What If Bitcoin Just Never Matters?

When Ray Dalio told CoinDesk’s Chief Content Officer that he (Dalio) owns “some Bitcoin,” the media and crypto proponents were quick to seize on the soundbite.

And that’s fair. I did too. It’s a big deal when the titan (not just “a” titan) discloses a position in the most controversial “asset” on the planet.

Of course, not everyone agrees it’s an “asset,” hence the scare quotes. “Bitcoin and other cryptocurrencies aren’t assets,” Nouriel Roubini told Goldman, during a recent interview. “Assets have some cash flow or utility that can be used to determine their fundamental value [but] Bitcoin and other cryptocurrencies have no income or utility.”

Read more:

It’s Official: Ray Dalio Has ‘Some Bitcoin’

Nouriel Roubini On Bitcoin, Blockchain Amid Crypto Turmoil

But even if you want to argue that Bitcoin is an asset, it’s pro-cyclical (Roubini mentioned that too) and that’s a problem for portfolios. While everyone’s needs are different, introducing an extremely volatile position that’s i) impossible to value on a fundamental basis, ii) is positively correlated with risk assets, iii) trades 24/7 and iv) reacts violently to totally unpredictable events (e.g., tweets), is a decision that, at best, is conducive to sleepless nights. At worst, it could be a career killer.

For those outside the cryptoverse, the prospect of “spillover” from a Bitcoin selloff is disconcerting. It’s one thing if those who choose to own Bitcoin discover that it amplifies (rather than buffers) declines in a panic (as it would have in March of 2020). It’s another if a selloff in Bitcoin triggers a selloff in other assets.

That’s one reason why Tesla’s decision to put it on the balance sheet was unnerving for some folks. Late last year, just before Tesla was added to the S&P, Goldman’s derivatives team suggested Tesla’s addition to the benchmark would have “a small mechanical impact on index volatility and the VIX.”

While there’s no real way to quantify what the introduction of Bitcoin to Tesla’s balance sheet could mean when it comes to the company’s impact on index vol, it probably doesn’t do anything to dampen the effect. And it’s not about the mechanical impact anyway, it’s about the precedent set by an S&P 500 constituent equating cash (and equivalents) with Bitcoin. What happens to index vol if that becomes a trend and it starts to manifest in weird ways during earnings season?

With this in mind, one silver lining from last week’s crypto carnage is that the impact on the broader market was quite limited, suggesting that even if crypto proponents may be disheartened to learn that, in a generalized panic, Bitcoin is even worse than owning stocks, “regular” market participants won’t need to worry too much about the impact of a Bitcoin panic on the overall market.

In fact, as Barclays suggested in a new note, it’s probably for the best that crypto finally sold off, as that completed the washout that had already manifested in steep declines for “hyper-growth,” SPACs and other manifestations of “froth” (figure below).

“With the sharp fall in cryptocurrencies over the last few weeks, most of the more speculative/liquidity driven trades have now seen some kind of reversal, and are generally at or below levels seen at the beginning of the year,” Barclays said, adding that “removal of some of the excess froth (and likely leverage in those trades) at an earlier stage reduces the chances of a large correction in speculative assets spilling over into assets whose returns are more fundamentally anchored over the long run by actual growth/earnings.”

Note that over the same period, the benchmarks have obviously held up much better, even as some folks (myself included) fretted that dramatic declines in some of these areas (most notably crypto) could lead to broader de-leveraging.

“Thus far, falls in the speculative assets have failed to de-rail equities, despite one or two days where the narrative was suggesting the crypto tail was wagging the dog (real economy/equities),” Barclays went on to say, before noting that although crypto’s correlation to risk assets “naturally ris[es] when there are wider risk-off/risk-on events, such as the COVID-induced sell off in March last year,” the notion that any such contagion can impact “fundamentally driven assets like equities for more than a few days” is probably misguided, if for no other reason than “the relatively small size of the crypto market versus equities or bonds” (see the figures, below).

This speaks to the correlation point, but also to something Dalio said during his remarks to CoinDesk’s Michael Casey.

“Right now, it’s not such a big deal,” Dalio said of crypto, while elaborating on regulatory risk in advanced economies. “And, you know, fighting is more of a big deal.”

Essentially, Dalio argued that Bitcoin (and crypto more generally) isn’t high on the priority list for officials and regulators in developed markets and that cracking down (China-style) would be more trouble than it’s worth given the relative size of the market.

That raises the obvious question: Does this story (crypto) even deserve the press it gets? Blockchain hasn’t achieved widespread adoption and even after ascending to $63,000, Bitcoin still isn’t worrisome enough for regulators and politicians in the world’s most advanced economies to go after it, despite having more than enough in the way of political cover to embark on a Beijing-esque crackdown. (If the Colonial Pipeline ransom wasn’t enough to light a fire under America’s regulatory apparatus, what would?)

So, I wonder (and I’m just musing idly on a sleepy Thursday), what if crypto just hangs around, never collapsing but never really achieving much in the way of “domination” and universal adoption? What if it never becomes a “big deal”? Maybe it’ll just persist in perpetuity as a fun casino that doubles as a method of payment for some vendors using some platforms.

Meanwhile, Carl Icahn said Wednesday he may soon get into crypto in a “big way.” “What’s the value of a dollar?”, he asked. “The only value of the dollar is you can use it to pay taxes.”