Time and again over the years, I’ve argued that the volatility associated with Bitcoin makes it an untenable investment for portfolio managers.
That was before people started suggesting corporate treasurers should hold it on the balance sheet, a decision I’ve openly described as lunacy.
To recap, if you want to argue that Bitcoin is an asset, it’s pro-cyclical 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.
“While the S&P 500 has returned 14% YTD, realized volatility equaled just 14%. This combination of high return and low vol explains the high YTD Sharpe ratio of 2.4 (1.4 on a 6-month basis), which would rank in the 89th percentile of annual S&P 500 risk-adjusted returns during the past 30 years,” Goldman’s David Kostin said Friday, adding that “despite Bitcoin’s 27% climb YTD, the annualized risk-adjusted return for the cryptocurrency would be just 0.8, or one-third that of the S&P 500.”
Readers used to ask if I’m “anti-crypto.” My answer was never very satisfying, so most of you stopped asking. The reality is, I just don’t care enough about what other people choose to do with their lives (or money) to have strong feelings one way or another about anything, really.
Let me give you a poignant example. Most people still don’t understand this, but I was never “anti-Trump,” where Trump is citizen Trump. I just became “anti-” Trump as president for a laundry list of obvious reasons, but mostly because he forced me (and everyone else) to watch what amounted to a high stakes, White House-themed version of “Keeping Up With The Kardashians” every, single day for four long years.
For a guy (me) who revels in serenity and cringes at Americans’ voyeuristic penchant for i) immersing themselves far too deeply in the everyday lives of their friends, neighbors and fellow netizens, and ii) living the high life vicariously through the racy Instagram posts of their favorite celebrities, being forced to follow the play-by-play of one man’s life for an entire presidential term was a fate worse than death. Member of the “Resistance” I was most certainly not. I just wanted the guy to leave me the hell alone.
Bitcoin is a lot like Trump in a number of ways. It’s volatile, its fans worship it like a god, its detractors abhor it with a disdain typically reserved for evil spirits, it purports to be pure and populist but it often seems more like an oligopolistic fraud magnet, it’s the subject of tax scrutiny, it’s always trending on social media and it doesn’t stop making headlines on weekends.
There’s not much there that appeals to me. That’s true of all kinds of things, but Bitcoin, like Trump, doesn’t ever leave me (or anyone else) alone. Unlike the former president, Bitcoin can’t physically shout, but it doesn’t have to. The price action does all the “talking” and besides, its fans and detractors do enough shouting in one virtual back-and-forth for a lifetime. So, as was the case with Trump, I’m forced to weigh in on Bitcoin because it never shuts up and it’s squarely within this portal’s purview (markets, economics and politics).
The truth is, I don’t care for it in the capacity many people ascribe to it. I don’t care for it as a currency or as a store of value or as an asset. It’s fine as a poker chip, but that’s not how fans like to describe it. By the same token (see what I did there?), I don’t care for Trump as the guy with the nuclear launch codes, but he’s relatively harmless as a boisterous real estate developer just as long as you remember not to do any deals with him or enroll in his “university.”
If Bitcoin gains widespread acceptance as anything other than a poker chip, things will go about like they did when Trump gained widespread acceptance as something other than a tacky D-lister.
Just like Trump’s presidency, millions upon millions of people are being sold some version of a lie with Bitcoin. Eventually, that will end badly for almost everyone involved.
Just as Trump had plenty of ostensibly serious people on board with his “cause,” so too has Bitcoin roped in a long list of respected investors willing to stake a portion of their wealth and reputations on something they know might backfire in spectacular fashion.
And just like every irredeemable Trump tweet, every damning indictment of Bitcoin is explained away by its boosters as just “Bitcoin being Bitcoin.”
It’s not Trump’s fault that the Kremlin wanted him to be president. Like it’s not Bitcoin’s fault that Russian-based hackers decided to shut down one of America’s main fuel arteries and demand Bitcoin to restore it.
And sure, Trump said a few (thousand) things that nobody should ever say (or even think) in years two, three and four of his term, but he was “new” to politics. Just like Bitcoin’s ~30% plunge in a matter of hours (a few weeks back) was just part of its “maturation process,” a dozen years on from inception.
One thing we learned in 2021, though, is that when it comes to widely-adopted narratives accepted by millions with something approaching religious fervor, irreparable calamity isn’t enough to relegate the lie to the dustbin of history.
Maybe Bitcoin, like Trumpism, will outlive its own inevitable cataclysm — and then cite the catastrophe to extract more money from the same victims.