Hi everyone! You’re reading the free weekly edition of Crypto is Macro Now, where I update and/or re-share a couple of things I wrote in more detail about during the week. If you’re a premium subscriber, you’ve probably already read them, so feel free to scroll all the way down for some non-crypto links.
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In this newsletter:
No, crypto is not yet “mainstream”
Bitcoin ETFs: What academics think
Instead of February travel…
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Some of the topics discussed this week:
Why I’m sceptical of the China liquidity narrative
Why I might be wrong
The split lens of risk measures
Markets seem disconcertingly unaware
What Powell didn’t talk about
The potential impact of FOMC rotation
The other Fed mandate
Currency turmoil accelerating
What the Evergrande liquidation means
No, crypto is not yet “mainstream”
On the one hand, it’s encouraging when respected economists try to “diagnose” Bitcoin, putting it firmly on the shelf of things they think about (even if only fleetingly).
On the other, it’s disappointing when they don’t spend enough time getting basic facts straight before concluding that it is about to become, yet again, irrelevant.
I know, writing opinion pieces on a deadline is really hard – I did it for years when I was at CoinDesk, and am painfully familiar with the stress. There are not enough hours in the day to research everything deeply, and Bitcoin is complicated. Also, people regarded as experts are surprisingly reluctant to admit how much they don’t know. And there’s more reputational risk in supporting something and being wrong than in being late in understanding, especially when you don’t have to compete on investment returns.
On Friday, Bloomberg’s Allison Schrager published a piece on Bitcoin that contained, well, let’s just say a lot of factual errors. As usual for Allison’s pieces, it’s well written and witty, with her trademark big-picture quirkiness (of which I am a fan). So, it is with huge respect and in the spirit of collaboration that I point out some of the more obvious misconceptions.
Let’s start with this one:
“crypto has gone fully mainstream – which means it has peaked”
Conflating Bitcoin and “crypto” is a mistake many make, but they are very, very different. DeFi is far from mainstream, so is decentralized computing, so are DAOs. Easy-to-understand stablecoins are not quite on the road to “mainstream” just yet.
And even Bitcoin is not yet close to being “fully” there – if it were, we wouldn’t have to still wade through so much misunderstanding and misinformation. True, it’s getting nearer: the spot ETF launches are a big step forward, Bitcoin is often covered in economics classes and few can claim they haven’t heard of it. But investment professionals are still struggling with how to explain it, regulators still don’t agree on how to classify it, and new use cases are still emerging.
Next, here’s an establishment classic:
“The best use case appears to be in the black market or in a country with a failing currency.”
I’m not sure where to start with this one. Perhaps with the qualifier “best”, since that tends to be subjective. Arguably, black market transactions are not the “best” use case for Bitcoin in terms of either justification (if the transactions lead to crime) or actual numbers (blockchain forensics firm Chainalysis estimates that 0.34% of total online cryptocurrency transactions are used in crime, with less than a quarter of that coming from BTC).
Citizens of a country with a failing currency would probably agree that Bitcoin’s “best” use case is as a savings protection and financial access tool. But the sentence reads as if their needs should not concern dollar earners – I doubt that’s what Allison meant, but it highlights how easy it is for those of us who live in stable economies to dismiss the value of helping not-quite-so-fortunate others to preserve their economic independence. Even if Bitcoin was only useful in countries with failing currencies, that could easily be enough to justify a valuation of hundreds of billions, given the broadening scope of that category.
Moving on, here’s a misunderstanding that showcases the very human need to classify assets into definable buckets:
“In this sense, becoming mainstream is the kiss of death. Bitcoin is now a regulated asset that can be bought on an exchange. So what’s the point now?”
This seems to assume that Bitcoin can only be one thing. Bitcoin has to be either a speculative asset or a store of value, it can’t be both. Bitcoin has to be either a payment rail or a hedge, it can’t be both. Bitcoin has to be either a mainstream asset or a “rebellious” investment (not my adjective), it can’t be both.
To be fair, this is what market analysts are used to. Stocks, bonds, real estate, etc., all have clear functions and investment profiles. We are unlikely to ever confuse them with commodities, whose use cases can change. Some commodities already have multiple uses: for instance, gold looks nice in jewellery, doesn’t change when stored in a vault for centuries, and has high electrical conductivity. We’re ok with that, but stocks can only be stocks.
In this sense, bitcoin is like a commodity with multiple use cases; but it’s also a token that represents the value in a young, global technology network with no gatekeepers. It’s an immutable store of value and a decentralized payments rail; it’s also a liquid, open-access technology play of the type normally only available to venture capitalists or wealthy private investors.
Bitcoin can be a mainstream investment to some. It can be a statement of financial independence to others (not all of Bitcoin’s global market cares about the SEC’s approval). It can be whatever its holder wants it to be, because there is no one group that defines it. Price is driven by short-term traders, yes – but longer term accumulation is based on many other factors.
Allison correctly points out that the BTC price fell after the listing of BTC derivatives on the CME, and of Coinbase stock (she misses the listing of first BTC futures ETFs, after which the price also fell). Each event marked local tops. But each time, the drops were because of outsized expectations leading to speculative run-ups. And each time, the lows were higher. Just like the drop we’ve seen over the past couple of weeks does not mean that Bitcoin has failed, so the drops after previous market validation events don’t mean that Bitcoin hasn’t been making progress both in adoption and awareness.
“You would not expect the price to fall with a normal asset.”
Well, “sell the news” slumps in traditional assets after a speculative run-up are quite common. And, anyway, Bitcoin is far from “normal”. That’s a large part of its appeal.
One reason Allison gives for the drop after these market events is that being traded on more public markets means “more information is incorporated into the price, and markets are saying [Bitcoin] is not worth much”. As I write, Bitcoin’s market cap is equivalent to that of Berkshire Hathaway, and is more than 40% greater than the world’s largest chip maker TSMC. The market caps of Tesla, JPMorgan, Visa are lower still – are they “not worth much”?
Allison is correct in pointing out that Bitcoin’s finite supply is not what gives it value, at least not on its own. As she reminds us, other things have finite supply, such as Franklin Mint collectibles (I had to look these up, had never heard of them), and they are not worth hundreds of billions of dollars.
What she misses is that Bitcoin is an evolving technology with a valuable functionality: the ability to transfer monetary value without going through centralized controls.
Collectibles can do this too, but they are limited by an opaque market (what is the “consensus” price?), as well as physical and geographical limitations (shipping can be complicated, blocked or end in a broken product). Plus, there’s the need to trust that the item is genuine and that the seller or payment company won’t change the deal. And no-one would call collectibles a network on which applications can be built.
What gives Bitcoin value is in part its limited supply – but that alone does not produce a higher value without growing demand. In Bitcoin’s case, the growing demand comes from its transferability, fungibility and market liquidity, combined with deepening turmoil in currency markets around the world.
This brings us to the final misconception that I’ll pick on:
“[Bitcoin] is much more volatile compared to the dollar (the asset it is meant to hedge) or to the stock market, which is a better inflation hedge.”
Bitcoin is not meant to hedge the dollar. I could argue that Bitcoin is not meant to hedge anything – according to the original white paper, it was designed to be a peer-to-peer digital cash transfer mechanism. Much like gold (which also was not created to be a hedge), Bitcoin can be used for whatever people want to use it for: speculation, a data storage network, an art marketplace or a store of value. If people want to use it as a hedge, so be it.
Also, the need for a currency hedge is arguably much greater in non-dollar currencies such as the Argentinian peso, the Egyptian pound, the Nigerian naira, the Turkish lira, the Pakistani rupee and so on. Many economies around the world struggle with depreciating currencies relative to a trade basket, as well as a scarcity of dollars – holding bitcoin gives citizens of these jurisdictions protection against that depreciation, as well as an asset that can be converted into dollars at any time of day or night, any day of the year.
But, let’s face it, given the likelihood that the US debt will continue to balloon without a corresponding increase in federal revenue, the value of the dollar against a basket of finite commodities is likely to continue to decline. As a growing chorus of experienced fund managers can attest, a hedge against continued dollar dilution is not a bad idea.
To conclude, Allison is a great writer and an original thinker – I recommend following her work. And the fact that someone as smart as she is still doesn’t appreciate the premise of Bitcoin or the scope of its global market – well, that in itself highlights just how far from “mainstream” it still is.
Bitcoin ETFs: What academics think
One gem that Allison surfaced in the article I talked about above is this Chicago Booth survey of leading academics as to whether they think the SEC approval of spot BTC ETFs leaves investors “measurably better off”.
Survey respondents are asked to say whether they agree or disagree, to what extent and with what level of certainty.
Weighted by level of conviction, the results are pretty even: 40% agree, 36% disagree, while a refreshing 24% are uncertain.
(chart via Chicago Booth)
On the surface, this is encouraging – not just that roughly half of respondents who have an opinion are in favour of the listing, but that almost a quarter are willing to admit that they’re not sure. However, the response rate was low, and the comments revealed some confusion about what they’re supposed to be agreeing with. “Uncertain” doesn’t mean they don’t understand the topic, rather that there are arguments for each side (in true classical economist fashion). “Disagree” can mean that they think the SEC made a mistake, or that they think the SEC did the right thing but bitcoin is bad, or that bitcoin is good but the bump in investor welfare is not measurable. Confusing.
Overall, most of the comments were along the lines of “the SEC shouldn’t be making value judgements, but also investors shouldn’t be investing in bitcoin”.
For example:
Anil Kashyap at Chicago Booth (voted disagree):
“It is dangerous to argue that the government knows better and should protect people from having the choice to invest easily in bitcoin. but at some point I expect this to end in tears and would rather not have regular investors owning this stuff.”
Michelle Lowry at Drexel Lebow (uncertain):
“First, it reduces transactions costs, which is a positive for investors who would have purchased bitcoin anyway. However, it will likely cause more investors to purchase bitcoin, which may be negative given the lack of connection to a real asset, unclear value proposition, etc.”
John Cochrane from the Hoover Institution at Stanford (agree):
“It's not the SEC's job to stop people from making what it thinks are bad investments.”
Darrell Duffie at Stanford (disagree, I presume with the premise of the question):
“The SEC correctly acted as mandated, providing access to products meeting given legal requirements. Beyond that, SEC is not there to judge welfare.”
And here are a couple of unexpectedly original responses:
Campbell R. Harvey at Duke Fuqua (uncertain):
“It might have been measurable if the SEC had approved the first ETF application in 2013 when BTC was at $90. Now, after 10+ years of stonewalling BTC=$44,000. The SEC failed the very investors that it was charged to protect in the 1933. DeFi is promising. Look for ETH ETF next.”
Eugene Fama at Chicago Booth (disagree):
“Unless it becomes a widely used medium of exchange, bitcoin should eventually implode. The alternative is that all I learned from monetary theory about how currencies acquire value is meaningless.”
Fama’s response is worth thinking about. With a Nobel prize for work on capital markets and stock prices under his belt, Fama knows a thing or two about how assets acquire value. His comment scratches the surface of an interesting debate that we have yet to dive into: are currencies assets? If not, why not? And if so, do the same theories of value hold?
HAVE A GREAT WEEKEND!
Truthfully, I’ve never found January to be the bleakest month of the year. Christmas decorations are still up, the comedown after the festive season feels more like a rest than a disappointment, and the stores have good discounts.
No, for me that role belongs to February. By the second month, the novelty of the new year has worn off, the weather is still a bit gloomy and cold, and there are still months to go before the warm sunshine of summer.
When I was younger, I used to try to plan a routine-busting trip every February, but travel seems a lot less fun these days, so I’ve substituted trips for books and local excursions. Nevertheless, I’m keeping alive the hope that I’ll get back to it one day.
Until then, there’s the beauty of photography. Today I’m going to share some of my favourite images from the Travel Photographer of the Year 2023 competition. These photos don’t make me want to get on the next plane, nor do they make me wish I were somewhere else right now. Rather, they leave me awestruck at the beauty in a single moment.
(photo by Lilly Zhang)
(photo by Tim Bird)
(photo by Shyjith Onden Cheriyath)