    │                       NVIDIA              │
                    │                       PayPal              │
                    │                       AMD                 │
                    │                       Taiwan              │
                    │                           Semiconductor   │
                    │                       Intercontinental    │
                    │                           Exchange        │
                    │                       CME Group           │
                    │                       Overstock.com       │
                    │                       Silvergate          │
                    │                           Capital         │
                    │                                           │

The companies are known to hold crypto assets.

The intent is to create a financing channel to allow fluctuations in cryptocurrency prices to flow through to these new instruments. To the extent that crypto assets are like commodities (and no further), the funds are setting up a relationship just like commodity ETFs.

Both funds are trying to complete a financing chain like this schematic:

Crypto owners           Crypto intermediaries   Crypto investors
Assets      Liabilities Assets      Liabilities Assets      Liabilities 
───────────┬─────────── ───────────┬─────────── ───────────┬─────────── 
Crypto     │Shares      Shares     │ETF         ETF        │Net worth
           │                       │                       │            
           │                       │                       │            
           │                       │                       │            

In short, the proposals are betting that there are owners of wealth who would like to be able to benefit from the rise in cryptocurrency prices. These investors either cannot hold crypto assets directly, or would prefer to hold them through a vehicle with some kind of risk transfer or arm's-length quality.

My view is that such developments will, over time, increase the fragility of bitcoin financing arrangements: it is a greater volume of total claims keyed to a small amount of underlying asset. The pressure will be in the direction of expansion, the more so the greater are the available ways to spend crypto tokens, and so the tendency will be toward fewer fluctuation-absorbing structures. At some point, liquidity will come under strain, and the system will seize up, more or less spectacularly depending on the details. In the absence of a discretionary authority that can meet that liquidity shortfall, the system will crumble.