“Investors” are flocking to Bitcoin as fears of currency debasement grow.
That’s this week’s cryptocurrency narrative du jour.
Of course, you don’t need a narrative to explain the price action in Bitcoin. It’s not explainable in rational terms, if it’s explainable at all. At best, it’s a pure play on the greater fool theory: “I’ll buy it here, because someone will surely buy it higher.” Of course, not everyone who buys Bitcoin understands they’re participating in a greater fool theory-driven market, but they are.
Read more: Bitcoin Is Nothing
What’s got the crypto crowd excited this week? Well, for one thing, Bitcoin pushed back above $18,000 for the first time since the halcyon days of the mania.
But more than that, it’s surging even as gold falters. In fact, the Bitcoin to gold ratio is now the highest it’s been since early 2018, when the digital currency mania was in full effect.
Market participants have repeatedly cited gold’s rally in 2020 and Bitcoin’s concurrent surge as evidence that investors are looking to protect against currency debasement at a time when developed market economies are issuing mountains of debt to “fund” fiscal stimulus.
Other rationales for the ascent of gold and what some insist is “digital gold” don’t hold up as well. For example, their correlation with stocks over the summer didn’t support the haven appeal argument. Additionally, you’re reminded that US real rates plunged deeply into negative territory, eliminating the opportunity cost of holding “assets” (and I use that term very loosely when it comes to both gold and Bitcoin) with no internal rate of return.
Now, gold’s appeal is waning for a variety of reasons, including vaccine optimism and the prospect that, assuming Republicans don’t lose the Georgia runoffs in January, a GOP Senate will serve as a firewall against unchecked government spending in the US. At the same time, if hopes that a vaccine will restore a sense of normalcy to the global economy end up pushing Treasury yields higher, that too could sap demand for the yellow metal.
Holdings in the world’s largest gold ETF sat at a four-month low of 1,226.3 tons as of Tuesday. That’s the least since July 22. It shed 26 tons last week alone, which looks like the largest outflow since 2016 — by volume, anyway.
The performance disparity is laughable. Bitcoin is up nearly 150% in 2020. Gold, meanwhile, has managed “just” a 24% gain.
Generally speaking, market participants expect the dollar to fall in 2021. At least one sellside firm sees the greenback dropping as much as 20%. Goldman’s take is less dour, but captures the gist of the consensus story.
As ever, I would suggest that none of this is particularly relevant for Bitcoin. It doesn’t trade based on any rational narrative. The currency debasement thesis isn’t new. It’s not as if Bitcoin proponents weren’t making that case as vociferously a year ago (or two years ago) as they are now.
It’s true that wider acceptance has helped. “Corporate endorsements… appear to have propagated further demand for Bitcoin,” JPMorgan said, in a note out earlier this month, flagging what the bank called an “impressive” flow trajectory in October for the Grayscale Bitcoin Trust.
The contrast with gold ETF flows “lends support to the idea that some investors that previously invested in gold ETFs such as family offices, may be looking at Bitcoin as an alternative to gold,” the bank went on to suggest, before noting that momentum traders have “likely amplified the recent Bitcoin rally.”
Coming full circle, these belabored attempts to explain what is only explainable by reference to a non-asset that trades like precisely what is are almost painful to peruse. So, what is it? Well, that’s the thing. As discussed at length in the linked post above, Bitcoin is nothing. In a very literal sense.
Ray Dalio was diplomatic about it in a series of tweets this week. “My problems with Bitcoin being an effective currency are simple,” he said, adding that,
Bitcoin is not very good as a medium of exchange because you can’t buy much with it (I presume that’s because it’s too volatile for most merchants to use, but correct me if I’m wrong). It’s not very good as a store of wealth because it’s volatility is great and has little correlation with the prices of what I need to buy, so owning it doesn’t protect my buying power. And if it becomes successful enough to compete and be threatening enough to currencies that governments control, the governments will outlaw it and make it too dangerous to use.
“I might be missing something so I’d love to be corrected,” Dalio remarked.
Twitter was more than happy to oblige, but Dalio isn’t missing anything. He’s precisely correct.
Then again, Bridgewater’s flagship Pure Alpha II fund was down 18.6% through the beginning of this month. So in that sense, Ray is indeed “missing something.” Just not as it relates to the philosophical argument against Bitcoin.
Not just greater fool, but greater fools. That said, there are a lot of them and if people want to trade in Bitcoin who am I to say that they are wrong. It probably will keep going up until something new and more novel catches their eye.
How much of the rise in bitcoin can be explained by the ‘Robinhood effect’?
Consensus in the community is that Bitcoin will not be the money. The medium of exchange role it is not well suited for and this is fairly widely recognized. Rather, it’s role would be more akin to a store of value alongside, say, central bank digital currency (CBDC), which, by the way, are coming.
Central bank digital currency will be issued by governments……..Bitcoin is digital currency
that does not have the backing of any gov’t or central bank. I’m not storing my assets in any
currency that is not backed by a central bank.
He is obviously missing something!
H, we are in Trump’s America (sadly it still is for now) surrounded by fools everywhere, conspiracy believing fools, TSLA buy at all prices fools, and now some fools with real deep pockets in family offices and hedge funds. This is literally the perfect environment for the price of BTC to keep climbing, you can even earn interest in your BTC holdings these days at an annual rate over 3%. Everything Dalio said rings true, I say that as someone who has very nice unrealized gains in BTC, but I look around and I have a hard time believing we’ll enter an Age of Enlightenment and reason in the immediate future, I may be banking on a greater fool to but my BTC at a higher price down the road, but the thing is, there’s an abundance of fools and only so much BTC to go around…
Weren’t all that many Black Tulips either.
So that’s actually an interesting comment, if I may?
And there isn’t much gold, diamonds, top quality wines or vintage collector cars or master paintings. Or even London penthouses.
The utility value of those things, if it can be calculated at all, is pretty small. Yet some of these commands exceedingly high prices and therefore are pretty good stores of value.
Bitcoin is an emerging (attempting to emerge) store of value. Its value is entirely based on its network effects. But saying Bitcoin is ‘nothing’ is exactly like saying Gold is nothing (arguably, H does that but it’s weird b/c I can actually sell some for good money) and that Facebook is nothing.
Facebook might be nothing but its market cap ain’t nothing to laugh at.
“I say that as someone who has very nice unrealized gains in BTC”
You should sell now. Or my typical advice to clients is, when in doubt do half.
At one time my mother was into Beanie Babies and in a position to get them as each one was issued. One day she said “this one is worth $700!!”. I said “SELL IT NOW!!”
Of course she didn’t and it’s worth maybe $ .25. She may have even thrown them all away.
There are countless other examples.
Good Luck
Depends on your overall wealth and what you’re trying to do/get. Doing half is not a bad way to go. But, let’s be clear, if you agree with the ’emerging store of value’, BTC may be a 10X story or more in a few years time, if everyone sticks to it and the network effects take hold.
If you have enough net worth that you might not miss 1 or 2 or 5% of it, investing said proportion in BTC and waiting for a 10X might be reasonable. If it all goes to smoke, you won’t miss your 1 or 2% loss and 10% or 20% should still feel fairly beefy.
Being in the business I get all that. I was playing with Walt’s Greater Fool discussion.
It was meant to be a lighter comment, and I was hoping “Beanie Babies” would be the clue.
For years the gold investors have thought that the Fed was taking down the gold price because it was a competing currency. Recently we have seen prominent people charged with spoofing the gold market. If there is validity to these “conspiracies” then why have we seen no take downs in Bitcoin? We should then ask the question, Why did the government forgo the collection of billions of dollars of sales taxes on Internet Sales? This has given online retailers a 6-10% advantage for years against their brick and mortar counterparts. Perhaps Bitcoin is being allowed to run for a while to give this new technology validity? In the meantime the brightest and best minds have a cash prize to perfect the technology. After it is perfected it can be co-opted and replaced with a new Fed backed coin. Bitcoin may join ranks with MySpace and AOL just as the Locust tree will prepare the field for the Mighty Oak.
So I’ll approach this from a completely different angle which is, yes this is great fool at work but IF we accept that the push down the quality ladder is something between permanent and very long lasting due to NIRP/ZIRP then would we not expect the same behavior as drove the housing market surge into 2008? You have to buy because look at the insane gains people are making which drives more gains and as institutions get into the pool the gains will ramp further driving FOMO and literal fear of being fired for incompetence for missing the trade of the century… then once all the institutions are staked and they have all these paper gains… and putting incremental money in drives even more gains… why would it stop? After all as long as large institutions have “assets” on the books all is well. Then finally the value stabilizes as the whales no longer wish to sell massive amounts and businesses start to see it as a store of value, eventually the narrative becomes self fulfilling. If the argument is ultimately that information is useful and it proves to actually be used, then it’s useful, even if it has no inherent value. In much the same way fiat currency is based on acceptability for tax purposes crypto currency just needs to be accepted for something to exist in perpetuity. I would argue greater fool will propel it there whether it makes sense or not because humans aren’t ultimately logical creatures.
As for Jamie… compare the gold market cap to the bitcoin market cap and the image is very different. A bitcoin is no more comparable to an ounce of gold than to a gain of sand or a single Monet, price discover includes supply and demand so Supply matters.