Breakingviews – Chancellor: Was I completely wrong about bitcoin?

LONDON (Reuters Breakingviews) – Three years ago, this column suggested that bitcoin, whose price was up 15-fold in 2017, was facing a total wipeout. The cryptocurrency was not money, but instead looked like the goldsmith’s elegant sardine tin: “good for trade but not for eating.” It was a timely call: over the ensuing months, bitcoin lost more than two-thirds of its value. But now the crypto is back from the dead and trading at around twice the peak. Was my previous bitcoin judgment wrong?

Most seasonal bubble viewers would say no. Bitcoin is particularly prone to speculation as its supply is largely established in the short term while demand is volatile. Undoubtedly, the near-vertical ascent into early 2021 is like a classic bubble. The fact that the Grayscale Bitcoin Trust, a retail investment vehicle, has recently traded at a price of 40% to the value of net assets is another reliable indicator of reckless exile. Google Trends is showing high interest in bitcoin equal to the 2017 spike.

It should not be forgotten that the latest bitcoin frenzy has taken place against the backdrop of one of history’s greatest investment manias. Last year, the price of Tesla shares rose more than twice as much as bitcoin. With the Federal Reserve printing more money at a faster pace than ever before and interest rates stuck at zero, monetary policy is sure to make bubbles burst. Under these conditions, non-revenue-generating financial assets, such as bitcoin, do best.

Major investment managers have caught the crypto beast. The arrival of institutional investors is reminiscent of the late stages of dotcom mania in the late 20th century. Having amalgamated a large crypto-asset segment, Fidelity Investments is encouraging its high net worth clients to fall. Corporate treasures are said to be looked into bitcoin. Hedge funds have tried to get ahead of Wall Street’s massive move to cryptocurrencies. Multi-million-dollar orders placed in an illegal market have ramped up the price of bitcoin.

Surprisingly, the forces behind the conventional bubbles may be releasing the crypto. Adopt monetary policy. Bitcoin was created as a result of the body of Lehman Brothers to offer an alternative to fiat currencies which had a seeming stability in jeopardy from the printing of central bank money. But there were fears that runaway inflation would be premature. Last year, however, the central banks generated far more money than they did in a financial crisis. Instead of being locked up in the financial sector, as was the case with earlier quantitative easing, the new money has spent money on governments and entered the wider economy.

After tasting the forbidden fruit of the magic silver tree, there is no return. Central government-funded government deficits are here to stay. If inflation returns soon, as it seems, investors will look for other sources of value to fiat currencies. Gold, which has been around for many thousands of years, is an obvious competitor. But the digital age demands digital gold, and bitcoin is a key player in fulfilling that role.

Of course, bitcoin has much to do with gold, not only because its supply is limited but because the crypto does not generate revenue, it is impossible to provide value. There is value in the eye of the keeper. Bitcoin’s failure so far to serve as a currency is not a big draw. As the investment strategy Dylan Grice of Calderwood Capital Research points out, gold retained its value even after it was demonized.

Having lived in a number of bubbles and bubbles over the past decade, bitcoin has shown itself to be very stable. Bubbles are great marketing tools: almost everyone on earth knows about the bitcoin brand. In a world where all-powerful network influences, this free publicity gives the most popular crypto a huge advantage over competitors.

Institutional investors may be ramping up bitcoin, but the advent of the suits pays homage to cryptos. In its early years, bitcoin exchanges were largely unreliable, with much theft happening at Mt. Gox and other black clothes. Today, cryptos can be safely stored at reputable operations, such as Coinbase. Bitcoin ownership also falls under the umbrella of regulation, as digital exchange makes a jockey to meet the requirements of “get to know your customer”.

Transactions in bitcoin have always been very inefficient. But financial technology companies have come to the rescue. For a small fee, bitcoin held in fintech accounts can be converted into dollars for trading purposes and converted back into cryptos upon receipt. True, this goes against the grain of “spreadsheet” and looks a lot like traditional banking, but as it would, it seems to work. Soon you will be able to pay for Starbucks in the morning with crypto. More importantly, it is possible to see that bitcoin serves as the basis of money for a digital payment system, performing the same kind of function as gold before 1914.

From Lehman’s body, savers have become accustomed to very negative interest rates. The high costs of the pandemic ensure that declines continue for years. Zero interest rates are possible because central banks can offer fiat money in unlimited quantities. The dollar has become an interest-free perpetual bond with no value, by definition. Strangely, things are looking more normal in a world called “decentralized finance”, where digital tokens can be borrowed and borrowed over the Ethereum network at reasonable interest rates.

Several years ago, Claudio Borio of the Bank for International Settlements warned that unconventional monetary policies threatened “seismic unrest that defined epoch.” Borio expected a global downturn, coupled with rising inflation and capital controls. In recent years, bitcoin has proven its value in countries like Argentina, where currency rules have been tightened and inflation remains endemic. As Grice points out, people who can’t personally see bitcoin’s uses feel no need for its benefits. If Borio’s nightmare is realized, that day may not be far off.

Reflecting, I would say my 2017 bitcoin “bubble” call was seen. But I didn’t understand how stable the crypto was. Today, the ersatz silver is in another bubble, but it will inevitably survive from the body. If we learn anything from its short history, it seems that the thing that doesn’t kill bitcoin makes it stronger.