Meanwhile, in the land of the make-believe, Bitcoin hit a new record over the weekend, exceeding $60,000 in the process.
At this point, there’s little utility in attempting to “explain” or rationalize the coin’s “behavior.” Nobody knows why Bitcoin does what it does at any given time.
Media articles are replete with references to increased adoption, and that’s indeed an important part of the story.
In “How Bitcoin Can Replace The Dollar,” I recapped the “adoption” bull case on the way to noting that ultimately, Bitcoin is just like the dollar or any other popular fiction. It’s an inter-subjective phenomena. Adoption by the likes of Mastercard, Tesla, and Scott Minerd represents the ongoing construction of an “alternative imagined order” (as Yuval Noah Harari puts it). The more people believe it and trust it (the more embedded it is in the world’s consciousness), the better its chances of success vis-à-vis supplanting other imagined orders.
That’s probably the best way to conceptualize of Bitcoin. Outside of being a fellow (if competing) inter-subjective monetary phenomena, Bitcoin has no more in common with gold or the dollar than an ancient silver coin did with cowrie shells. Bitcoin clearly isn’t a hunk of yellow metal and it’s not a colorful paper certificate representing a claim on a government and faith in “God” either.
Little wonder, then, that correlation charts seem to make less and less sense over time.
“Bitcoin is often compared to gold, but pair less correlated as token booms,” read the subheader on a version of the chart (above) published by Bloomberg on Saturday.
That’s hardly a mystery. We’ve decided, collectively, that gold (as a form of money or a store of value) has certain known relationships with other kinds of money and savings vehicles. Gold, by virtue of being finite, is supposed to “hedge” against the assumed inflationary consequences of the unbridled creation of paper money. But as we’ve seen over the last several months, that promise is subject to a list of sometimes ironic caveats. For example, expectations of higher economic growth catalyzed by the creation of dollars (stimulus) can push yields on interest-bearing dollars (Treasurys) higher. That, in turn, can raise the opportunity cost of holding an inert metal with no internal rate of return, up to and until the promised inflationary spiral kicks in. In trader parlance, gold can fall victim to rising real yields.
There are other, even more paradoxical caveats. If real yields rise fast enough, market participants might rethink the appeal of ownership certificates (stocks) in imagined entities called “companies.” If the going market rate for those certificates (stock prices) declines fast enough, it can create demand for gold in what’s commonly known to traders as a “safe-haven bid.”
You’ll note that, when the lingo is put in scare quotes and examined from outside the market (i.e., when we call things what they are), it all sounds quite absurd.
All this trading and arguing about the value of things takes place inside a fantasy world of our own creation. There’s nothing real in the entire equation. Dollars obviously aren’t an objective reality and neither are their interest-bearing counterparts. Companies are imaginary constructs. Stocks represent ownership stakes in those constructs, and while you could argue that partial ownership of a company does, in fact, give you some claim on an entity’s “stuff,” companies can exist without much in the way of physical assets. Just ask Coinbase, which is going public at a valuation near $100 billion, but lists no physical address in its regulatory filing. Gold as money isn’t real either. The only thing that’s real in any of the above is gold, the yellow rock.
But nobody wants to think in these terms and, indeed, it isn’t very useful to do so on a daily basis. So, how to classify Bitcoin?
Well, for me anyway, the last 12 months have made it abundantly clear that Bitcoin trades more like a risk asset than anything else. Lots of money is looking for a home, and increasingly, it’s finding its way into speculative propositions, with Bitcoin being perhaps the most speculative of all.
When things get dicey, Bitcoin tends to waver. It crashed during the COVID panic, and rare stumbles since then have generally coincided with periods of market angst, with some exceptions to account for the digital token’s penchant for diving on no readily discernible catalyst.
Of course, periods of market tumult have been exceedingly rare since April of 2020, when central banks stepped in, promising to provide cheap money in virtual perpetuity and also to create money to purchase assets in order to ensure not just that investors would be made financially whole (and then some), but also that the imagined entities behind those assets (governments and companies) could continue to finance themselves at virtually no cost.
The test for Bitcoin, like all other assets and currencies not called “the US dollar,” will be the next catastrophe or crisis. My guess would be the digital token will suffer large losses, right alongside stocks, bonds, gold, and everything else that will be summarily liquidated to raise USD “cash.”
But if dollars are just an imagined construct like all the rest, why do people flee to them in times of deep distress? Simple: Because the assumption is that the world isn’t actually ending, and if it is, none of it matters anyway. Assuming the crisis passes, whatever needs to be bought again can be bought in dollars. And if the crisis doesn’t pass, then you won’t be any worse off with dollars than you would with stocks, gold, Bitcoin, or corporate bonds. It’ll all be worthless.
At a certain level, everyone understand this. It’s why the supermarket shelves are bare when a hurricane is approaching and why Americans broke the all-time record for gun background checks last summer when the combination of a raging virus and large-scale violent protests made the prospect of a complete societal breakdown seem suddenly real.
When anarchy beckoned, humans rushed to exchange their dollars for weapons. And a few months previous, they were more than willing to hand over ornate green pieces of paper featuring the signature of the Treasury Secretary and allusions to trust in “God” for rolls of white paper embossed with the word “Charmin.”