WEEKLY, Oct 7, 2023

bitcoin's asymmetric downside risk, crypto and SBF, risky situations

Hi everyone! I hope Q4 is treating you well so far… It’s off to a pretty dramatic start, and I have a feeling this is just the warm-up.

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 cool non-crypto links.

If you’re not a premium subscriber, I hope you’ll consider becoming one! You’ll get a daily update as to the crypto and macro trends that I feel are being overlooked, along with some market commentary. It’s only $8/month for now, and it would allow me to continue to explore the impact the crypto ecosystem will have on the global economy – I really feel this intersection matters, now more than ever.

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Some of the topics discussed this week:

• A strong start to Q4, and why it matters for more than price

• ETH ETFs: not quite ready yet

• What the shutdown save could mean for markets longer term

• A tale of two prices (BTC vs ETH)

• What bond markets are signalling

• Higher yields and crypto

• What’s going on in Japan?

• The real impact of the PayPal stablecoin

• Hong Kong dominates Asian institutional trading

• … and more

Asymmetric downside risk

Bed Bath & Beyond is not a stock I follow. Actually, I don’t follow any stocks, but even if I did, BBB would not be one of them. However, I did read with interest a report by Alexandra Scaggs on FT Alphaville the other day, in which she bravely takes on the Reddit meme stock day trading army who apparently had been fuelling rumours that shareholders in the bankrupt company would have their interests transferred into a new vehicle.

Why it matters:

Alexandra points out that this is generally not how bankruptcies work, and it certainly isn’t how this one works, as the restructuring plan clearly states that all equity interests have been cancelled.

Which brings us to bitcoin (stay with me here). It’s not that bitcoin holdings can’t be cancelled – they can’t, and that’s one of its enduring appeals, but that is already well-discussed. What is largely overlooked with bitcoin is that, unlike equity, its value can’t go to zero.

This may sound obvious, but let’s pick at that asymmetric downside risk a bit more, because it masks a fundamental feature of bitcoin that I think deserves more attention.

When you buy a share in something, your downside is 100%. If the company goes bankrupt, as an equity holder you’ll most likely get nothing at all, with no chance of even a partial recovery. Zilch, nada.

When you buy a bitcoin, it’s not going to go down to zero. In a global market of an easy-to-transfer fungible asset, one that has multiple potential uses, there will always be a buyer at some price.

(chart via TradingView)

True, that price could be much lower than your acquisition price. But it won’t be zero because someone, somewhere will want to use bitcoin to shield some savings, make a payment, upload some data or perhaps something that has not yet been explored. (Bitcoin is, after all, an evolving technology.) And a bitcoin in Ankara is the same as a bitcoin in Seattle which is the same as a bitcoin in Lima.

Even if all the world governments got together to ban bitcoin, there would still be demand. Much less, for sure, but a non-zero amount, especially since this kind of oppression would highlight the need for a seizure-resistant, censorship-proof asset. Even in this cataclysmically unlikely scenario, bitcoin could move and your bitcoin could find a buyer. There is no other asset that I know of outside the crypto ecosystem that can fly around the world in minutes without middlemen.

The number of miners working on the bitcoin network would dwindle. But some miners would remain because the difficulty would adjust downward so that it became profitable again. What’s more, the difficulty would adjust automatically – no-one would be able to stop this from happening.

Fewer miners means much lower security, yes. But even with that, there could still be demand for bitcoin. Not all of its transactions need to be ultra-secure. And even a less secure Bitcoin network would be more secure than a censored fiat network. In other words, mining and therefore also security could drastically shrink in the worst-case scenario – but even so, there would still be some demand for bitcoin.

Even more important, in the face of a global ban and a collapse in value, bitcoin would keep on working. All bitcoin ever mined would still exist in addresses on a network that no-one can erase, not ever. This means that a miner or an investor can expect the bitcoin they hold today to recover in price, eventually. With bitcoin, there will always be the hope of future value.

Unfortunately, Bed Bath & Beyond shareholders can’t say the same.

Okay, I do have to mention SBF after all

I know that I said that I wouldn’t be talking about the Sam Bankman-Fried trial here, since it isn’t particularly relevant to markets. But over the past couple of days a few people have asked me how I think the trial might impact markets, which got me thinking about some of the bigger-picture effects. It turns out that the circus, I mean the saga isn’t as irrelevant as I had thought.

Short-term, there are unlikely to be any surprises, other than some intriguing but not relevant human-interest details – who did what, who said what, who knew what. It’s gripping, much like a good TV series would keep us wanting to know what happens next.

But the breadth of the coverage across media is significant. Just about every financial and most mainstream news sources are covering this.

Some are framing it as a test of crypto as a valid asset class, which is totally wrong. Crypto is not on trial here, fraud is. But even those presenting a more neutral view are unavoidably transmitting just how scammy the crypto industry can be. And this does impact the market indirectly.

This is not unfair. The crypto ecosystem can be scammy, as we have seen. Many investors will be turned off by this, which should dampen the potential flow of funds into the market.

My hope is, though, that more investors see that the crypto industry is capable of learning from its mistakes, and of policing itself better going forward. It was, after all, a crypto news site that published the report that triggered the collapse. (Disclosure, I used to be an employee of CoinDesk, and am currently working with the team on their Markets Daily podcast.)

Most of the crypto firms that overleveraged have collapsed. Surviving firms and new ones will be held to a higher standard. Crypto “heroes” will be regarded with greater skepticism. Collaboration with regulators will not be treated with such harsh suspicion. None of us want anything like FTX to ever happen again.

And the closure of the trial will eventually allow us to put this painful episode behind us. We should be dwelling on what happened, and asking ourselves to what extent the crypto community enabled this, even if it is financial and not crypto fraud. But we do need to move on and to implement the lessons learned.

As for the potential magnitude of the next bull run, some have argued that it will be more muted because of the suppression of leverage (in relative terms - leverage still exists, as it should). This makes sense, but in my opinion overlooks the impact of new investment. The last bull run was driven by momentum investors, volatility investors, leverage traders and a wave of other non-crypto natives looking to maximize profits using whatever tools were available.

Many of those tools are not available anymore (such as low-collateral crypto lending), but some are. More importantly, the potential wave of new investors is much larger than in the previous run. More are aware of the fundamentals of crypto assets. The regulatory chill in the US is certainly keeping a lid on institutional participation, but trading in bitcoin and ether, through spot, ETFs or derivatives, is not frowned upon, and offshore markets are deep. The career risk of missing out on the next one is greater than the career risk of suggesting an allocation.

So, in sum, I was wrong, the SBF trial is indirectly relevant to crypto markets. I still can’t wait for it to be over, though, so we can get our focus back.

ALSO:

Over the weekend, I watched a couple of episodes of “SAS Rogue Heroes” – the gritty and expletive-laden story about a handful of crazy soldiers willing to do whatever it took to stop the advance of the Axis powers in North Africa at the height of WWII.

There was one episode where the use of a plane was being denied because of bad weather. “It’s too unsafe,” said the pilot. This prompted an explosive “WAR IS UNSAFE!!” from one of the aforementioned crazies, and he’s totally right.

This is not dissimilar to investing. Retail investors’ options are limited because regulators assume some types of exposure are too risky for those who aren’t already rich. Some “out there” investments are, indeed, risky – but the potential returns, in theory, compensate for that additional risk. Flipping this around, to get higher returns, it’s fair to assume higher risk. High-return investing is unsafe. Limiting those opportunities to only those that can prove a certain degree of wealth is not only condescending and paternalistic – it further exacerbates investing inequality.

Going back to the series, the war was being lost because the Brits were worried about safety. In blew the SAS, threw safety rules out the window, and turned the war around. I’m not saying that should happen to investing, not at all – but just imagine what broader access to investment in new technologies could do for both project funding and individual wealth. There are plenty of losses in those types of investments, for sure. But the wins are meaningful, and some of them can change the world.