As the year that felt like a decade on speed starts to draw to a welcome close, some of us are starting to try to make sense of the timeline of narratives and events. Most of us (myself included) are failing. And that in itselfis an intriguing narrative, that sheds light on bitcoins rally.
Bear with me while I try to explain.
On the one hand, we have a rapid rise in the bitcoin price, and coalescing institutional support from traditional investors and companies that see potential in crypto assets and markets.
Related: First Mover: As Markets Turn Ugly, Bitcoiners Thank Secular Trend
On the other hand, we have conflicting economic and social trends. We have blind faith in the power of vaccines combined with rejection of the science of virus transmission; monetary policy designed to encourage lending combined with banks that are unwilling to do so; growing interest in the value of emerging markets combined with escalating risk of default; widening inequality combined with greater power of protest; I could go on.
These conflicting forces and the uncertainty swirling around them should encourage us to look closely at prevailing narratives. Yet, those of us watching the growing institutional interest in bitcoin markets have accepted without question the assumption that bitcoins inflation hedge qualities are behind it.
Lets pick that apart.
First, lets look at another pair of conflicting economic trends.
Related: Blockchain Bites: The Fight for Private, Digital Cash
Most economists seem to believe that a resurgence of inflation is unlikely. Depressed consumption and excess supply, the continuing impact of technology and demographic shifts, the low velocity of money and the weak labor market are just some of the factors they point to. These have already led to deflation in some key economic areas.
The bond market, on the other hand, tells us that inflation concerns are real. The five-year breakeven rate, a proxy for inflation expectations calculated by taking the difference between five-year U.S. Treasurys and Treasury Inflation-Protected Securities, is close to its five-year high.
Whats more, the yield curve continues to steepen, signaling expectations of higher interest rates in the future as central banks tackle a looming inflation problem. Taking into account the damage rising interest rates would do to debt-laden economies, this is the bond market telling us that they see trouble ahead.
But does that really matter for bitcoin?
Bitcoin is seen as an inflation hedge mainly because of its limited supply, which is not influenced by its price,and because of its relative attractiveness when real yields head to zero or lower.
Yet, when you buy bitcoin, youre not just doing so to hedge inflation. Youre buying bitcoin to hedge all the other negative consequences that usually accompany it.
True, inflation is not always bad. Good inflation, a result of economic growth and low unemployment that helps to close the gap between supply and demand, encourages investment and even more economic growth.
Runaway inflation, however, exacerbates poverty, heightens uncertainty, demolishes trust in institutions and can lead to the breakdown of social order. This is not isolated to post-WWI Germany we see it today in Venezuela, Zimbabwe, Lebanon and Argentina, to name just a few.
Bitcoin is also a hedge for unstable governments that close bank accounts, police states that want to seize private wealth, broken payments rails due to corrupted systems or outside cyber attack threats, paranoid leaders that want to disenfranchise opponents, export-protecting devaluations that trigger more inflation.
These are less likely in developed economies. But lets not forget that tipping points lurk around unexpected corners, and that Venezuela was once one of the wealthiest countries in the world and one of the more stable democracies in Latin America.
Bitcoin is a hedge against inflation, but also against political instability and social disruption, which if inflation comes roaring back is not a ridiculous thing to prepare for.
Bitcoin is also a hedge against a more gentle but just as pernicious debasement of currency through a loss of trust.
Traditionally, inflation moves in tandem with the strength of the local economy. But it can be triggered by currency weakness, which raises the prices of imported goods.
This is usually corrected when the central bank raises interest rates to combat rising inflation, which increases the attractiveness of the currency compared to others.
But in the current environment, an increase in interest rates may have the opposite effect, given the potentially catastrophic impact on debt-ridden economies. The U.S. bond market is telling us that it thinks interest rates will rise. The dollar continues to head lower, however, and could continue to do so even if those rate increases materialize, as faith in the capacity of the U.S. to employ traditional tools to good effect could be shaken.
And, most bitcoin trading is denominated in dollars. Therefore, if the dollar heads lower without a corresponding fall in the value of bitcoin (and since its unrelated to the economy, theres no fundamental reason why it would), the BTC/USD ratio heads up.
Bitcoin is a hedge for not just the macroeconomic ills that we have been trained to watch out for. It can also provide ballast against the unforeseen problems waiting to be triggered.
This highlights another hidden strength of bitcoin as an investment asset.
It is unlike any asset that we have seen before: programmatic supply, decentralized governance, fragmented market infrastructure that runs on technology developed by an unknown entity yet maintained by miners, developers and validators distributed across many geographies.
It doesnt fit into standard economic thinking and for that reason, it is perfect for our times.
In a world where youve gone from orthodox monetary policy to Keynesian economics to MMT in a few months, there is no longer any trust in the traditional recipes.
To paraphrase G. K. Chesterton, when you stop believing in traditional recipes, your mind is more open to new ones.
Bitcoin in portfolios represents more than a new recipe. It represents the need for a new recipe. It represents a safety play against a world in which old ideas are up in the air, and new ones have yet to take root.
It represents more than a hedge against inflation: it also represents an acceptance that politics and economics can get weird, and that untested ideas that are untethered to macroeconomic features and past assumptions are worth considering.
It represents a hedge against crazy, which is hopefully not what awaits us but the risk of not preparing for that possibility is verging on irresponsible, and not even thinking about it is likely to end up being prohibitively expensive.
The outperformance of bitcoin in 2020 has to set up the asset for even more professional investor attention next year, even though we all know that past performance is not an indicator of future performance. Or is it? The momentum trade seems to be the predominant strategy this year, and given the amount of money sloshing around markets looking for a good return, there is no indication that will end soon.
Then again, all bull markets have to end some time, although the underlying fundamentals and investment theses of bitcoin do not get worse with vaccine disappointments and worse-than-expected economic figures unlike with stock and bond markets.
Scott Minerd, CIO of fund manager Guggenheim Partners, which manages more than $230 billion worth of assets, told Bloomberg TV hosts this week that his firms fundamental analysis shows that bitcoin should be worth $400,000. This conclusion is based on the assets scarcity, and its relative value to gold as a percentage of gross domestic product. He also revealed that Guggenheim had started allocating to bitcoin when it was trading at around $10,000.
U.K.-based fund manager Ruffer Investment Company has invested approximately $740 million in bitcoin, equivalent to around 2.7% of the firms assets under management. According to the company, the investment was primarily a protective move for portfolios to act as a hedge against some of the risks that we see in a fragile monetary system and distorted financial markets. Ruffer is known in investment circles as a conservative manager focused on capital preservation. It had the top-performing active fund in Europe for January-June 2020: the LF Ruffer Gold Fund produced a six-month performance of over 55%. And now its investing in bitcoin. Ruffer has spoken often in the past about its inflation concerns. This investment makes me want to check in on other active managers worried about inflation their ranks are growing.
One River Asset Management, a $1 billion hedge fund (as of April 2020) specializing in volatility plays, has invested $600 million in bitcoin and ether or institutional clients (including Ruffer, which owns a stake in the company) via its subsidiary One River Digital Asset Management. CEO Eric Peters told Bloomberg that One River Digitals crypto holdings will cross $1 billion in early 2021. Brevan Howard Asset Management co-founder Alan Howard is taking an ownership stake in One River Digital and helping to provide the company with back-end trading services.
Christopher Wood, global head of equity strategy at investment firm Jefferies, has trimmed the recommended exposure in his model global portfolio from 50% gold in favor of bitcoin. This is even more notable given that this particular portfolio is designed with U.S. pension funds in mind. Whats more, he has said that he plans to increase exposure to bitcoin should there be a correction.
Jeff Currie, head of commodities research at Goldman Sachs, told Bloomberg that bitcoin was a retail inflation hedge, and a risk-on growth proxy.
Not an endorsement, but an interesting and potentially useful thread prompted by tech investor Andrew Wilkinson, co-founder of Tiny Capital.
In market developments:
U.S.-based crypto asset exchange Coinbase has filed preliminary documents with the U.S. Securities and Exchange Commission (SEC) to go public. The Form S-1 is expected to become effective after the SEC completes its review process, subject to market and other conditions. TAKEAWAY: Here we go This will create by far the largest listed company in the crypto industry, and has been rumored for some time. As well as attracting even more attention to crypto markets, it is likely to kick off a slate of crypto-related listings, especially given the recent price movements and the swelling of institutional interest. What Im most excited about, apart from seeing how the market values a systemic crypto market infrastructure business, is getting a look at their balance sheet and P&L.
Cboe Global Markets will launch a suite of crypto market tools in 2021 in a licensing partnership with execution provider CoinRoutes, including cryptocurrency indexes, historical data and real-time ticks. TAKEAWAY: Cboe operates the largest options exchange in the U.S. Coming from a traditional market infrastructure player, this deal signals support for the nascent asset group, and points to the introduction of new crypto services and products over the coming years. S&P also recently revealed crypto index plans, and other market data providers are likely to join the race to capture crypto data market share.
The Chicago Mercantile Exchange (CME) will launch a futures contract on ether (ETH) in February 2021. TAKEAWAY: This goes a long way towards validating ETH as a potentially institutional-grade investment. The lack of liquid ETH derivatives for institutional investors has dampened hedging opportunities, and the removal of these barriers could encourage more professional investors to at least consider its merits.
Advisory company Evercore has named PayPal as its top payments stock, in part because it believes that the firms cryptocurrency services could be good for customer engagement and transaction margin. TAKEAWAY: This not only encourages investors to consider companies that are launching crypto asset services; it also encourages more companies to offer crypto asset services, because who doesnt want investors looking at them?
Sovryn, a self-billed decentralized platform for trading and lending Bitcoin, has launched on the Bitcoin sidechain RSK, with $2.1 million in funding. TAKEAWAY: Theres a lot of debate about whether Bitcoin could ever be used for smart contracts. This is a reminder that the jury is still out, and technological progress is pretty good at showing that what many think is impossible is not that impossible after all. If the range of applications that can be built on Bitcoin broadens, that could boost its potential value.
SBI Financial Services, the subsidiary of Japanese tech conglomerate SBI Holdings, has acquired U.K.-based cryptocurrency OTC desk B2C2. TAKEAWAY: This is another example of legacy finance leveraging crypto asset services to broaden its client base, and to sell more to existing clients.
Banca Generali, an Italian private bank that focuses on wealth management for high net worth individuals, is leading a $14 million investment round in crypto wallet provider Conio, with an agreement to offer Conios services to the banks clients. TAKEAWAY: Yet another legacy bank gears up to offer crypto asset services to its clients. We will see a lot more of this in 2021.
You have banks building or buying crypto asset services, and you also have crypto firms trying to become banks. Crypto payments firm BitPay has filed to become a national bank in the U.S., headquartered in Georgia. TAKEAWAY: By becoming a national bank, BitPay will be able to operate in all U.S. states, while its non-bank competitors will need to get money transmitter licenses in each state they wish to operate in. This confers an operational advantage, and also a strategic advantage in that clients could prefer the additional scrutiny borne by national trust banks, compared to firms that dont have a national bank license.
Speaking of crypto firms hoping to become banks, crypto asset platform Paxos (which last week filed to become a federally regulated bank) has raised $142 million in a Series C round. TAKEAWAY: Paxos is emerging as a key player in the developing crypto market infrastructure: as well as a crypto exchange itBit, it is building a full-stack infrastructure service that includes custody, tokenized securities, stablecoins and more. It powers PayPals new bitcoin offering, and also counts Credit Suisse, Socit Gnrale and Revolut among its clients. (Paxos founder, Charles Cascarilla, was named one of CoinDesks Most Influential for 2020.) With this amount of funding, it will be interesting to see which of their many services they choose to build out more, or whether they will be adding new market tools to the mix.
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- Bitcoin exchange Kraken considers going public after record trading volumes in the first quarter - CNBC - April 9th, 2021
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- This Financial Advisor Thinks Bitcoin Could Be Headed for Mass Adoption - Motley Fool - April 9th, 2021
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- Fidelity Says Bitcoin Adoption Will Keep Accelerating 'We've Reached a Tipping Point' Featured Bitcoin News - Bitcoin News - April 9th, 2021
- The IRS wants to know all about your Bitcoin holdings --- and this court summons is a reminder - MarketWatch - April 9th, 2021
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- BIGtoken to Host Webinar on Thursday, April 15, 2021 to Discuss Bitcoin 2021 and Beyond - Business Wire - April 9th, 2021
- Kevin OLeary says he will only buy bitcoin mined with clean energy, and none mined in China - CNBC - April 9th, 2021
- Ripple Granted Access to SEC Documents on Bitcoin, Ether in Ongoing XRP Fight - Yahoo Finance - April 9th, 2021
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- Texas A&M Mays Innovation Research Center To Host Bitcoin Conference April 16-17 - Texas A&M University Today - April 9th, 2021
- Economist Says Bitcoin Isn't Too Big to Fail Warns BTC Can Only Establish Itself if Governments Allow It Regulation - Bitcoin News - April 9th, 2021
- More companies are accepting bitcoin, including PayPal and Xbox - Business Insider - April 9th, 2021
- Bitcoin And Crypto Market Smashes Through $2 Trillion As The Price Of Ethereum, Binance Coin, Litecoin And Ripples XRP Suddenly Soar - Forbes - April 9th, 2021
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- Chipotle is giving away burritos and Bitcoin. Heres how to play - WBTW - April 2nd, 2021
- Ether Rises to Record as Crypto Rally Broadens Beyond Bitcoin - Bloomberg - April 2nd, 2021
- Chipotle giving away $100,000 in free burritos and $100,000 in Bitcoin today - syracuse.com - April 2nd, 2021
- Will Bitcoin Ever Become Truly Mainstream? - Motley Fool - April 2nd, 2021
- CoinShares Partners With Canadas 3iQ to Launch New Bitcoin ETF on TSX - Yahoo Finance - April 2nd, 2021
- Could Bitcoin Solve The Oil Flaring Problem? - Yahoo Finance - April 2nd, 2021
- Irish Police Investigate Massive Bitcoin Scam That Allegedly Stole Millions From High-Net-Worth Individuals News Bitcoin News - Bitcoin News - April 2nd, 2021
- Why Is Ethereum Surging, Outperforming Bitcoin Today? - Benzinga - April 2nd, 2021
- Bitcoin miners and fracking companies are working together - Quartz - April 2nd, 2021
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- Bitcoin Cash (BCH): Hows It Differ From Bitcoin and Whats It Worth? - Yahoo Finance - April 2nd, 2021
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- Bitcoin's Got Talent crew talks Bitcoin culture and development on CoinGeek Weekly Livestream episode 8 - CoinGeek - April 2nd, 2021
- The Power of ETH and BCH: Smart Bitcoin Cash Project Highlights Innovative Sidechain Technology Bitcoin News - Bitcoin News - April 2nd, 2021
- Bitcoin uses as much energy as Sweden and is on course to use even more - Business Insider - April 2nd, 2021
- A Crypto Exchange Weighs Going Public. Bitcoin Is Just That Hot. - Barron's - March 31st, 2021
- Cathie Wood On Bitcoin: '$1 Trillion Is Nothing Compared To Where This Will Ultimately Be' - Yahoo Finance - March 31st, 2021
- Marathon Digital Holdings to Launch the First North American-Based Bitcoin Mining Pool, Fully Compliant with U.S. Regulations - Yahoo Finance - March 31st, 2021
- Bitcoin for Babe Ruth? Sports auction house will accept crypto - Aljazeera.com - March 31st, 2021
- Bitcoin ETF Proposals: The SEC's Long History Of Rejections - Benzinga - March 31st, 2021
- Spanish Island Government Decides to Sell Its Bitcoin Investment by Citing 'Ethical' Reasons News Bitcoin News - Bitcoin News - March 31st, 2021
- If History Is Any Indication, $200,000 Bitcoin Is Coming In 2021 - Bitcoin Magazine - March 31st, 2021
- Here's When the Winklevoss Twins First Discovered Bitcoin - The Motley Fool - March 31st, 2021
- HashWatt.io - HashWatt Sustainable Bitcoin Mining and Captive ESG Energy Development Company announces completion of 2nd financing round to expand... - March 31st, 2021
- Bitcoin draws millions of workers sending their money abroad - Quartz Africa - March 31st, 2021
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- ARK Invest CEO Cathie Wood On Bitcoin: "$1 Trillion Is Nothing" - Bitcoin Magazine - March 31st, 2021
- Ray Dalio: The government 'outlawing bitcoin is a good probability' - CNBC - March 26th, 2021
- Bitcoin draws millions of workers sending their money abroad - Quartz - March 26th, 2021
- Jack Dorsey wants the entire world to know hes got a bitcoin clock - The Verge - March 26th, 2021
- Bitcoin options worth $6bn expiring today: What does it mean for investors? - Mint - March 26th, 2021
- One Ultra-Rare Metal Is Doing Much Better Than Bitcoin This Year - Bloomberg - March 26th, 2021
- Dalio on Bitcoin: 'Good Probability' It Will 'Outlawed' by US Gov - CoinDesk - CoinDesk - March 26th, 2021
- Bitcoin ETF The race to follow the trend - Mint - March 26th, 2021
- Bitcoin, crypto investors will be watching these 5 questions facing the Biden administration - MarketWatch - March 26th, 2021
- Guide: What is Bitcoin and how does it work? - CBBC Newsround - March 25th, 2021
- Bitcoin could surge to $300,000 but winter could last for years when the bubble bursts, says crypto entrepreneur - CNBC - March 25th, 2021
- Bitcoin (BTC) ETF: Fidelity Applies for Fund That Tracks the Cryptocurrency - Bloomberg - March 25th, 2021
- Wall Street banks diverge in views on bitcoin boom - Financial Times - March 25th, 2021
- Good probability the U.S. will outlaw bitcoin: Ray Dalio - Yahoo Finance - March 25th, 2021
- Bitcoin volatility is here to stay, top technician warns - CNBC - March 25th, 2021
- Blockchain.com Raises $300 Million as Investors Find Other Ways Into Bitcoin - The Wall Street Journal - March 25th, 2021
- NYDIG Cuts Total Cost of Bitcoin Access to 0.30% - PRNewswire - March 25th, 2021
- Norway is the worlds most cashless country but its central bank isn't keen on bitcoin: 'It doesnt preserve stability' - CNBC - March 25th, 2021
- Bitcoin-Based DeFi Project Sovryn Near Agreement on $10M Investment From Pomp - Yahoo Finance - March 25th, 2021
- Mystery Whale Moves 20 Bitcoin Block Rewards from 2010, Entity Moved 10000 BTC Since Last Year Featured Bitcoin News - Bitcoin News - March 25th, 2021
- Bitcoins, coming soon to an ATM near you? - CBS News - March 25th, 2021
- Bitcoin Is All the Rage, But DeFi Could Be Even Bigger - ETFdb.com - ETFdb.com - March 25th, 2021
- Bank Of America Calls Bitcoin 'Impractical,' And Crypto Community Has A Lot To Say About That - Yahoo Finance - March 25th, 2021
- Stock Market Today With Jim Cramer: Tesla and Bitcoin - TheStreet - March 25th, 2021
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- 'Demand to surge': Expert's $70,000 Bitcoin prediction - Yahoo Finance Australia - February 12th, 2021
- Uber wont buy bitcoin with its cash but would consider accepting it as payment, CEO says - CNBC - February 12th, 2021
- Beyond Bitcoin: The wild world of altcoin cryptocurrency trading - CNET - February 12th, 2021
- Long-awaited bitcoin ETF could finally get approved this year, market analyst says - CNBC - February 12th, 2021
- Bitcoin outlook: the long term picture looks very sound - Yahoo Finance - February 12th, 2021
- Fintech giant Adyen says it has no interest in bitcoin as a payment method and clients aren't asking for it - CNBC - February 12th, 2021
- Dollar headed for weekly loss, bitcoin hits record $49,000 - CNBC - February 12th, 2021
- 7 public companies with exposure to bitcoin - Yahoo Finance - February 12th, 2021
- Not Just Bitcoin, Paypal's Vision Involves Central Bank Digital Currencies Too: What You Need To Know - Yahoo Finance - February 12th, 2021
- The Grayscale Bitcoin Trust: What It Is and How It Works - Yahoo Finance - February 12th, 2021
- BlockFi Launches the BlockFi Bitcoin Trust - PRNewswire - PRNewswire - February 12th, 2021