WEEKLY, Apr 1, 2023

Safety and trust and crypto and investing and big things like that...

Hello everyone, and welcome to Q2! You’re reading the free weekly Crypto is Macro Now email, where I look at the intersection between the crypto and macro landscapes, poke at established narratives and share listening recommendations. Nothing I say is investment advice!

I’ve been making changes to the formats of the weekly and the premium daily, to manage the content distribution, hopeful utility and the workload. For more detailed market updates and news commentary and narrative updates, plus a lot of charts and some fun links, do consider subscribing to the premium daily newsletter, it’s only $8/month. Or take out a free trial! 😊

Programming note: 🌺 This newsletter will be taking a break next weekend (Friday-Monday inclusive) for the Easter holiday. 🌺

MARKETS

So, that was a nice change. March is not usually a great month for crypto, but this past month delivered the second-highest March returns for BTC and ETH on record (not counting 2013’s crazy outlier).

This is in spite of a barrage of bad news. We had:

• the closure of the crypto ecosystem’s two main banks, a dramatic weekend in which USDC depegged

• the Coinbase Wells notice in which the SEC informed the exchange of a pending enforcement action

• the CFTC suit against Binance which will most likely dent market liquidity

• an increasingly obvious intention at the regulatory level to attempt to dampen crypto development in the US

• SEC Chair Gary Gensler pretty much saying that he thought ETH was a security

• the US government’s intention to sell 41,490 BTC in coming months – at current prices, that’s almost $1.2 billion worth, and it’s not like the BTC market is super liquid these days

• the macro environment changing as financial conditions have tightened following the banking scare

• signs that US inflation is perhaps moderating but still very far from the Fed’s target

That BTC and ETH can deliver those performances with such strong headwinds is a testament to the tailwinds being even stronger, which suggests strong buying support as new narratives gain prominence.

In the daily Crypto is Macro Now I go into more detail as to market drivers and ecosystem shifts – if you’re not subscribed, you can do so here:

COLUMN

Bitcoin and the changing definition of “safety”

Fortunately, we rarely have to think about Maslow’s Hierarchy of Needs, that triangle we might have seen in school that layers the key human requirements for flourishing. Until, of course, one of the needs towards the bottom isn’t being met, and then we think about it a lot.

To recap, at the very bottom we have the basics for survival: the physical needs of nourishment, rest and shelter, and then layered on top of that, safety. The next part of the stack is the psychological need of belonging and self-esteem, and then we come to the peak of the pyramid which is about achieving one’s full potential. (I know that it’s actually more complicated than described, that many academics disagree with the premise, that Maslow never actually drew a triangle, etc., but bear with me as I sketch out this construct.)

(image via Wikipedia)

Some of you may notice that there isn’t a separate layer for “trust”. One could argue that it is a requisite for every layer in that you need to trust the food you eat won’t kill you, your house won’t get blown away, a friendship will lift you up. But the layer with which it is most intertwined is “safety”, and I’ll argue that it is wedged into that category. Trust implies belief in the safety to feel and to act, and is a core component of pretty much everything that implies both personal and civilizational progress.

So, trust is necessary for safety (which is meaningless if there is no belief in it) and safety is necessary for trust (without basic reassurances, it’s hard to trust anything). What happens when our belief in “safety” starts to change?

Bringing the philosophical into the practical, it is in the financial world that this is becoming most obvious, especially with regard to the “safe” investments that we are told are the sensible choice. Let’s take a look at how they’re doing.

• US government bonds are supposedly the safest assets in the market, in that the US government is not going to default on its debt (right??). However, earlier this month their volatility reached its highest level since the Great Financial Crisis of 2008. Over the past year, with the fastest hiking period since the 1980s, interest rate risk has been higher than ever. Bond values have plummeted, and all this while the cost of insuring against a US government default on its debt has soared to its highest level in over 10 years. That doesn’t seem so safe.

(chart via TradingView)

• What about stocks? We’re told that they are among the riskiest assets, but over a long time-frame they have been up and to the right. The below chart shows the S&P 500 together with an index of long-term government bonds. Which looks safer to you?

(chart via TradingView)

• Then there’s the wisdom of diversification – mimic the large indices, we’re told, and your returns will be better distributed. Only, probing deeper, we see that high-risk tech stocks account for almost 30% of the S&P 500 and occupy the top six positions in the market cap ranking. That sounds more concentrated than diversified.

• And anyone who has interacted with a professional adviser will have heard about the 60/40 portfolio, which counts on bonds and stocks counterbalancing each other to deliver a “safer” return than focusing on just one or the other asset class. Yet last year, the typical 60/40 portfolio lost 18% on a nominal basis, pretty close to the damage done by the S&P 500 alone. Not that safe.

• Houses must be safe, surely? Ah, wait – data released this week shows that US home prices are falling, down 0.2% in January from December, and down 3% from last June. Those percentages may seem small compared with last year’s fall in equities, but since housing is often a family’s most significant investment, those drops can hurt. Still, the house is presumably still standing, right? That sounds reassuringly secure.

• Gold is one of the oldest “safe havens” known to man, a durable metal with a liquid market and (in theory) an unmanipulable supply. However, we can’t always be sure that what we have is actually gold, and it’s complicated to store and to keep out of the hands of people stronger than ourselves. Paper gold is more convenient, but even if we could be sure the bars backing it were real, those bars are subject to seizure. Safe-ish, but not totally.

• Of course, the “safest” thing to do is to shun securities markets and keep your money in your bank account. Despite official protestations that the US banking system is “strong and resilient”, depositors are still nervous although outflows seem to have slowed for now. But the digital nature of banking means that could change in minutes, and it is not yet certain that all deposits would be protected.

• Then there’s bitcoin. We’re told it’s not safe at all, we’re even told it’s “dangerous”. And yet throughout the past year of crashes and disappointments, bitcoin kept on working. The price plunged, but bitcoin didn’t miss a beat. What’s more, in times of turmoil, an asset that is hard to seize but easy to transport would sound refreshingly safe to many fleeing their homes and/or worried about being shut out of traditional payment rails.

So, just as we are starting to realize that it’s time to re-examine what “safe” means, whether it refers to returns, continuity or independence, we have a cultural shift that is asking us to question why it even matters. Even before the pandemic, trust in institutions had been dropping, and the intensifying political polarization seen around the world weakens confidence for many that governments will offer protection, especially if – as we are regularly reminded – the planet is in trouble anyway.

Plus, there’s the “gamification” of investing, which rewards decisions with screenfuls of confetti or at least some social kudos. Fun generally trumps safety, especially when the future for which young people are supposed to save looks increasingly bleak through their eyes.

Overlaid onto this is a growing interest in a new type of asset that runs on rails totally outside the establishment system and that speaks to the growing desire for horizontal community and scepticism of the authorities’ good intentions.

All this points to an inevitable recognition that bitcoin and its peers represent much more than a “risky” investment asset. They represent a shift in investment philosophy that speaks to an increasingly independent generation of investors. They also represent cultural and political shifts that weaken the power of authorities attempting to invoke rules of safety that no longer make sense.

Going back to Maslow’s pyramid where trust and safety are intertwined: if one changes, so does the other. That’s why the investment framework shifts we’re seeing are about much more than portfolio allocations. They’re also about bigger social changes and the recognition that, while wisdom builds up over generations and should not be thrown out the window just because it’s “traditional”, questioning convention helps a culture be more flexible and resilient. A retreat from the new adds to fragility – not very safe at all.

SOME GOOD LISTENS

• NLW offers a breakdown in The Breakdown of the RESTRICT Act, with eye-opening detail and energizing rhetoric.

• This Odd Lots episode with Matt King is key to glimpsing how “tightening” doesn’t necessarily mean tightening, and the next round of “easing” may not have the same results as the previous one.

• Jack Farley interviews Sir Paul Tucker, one of my favourite observers on global economic shifts – big-picture experience, wry sense of humour.

• This What Bitcoin Did interview with Izabella Kaminska was wide-ranging, deep, high-energy and fun.

For more frequent links to key and/or interesting podcasts as well as articles about crypto evolution, the macro economy or sometimes just quirky things, subscribe to the premium daily Crypto is Macro Now!

HAVE A GOOD WEEKEND!

Most of you are probably familiar with the bittersweet pleasure of wallowing in a sad song. Even when they are an extension of one of life’s many setbacks, sad songs can encapsulate a moment beyond the rawness of individual impact and make us feel part of something bigger, something shared. That is a key component of their curative power. I find them uplifting, ideal for late night thinking, and sometimes a helpless trigger for a memory soggy with feeling.

I was reminded of this by a John Authers newsletter this week, in which he offers and also crowdsources a list of sad songs – he himself was inspired by the breakup playlist featured in the third season of Ted Lasso.

So, in keeping with the group therapy spirit, I offer two contributions: my very first “breakup song” when I was but a naïve young thing was Phil Collins’ “Against All Odds”.

And my second breakup song, from an older, wiser place but nevertheless motivated by the same heartless complicated individual, is “Turn Your Heart” by Matilde Santing.