WEEKLY, Nov 16 - Bitcoin, safety AND volatility
plus, an overlooked risk in the EU's CBDC campaign
Hi everyone, I hope you’re all doing well!
You’re reading the free weekly version of Crypto is Macro Now, where I reshare/update a couple of articles from the past few days.
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In this newsletter:
Yes, Bitcoin can be volatile AND safe
CBDCs and an EU tussle of power
Some of the topics discussed this week:
BTC, gold and the US dollar
CBDCs and an EU tussle of power (shared below)
BTC sentiment: not frothy yet
Rates expectations on the move
Tokenized receivables from the world’s largest marketplace
Inflation: stickiness turns out to be sticky
Yes, Bitcoin can be volatile AND safe (shared below)
Happening fast
Rates expectations don’t make sense
Rates expectations II: moving a monolith
What Tether’s recent moves say about crypto’s evolution
Yes, Bitcoin can be volatile AND safe
Oh, Allison, really?
Earlier this year, I wrote a rebuttal to an Allison Schrager column that showed how little she knew about crypto. Back then, she insisted that crypto had peaked because it had gone “mainstream”. This was in January, when BTC had less than half the valuation it does today.
She published a similar attempt earlier this week, called “The Bitcoin Bubble Isn’t All About Trump”, which shows that her understanding has unfortunately not deepened much.
(An aside, surely when you are about to write on a topic you are not familiar with, a minimum of research is warranted? Talk to a couple of colleagues maybe? Unfortunately, we’ve seen this across time and across specializations, and maybe it comes down to humans generally assuming they know more than they do. But I digress.)
Anyway, like I said back then, I think Allison is smart, a good writer, and anyone getting their opinions out in public on a regular basis is brave in my book, especially in this troll-happy media landscape.
So, it is with respect and out of professional courtesy that I offer the following corrections:
#1
“I think I finally understand value of cryptocurrencies: They add some volatility to your portfolio.”
Not necessarily. Stablecoins are not volatile, for instance, and they are cryptocurrencies.
But being charitable, let’s assume she means BTC, ETH and the like. (I have to assume she by now knows enough to not conflate Bitcoin with all cryptocurrencies, surely someone she trusts has pointed that out?)
A cursory two-minute dive into what Ethereum, Solana and other blockchains are trying to do would make it obvious that they are technology platforms whose tokens represent the utility of those platforms. Insisting that has no “value” shows a surprising lack of interest in innovation, especially when the impact is no longer purely theoretical – millions of users around the world use decentralized applications, which currently have over $100 billion worth deposited in their smart contracts.
(chart via DeFiLlama)
And Bitcoin is a lifeline for millions around the globe who either have lost financial access from censorship, or live in fear they are about to. It may not be a good payments rail for those of us who live in sophisticated financial systems, but most of the world doesn’t. Its verifiable hard cap makes it a provably strong store of value relative to all fiat currencies, including the mighty dollar. And it is one of the most-used networks for storing evidence of digital ownership. These are not worthless functions.
It is frustrating to see otherwise well-informed people assume their small circle is universal. I’m pretty sure no-one outside the Western financial echo chamber sees cryptocurrencies as having no “value” other than volatility.
#2
“It’s not possible for something to both add risk and provide safety.”
Of course it is. On the financial side, it’s all about timeframe. Short-term, BTC is volatile because it is a new technology. Longer-term, it offers safety, especially in an increasingly volatile world.
And if you equate financial safety with “no loss”, then we can argue that Bitcoin is safer than equities or corporate bonds – it can’t go to zero. If a stock or bond goes to zero, it’s not coming back from that. Bitcoin may fall, but will not reach zero because of the diversity of its use cases, and because it can never be turned off. Someone, somewhere will want to use it for something. With that, the token will always have a value. The price of BTC will obviously swing more wildly than most (not all!) equities and bonds. But if we want the ultimate safety, we have to think bigger.
On the philosophical side, we can also argue that only risk gives you safety and quality of life. Never going outside is safe but limits experience, never having friends is safe but breeds social instability, never doing exercise is safe but damages health. New technologies are always risky, but also push productivity and civilizational progress. Risk is a healthy and necessary part of life – I truly don’t understand the mainstream financial establishment’s aversion to it.
When it comes to Bitcoin, risk and volatility are not the same thing at all.
#3
“Crypto has been around for only about 15 years, which is not much time in financial markets in general and certainly not enough time to make a definitive inference about its pricing behavior.”
Oh, nice, here is something I agree with! Yet Allison then goes on to pull out the “correlation” justification for her conviction that crypto is nothing more than a high beta portfolio asset. Cryptocurrencies (her use of the term) are “very correlated with the overall stock market”. I invite anyone to play around with the actual numbers – try various assets (BTC, DOGE, SOL, etc.), choose your correlation benchmark (S&P 500, Dow Jones, Russell small caps), choose your measurement window (10 days, 30 days, 90 days) and play around with timeframes (try 2024, 2023, 2022, April to September of this year…). If I were better at coding, I’d spin up an interactive for you to test. But I assure you, you’ll get a wide range of results that show that sometimes crypto is correlated with the stock market, sometimes it isn’t.
So, there’s “not enough time to make a definitive inference”, but here’s a definitive inference based on what seems to be a poor understanding of how manipulated correlations can be. The above exercise will show that you can pretty much always find a correlation number in line with whatever narrative you want.
The three quotes above are just from the first three paragraphs.
The rest of the article continues to insist that cryptocurrencies can’t be a good store of value because their high correlation with the stock market shows that they won’t protect savings from being inflated away. Yeah, I don’t get the logic sequence, either. Allison also suggests that if what you want is volatility, try leverage instead.
To be fair, Allison is writing for the Bloomberg readership, which is market-focused and largely concentrated in Western economies. And I do admire her refusal to pander to the global audience I assume Bloomberg wants to cultivate – op-ed writers shouldn’t take commercial considerations into account, I’m serious on that. Plus, her job is to share her opinion with us, we don’t have to agree. As I’ve said before, I am a fan of her work, my frustration here doesn’t change that.
But I live in hope that market commentators will do more to broaden their lens and realize that timeframes are variable, safety is relative, and asset evolution is driven by people who are aware that most of the world is afraid of a lot more than a US stock market crash.
CBDCs and an EU tussle of power
The messaging around a retail central bank digital currency (CBDC) in the EU is getting noisier, which suggests the idea is nearing approval. But friction is building in the halls of financial supervision, which highlights not just the likely futility of the initiative, but also significant fault lines in the EU system.
The official version
A couple of weeks ago, European Central Bank (ECB) executive board member Piero Cipollone published a post explaining to a retail audience why a CBDC would make our lives so much better.
A huge pain point (that you might not have been aware of) is that the current digital payments landscape in Europe is fragmented, and we are frustrated (news to me) by the lack of a “universal” application usable in any situation. Some rural fruit stalls only take cash, for instance, and surely we would insist on swiping our phones. Also, we can’t use the same app to send a remittance as to pay for a taxi, which we’re told creates unnecessary stress.
According to Cipollone, a CBDC would solve these issues, as it would be accepted throughout the region. For those areas that don’t take digital payments because of a lack of reliable internet access, or the thin margins that make card payments unprofitable, well the ECB has a solution: free digital payments that also work offline.
And for those worried about privacy, he insists they needn’t: offline payments won’t transfer personal data, unlike current digital payment services. Bottom line, “the project promises greater freedom and convenience.”
On the one hand, we can raise an eyebrow at the assumption that trust in centralized authorities will give us “greater freedom”.
But Cipollone is selling an idea with what he thinks is a well-crafted pitch in a format many will recognize: convince the buyer that this product is the only possible solution to a problem they didn’t know they had.
Only, an adage in politics and finance is that there is rarely a solution that doesn’t create other problems. And in this case, they’re potentially huge and far-reaching, as they not only throw into question the role of a central bank, they also uncover an unsolvable weakness in the EU structure.
(Photo by Charlotte Venema on Unsplash)
Rumblings of discontent
First, there’s the question of whether a central bank should be servicing retail clients. This went out of fashion in western economies in 1946, when the Bank of England was nationalized and withdrew from the retail market. If the ECB were to attract retail money, it could be accused of competing with the banks it is supposed to regulate.
Glossing over that fundamental shift in the commercial bank-central bank relationship, the ECB has a solution: a cap on the amount of CBDC individuals can hold in their wallet. It’s unclear just how this is the “freedom and convenience” Cipollone promised, but at least it would limit any drain of deposits from the commercial banking system.
Second, there’s the question of whether a central bank should be building digital payment platforms. Central banks are tasked with monetary stability, and in some cases, also full employment. How do digital payments fall into either of these categories?
The central bank will argue that, since it is the only supplier of physical cash, it should handle the digital equivalent. But the two services are not equal as 1) there are plenty of digital equivalents already in the market that work just fine, and 2) in a competitive landscape, digital services are less about the transfer as they are about the user experience. The printing of bills and notes is not competitive, only central banks can do that. But digital payments? Very competitive, no matter how strong the guarantee may be – after all, central bank security is not a huge priority when buying a cup of coffee or a train ticket.
Third, and here it starts to get even more complicated, is the decision on the individual holding limit. It’s not so much the level, it’s the nature of the decision. Does it fall within the scope of monetary policy? Or is it closer to financial plumbing rules?
The ECB seems to assume that the cap is part of the overall CBDC design which falls under its purview.
National central banks disagree, according to a recent report in Politico.
They see the decision as directly impacting national banking systems, with a high cap potentially exacerbating any bank runs. They also bristle at decisions that have a local impact being taken by what is seen as an increasingly out-of-touch technocratic institution.
The fault lines
One of the deeper problems (which could also be an advantage) is the lack of harmonization across the European banking system. The region has currency union, but not banking nor capital markets union. The ECB supervises national central banks as well as systemic commercial financial institutions – for instance, it directly supervises Banco Santander, one of the largest banks in Europe, but not the Caja Rural de Aragón.
National central banks supervise all local commercial banks, have some leeway in setting macroprudential guidelines (banking rules that can impact the economy, such as reserve ratios, mortgage limits, etc.), and would be expected to step in should any local non-systemic bank run into difficulty – such as, an outflow of deposits into an obviously very attractive ECB-issued wallet. This is especially relevant given the lack of centralized EU deposit insurance, with different regions having different levels of coverage in the case of a bank run.
So, is the wallet cap a macroprudential guideline that should be set by or at least in consultation with national central banks? Arguably, the smaller banks not under direct ECB supervision would be most vulnerable to any outflows. Should national central banks pick up the tab for a situation possibly created by the ECB?
The ECB is reportedly worried, however, that devolving the cap decision to national governments could leave it open to political influence – some authorities might use the cap to undermine the project. Or, they could bow to public demand for higher caps, potentially destabilizing the local banks they are tasked with protecting.
At the heart of this divide is national resentment at what is seen as ECB overreach, and the desire of the European central bank to maintain its relevance in an increasingly digital world.
Whichever side wins on this issue, European banking will change.
Of course, the end result will probably be a compromise, but will produce one of two inadvertent results:
either caps will be fragmented and decided by national authorities, leading to a fragmented and more politicized digital euro; or
the ECB will be seen as disregarding the will of its constituents (for now, central banks and large commercial banks).
This highlights the difficulty of implementing profound change to the EU financial system without “banking union”. Steps were being taken toward more centralized control after the 2008 crisis, but as I mentioned above, the area still does not have unified deposit insurance, arguably a key pillar of a banking system. There has been little progress on this given a lack of political consensus – for instance, German banks have balked at funding deposit insurance for Greek banks. This may change as German banks aren’t doing so well these days, but opposition will most likely always come from somewhere.
It also highlights the blurring boundaries between monetary and banking policy, especially if the EU central bank is planning to march into territory previously dominated by commercial banks.
Marching into an unnecessary battle
In its scramble to remain relevant in the digital world, the ECB is set to inadvertently trigger fault lines that will ripple across the financial structure of the European Union, at a time when political tensions are high and the economic axis is shifting away from Germany towards the south.
In the process, it will be raising questions about not just mission creep, but also the benefits of increasing centralization and accountability.
And beyond that, it will change the relationship between commercial banks and their supervisor – when your regulator sets up a competing business, there’s even less reason to trust that investment in improving banking technology will yield a return.
Bigger picture, retail CBDCs are much more than a grasp at continued central bank relevance in an increasingly digital world. They are much more than an instinctive reach for greater influence in retail payments. They also involve a series of macroprudential decisions that will bump up against politics at a particularly contentious time. And in so doing, they could set off a ripple of restructuring within an industry built on pillars of stability.
See also:
HAVE A GREAT WEEKEND!
(in this section, I share stuff that has NOTHING to do with macro or crypto, ‘cos it’s the weekend and life is interesting)
Regular readers will know I’m based in Europe, and although I hate to generalize, we do find the US electoral system bewildering. We realize it is sprawling and needs to be decentralized, but the ability of the electoral college to deliver an outcome the people didn’t vote for is hard to explain – that said, the European custom of political coalitions also often defies logic.
We also are often amused by the US emphasis on “character”, which is not as much a feature in European politics – as a rule, we don’t expect our politicians, most of whom have done nothing else in their adult lives, to be “wholesome”. Affairs, stupid public statements, heck, even corruption are depressingly not as much of an issue.
Of course, things are changing everywhere, but I’m not here to talk politics – all this is as a preamble to a clip I want to share with you today, in the spirit of cultural levity. It’s from a French TV spy series set in the 1960s, and it had me in stitches.
DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold some BTC, ETH and a tiny amount of some smaller tokens, but they’re all long-term holdings – I don’t trade.