Insight & Analysis

Focus on Bitcoin’s trust, not its volatility

Published: Jul 2022

Trust in financial services – and other aspects of the digital world we now live in – is crucial. And although Bitcoin has had a bad rap for its volatility, one author argues that more people should be focusing on the role it has in bringing trust and transparency to markets.

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If the pandemic has accelerated the digitalisation of our daily lives, does this mean that we could be heading for a dystopian future where everything we do – shopping, communicating, dating etc – is ultimately controlled by a handful of platform companies? Could our lives be changed in an instant, by an algorithm, or a few clicks, by people and companies that we really shouldn’t be putting our trust in?

The role of trust has always been important in financial services, and in the digital world it now has a critical role to play. And this goes beyond Elon Musk arguing with Twitter about how many of its users are real or fake, but extends to every interaction and transaction we have in the digital world.

This is the focus of a recently-released book, ‘Rearchitecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms,’ Omid Malekan. He has also written ‘The Story of Blockchain,’ and describes himself as an ‘Explainer in Chief’ of crypto. He is also an adjunct professor at Columbia Business School and was previously a subject matter expert in crypto at Citi Ventures.

His book opens with painting a dark picture of what our future digital world could look like, a world where nobody trusts anyone or anything. And this is where Bitcoin comes in. This, and other cryptocurrencies, have been maligned in the press because of the volatility and the investors who have lost millions (as has been previously reported by Treasury Today).

However, Malekan argues that we should be focusing on the trust mechanism and crypto’s transparency instead. He points to the original intention of Bitcoin which was outlined in the paper by its pseudonymous creator Satoshi Nakamoto. At the time, in 2008, the world was already digitising and there was a need for trust. Malekan quotes the paper, “Commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for transactions, it still suffers from the inherent weaknesses of the trust-based model.”

It is this trust that Malekan focuses on. Although the commentary on Bitcoin has focused on the volatility, Malekan argues this is part of its strength. That volatility instead should be reframed as a transparent way of valuing markets that previously wouldn’t have been valued.

Start-up investments have typically been illiquid, and impossible to get a current value on. With crypto, and the issuing of tokens that can be traded immediately, that changes. In a recent article for Harvard Business Review, Malekan writes that crypto gives liquidity and price discovery from the outset. “This unique attribute – enabled by the novelty of the underlying infrastructure – leads to a more benign explanation of the volatility,” he writes.

And he also notes a feature of the volatility that often gets missed, “If your cousin’s new restaurant had tradable shares, they’d probably be as volatile as crypto.” And then he draws on more famous examples, of WeWork being able to raise money with a valuation of US$47bn before it crashed. Malekan argues that this is just as volatile as crypto, it’s just that it wasn’t visible.

Because crypto is so transparent, the volatility makes it look worse than it is, he argues. And as for crypto failures, Malekan argues, “Crypto is unique in that even the scams are transparent, and in the long run, transparency is a powerful tool for countering shady behaviour, in any industry.”

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