Bitcoin’s Messiahs Share the GameStop Rage

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Bitcoin Is Not a Currency, and Other Revelations

One of my favorite moments in Monty Python’s Life of Brian, itself one of my favorite movies, comes when Brian is trying to convince a gaggle of followers that he isn’t the Messiah. One woman pipes up to say: “Only the true messiah denies his divinity!”

“What chance does that give me?” cries Brian, who then gives in and tells them he is indeed the Messiah. Their response is to bow before him and say “Hail the Messiah!”

I’m reminded of this when trying to discuss bitcoin with ardent supporters. Nothing works. If there is some telling problem with the digital currency, it somehow turns into an advantage. My argument — not at all unusual — is that extreme changes in bitcoin’s value make it very hard to use as a currency. Who would want to denominate a large transaction in a currency that might dip or rise by more than a third in a matter of hours?

Here are a few of the responses I received:

Bitcoin is not made for transactions, you don’t do transactions with gold either.

Bitcoin is NOT A CURRENCY.

If bitcoin isn’t for transactions, what is it for? And precisely the complaint against fiat currencies is that they replaced those based on gold, in which it was very much possible to carry out transactions.

There is no long term stability without short term volatility.

For assets to be valuable they need volatility, otherwise they’re pointless & provide little to no use. Asset and currency are not the same thing, nor do they have to be.

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These statements may be true as far as they go. In general, you earn a greater return for taking more risk, and it has become standard in the literature to define risk as volatility. Fast-growing assets will inevitably have a degree of volatility on the way up. But it’s not as though volatility is an outright advantage or something desirable — particularly on the scale of bitcoin in the last 48 hours. Over that period, I count a fall of 30%, followed by a rise of 33.2%, a fall of 13.3%, a rise of 21.2%, and a fall of 9.4%. Over the whole two days, it dropped 7.5%, which is unremarkable. But the idea that such volatility might actively be healthy is crazy.

Another line of attack is to hammer away at fiat currencies, which many bitcoiners regard as illegitimate. This one was particularly impressive:

Enjoy your petrodollar, warmonger!

When I asked what this was supposed to mean, I received this response:

Fiat: funds wars. Violent, by decree. Bitcoin: defunds wars. Voluntary, opt-in. Using fiat is a vote for more wars. Using Bitcoin, by sending value peer-to-peer over the Lightning network bankrupts the war machine. The choice is available to you today. What do you choose?

This is startling on a number of levels, even if we ignore the fact that the great majority of history’s wars were funded by currencies backed by precious metals, rather than governments, and that fiat currencies have funded the eradication of many diseases worldwide in the last few decades. Here is another example:

People suffering from the abuse of central banks and governments have no champion except #bitcoin. Humans are greatly in abject slavery and there is a clear way out.

There are huge issues with the global financial system in the 50 years since the last partial peg to gold was removed by President Richard Nixon with the end of the Bretton Woods system in 1971. That period saw the slump of the 1970s, and the global financial crisis, and steadily deepening inequality in the West. It also saw huge inroads against poverty and disease across the world, and the end of the cold war. There has been no hyperinflation in the West. While the paradigm of the last few decades appears to have reached a point where it has to change, it isn’t clear to me that 50 years of fiat have been so obviously terrible compared to the history that preceded them.

Implicit, and sometimes explicit, in much of the anger is that fiat currencies are illegitimate, because they are decreed by governments. What is alarming about this is that the governments in charge of all the world’s major fiat currencies, with the significant exception of the Chinese yuan, are democracies. Cryptocurrencies are a revolution against democratic governments as currently constituted. The guiding spirit is less libertarian, and more anarchist, or anarcho-capitalist. And the guiding emotion isn’t greed, so much as anger.

In this respect, the GameStop Corp. saga is very similar. Both are motivated by anger, and a genuine, righteous desire to right the wrongs of society — whether by toppling unscrupulous speculators, or a corrupt government imposition.

Also, as with GameStop, there is a painful generational angle. “Why are old people so tied up in this?” asked one respondent, while another called me an “ultra rich boomer media guy.” Would that were accurate. Again, the worrying part is the sense of generational injustice. This grievance is genuine: millennials and Generation Z have a dreadful deal compared to the baby boomers. But it’s disturbing that has made ageism acceptable when just about every other form of identity-based abuse is now unacceptable. 

Bitcoin as a Fang

To return to the opening question, if bitcoin isn’t a currency, what is it? The answer is that it is increasingly regarded as a growth asset, which behaves increasingly in line with growth stocks. For a startling demonstration, look at how bitcoin has performed compared to the NYSE Fang+ index, which includes the big internet platform companies and Tesla Inc., over the last few years. Anyone who bought bitcoin at its last peak in December 2017 would have been better off with the Fang index. Obviously this is an extreme point at which to start, but the tendency of bitcoin and the Fangs to travel in the same direction is becoming marked:

This ties with a phrase from my former colleague Rob Armstrong: “Bitcoin is best thought of as equity in a company whose only asset is a promising but unproven technology — this is not strictly true, but it is the right metaphor.”

Obviously, that is how its price behaves. It has much the same total worth as a Fang stock at present, having topped $1 trillion earlier this year. The likes of Apple Inc. and Google introduced paradigm-changing technology in the past, and the intricate mathematics and blockchain infrastructure of bitcoin is comparably revolutionary. 

The problems are as follows:

  1. The technology doesn’t work well enough yet. (This week’s volatility puts that beyond argument.)
  2. The way to invest in the technology isn’t by buying the currency, but by buying stock in the companies that produce that technology.
  3. Stock in Apple or Amazon.com Inc. has the advantage that it is backed by the companies’ assets and cash flows; bitcoin has no comparable backing.

So, bitcoin is behaving like a promising but unproven technology that people are prepared to buy even though it as yet has no assets to back it. The more the brilliantly inventive people involved in the crypto world work on improving the technology, and the more people actually use it, the more of a viable currency bitcoin could become. But for the time being it is reliant on the ebb and flow of crowd emotion.

The Anti-Bank, Not the Anti-Fiat

One more point: There are plenty of causes for complaint against governments. There always are. But without governments or states to protect the little guys, life could easily get even more cruel and unfair. Bitcoin shouldn’t be seen as the protector of the little guy. There’s much more of a risk that it will become a vehicle to deprive little guys of their money the next time the price dives.

However, I do think there is a revolutionary role for crypto. Rather than replacing fiat currencies, it could release us from blackmail by big banks. If the vast banking infrastructure can be separated from the payment system, then banks can be allowed to fail. As it stands, they control this invaluable public good, and so cannot be allowed to go under; the disaster that befell the Greek economy in the summer of 2015 when its banks and ATMs were shuttered for two weeks during a standoff with the European Union makes that clear. 

Cryptocurrency and blockchain also offers the possibility to make banks’ back offices far more efficient. That in turn would make it far easier to rid the financial world of moral hazard, and allow a big bank to fail at the next threat of a repeat of the Lehman crisis. That is a consummation devoutly to be wished, and is much more realistic than displacing the fiat system altogether.

This is what I wrote for my old employers a frighteningly long time ago, in December 2013, at a point when bitcoin was almost at the apex of its first big wave of excitement. It’s the first time I tried to get to grips with bitcoin and it’s tied me in knots ever since:

This could be an investment opportunity. Rather than an alternative to fiat currencies, Bitcoin has a role in a critical trend; the disintermediation of banks. African tribesmen can now pay each other using their mobile phones, without involving a bank. Crowdsourcing systems raise loans over the internet without involving a bank. Internet currencies are part of the same trend.

Buying Bitcoins while their price is so bubbly is nothing more than a gamble. Investing in other online currencies, or in companies that can help the Bitcoin economy develop, looks like a sensible use of a venture capitalist’s money.

I’m happy to stand by that more than seven years later. That still seems to be the future for cryptocurrency to me. Full disclosure: When I said that buying a bitcoin was nothing more than a gamble, I was arguably proved right when bitcoin subsequently dropped 79%, and failed to show a profit until early 2017. But over the full period since I wrote that, bitcoin has risen by 4,500%, compounding at 67% per year. So it’s fair to say that I should have been more positive. Even an aging financial media guy like me can learn something over time.

 

Inflation Scare Update

Every day brings a new scary inflation indicator. The latest was from the Philadelphia Fed survey of businesses, which found the proportion complaining that they were paying rising prices at a 40-year high:

The Philly Fed survey shows prices paid by business at a 40-year high

It’s a noisy survey, but it adds to evidence that the price of inputs is going up. Meanwhile, the latest data on claims for jobless insurance continue to suggest a labor market that hasn’t rebounded as quickly as might be expected given the overall strength of the recovery. Combined initial and continuing claims are still double their pre-Covid level:

Initial and continuing jobless claims remain double their pre-Covid level

Obdurate unemployment implies that the Fed might feel obliged to sustain stimulus for longer, and thus increase the risk of inflation.

Yet inflation breakevens, the clearest measure of market expectations, are actually lower than they were two months ago. After a precipitate rise from the deflation scare that accompanied the Covid shutdown, they have stalled even as evidence of inflationary pressures mounts:

Market-driven inflation forecasts are where they were two months ago

The best explanation is that markets are, once again, calling the Fed’s bluff. They don’t believe policy makers will let the economy run so hot as to risk accelerating inflation. This is also reflected in the stock markets, where the last few days have seen a revival of growth and tech stocks. These are seen as relatively immune to the difficulties of tighter monetary policy. This chart shows how the Russell index for growth has performed relative to value, and how the S&P 500 information technology sector has performed compared to the rest of the S&P 500, for the last month:

After a bad run, technology and growth stocks are regaining some ground

There’s no need to over-egg the move of the last few days. So far, it’s no more than a swing of the pendulum as opinion continues to develop on the most important issue facing markets this year. Some dovish Fed pronouncements could change things, as could a swift decline in inflation numbers. But market wisdom — for what it’s worth — is switching back toward a Fed that will begin to exit from easy money sooner rather than later. 

 

Survival Tips

Don’t get into unwinnable arguments with bitcoin aficionados.

And for those of you who had the sense not to do that in the first place, try getting some sunshine this weekend. The Beatles had some great songs on sunshine, like Good Day Sunshine and Here Comes the Sun; but you could also trySunny Afternoon by the Kinks, Invisible Sun by the Police,The Three Sunrises by U2, and You Are the Sunshine of My Life by Stevie Wonder. Have a great weekend, and don’t forget to get reading our book club selection Narrative Economics by Robert Shiller. After this week he’ll have material for another chapter, if not a whole book. 

 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
John Authers at jauthers@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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