today is Jun 05, 2023
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This is obviously an old chart in the background! At the beginning of the year, I wrote about most of the obvious bubbles out there and how they all were nearing the end. I specifically cited tech stocks, meme stocks, bond yields, and crypto. Not bad!
But this isn’t pat on the back time. This is the time to reexamine the thesis. Is this the beginning of the fall or the end? I’m not going to review every asset class, but I think it’s worth examining one in more detail: crypto.
The conclusion: it’s over. In two or three years, people won’t even talk about crypto. It will become a small corner of the investment world limited to the true believers who refuse to surrender.
Names will be taken off arenas. Matt Damon will return to making movies instead of commercials. El Salvador will revert to using whatever worthless currency they had before Bitcoin.
Bitcoin as an alternative currency has already been debunked. The true believers just haven’t realized it yet. It’s not just because a stablecoin failed. It’s so much more than that. Let’s explore…
The original case for Bitcoin was fiat currency couldn’t be trusted because of evil governments who would debase their currencies. Because bitcoin was limited in supply, it couldn’t be printed at will and thus would hold value when paper currencies collapsed.
How’s that working out? Well, governments have printed money at unprecedented rates worldwide over the last year. If there were ever a time for BTC to be going parabolic, it would have been over the last year. What happened? It went down by half.
Now, that’s from an all time high but the point is that all time high came before evidence of inflation. Once the inflation arrived, BTC has gone only one direction – the wrong one.
To be fair, the traditional inflation hedge of gold is largely flat over the last year and has underperformed BTC over longer time periods. However, the US dollar index is at 20 year highs! And many commodities are at 20 year highs to the dollar!
If the thesis was money printing meant we needed an alternative to the $, well, that hasn’t worked out so well! Maybe the $ collapse is in our future and then the bitcoin bulls will be rewarded, but the idea that inflation would be a catalyst to drive bitcoin’s value has been proven plain wrong.
One of the great ironies is bitcoin acted like QE (quantitative easing). Think about all the criticism over the Fed expanding its balance sheet. Fed holdings went from $4T to $9T over the last ten years.
By contrast, the cumulative crypto complex grew from essentially $0 to $2T before its recent crash. Where did this money come from? It was essentially a money multiplier effect of QE.
As the Fed printed more money, more crypto assets were created. There is clearly a correlation here. Fed money printing led to new cryptocurrencies, NFTs, stablecoins, and mining activity.
That’s right, crypto is no more than a derivative of Fed policy. Thus, it is correlated to inflation, not a hedge.
Furthermore, it is the tail end of money printing. The worst of the worst excesses of too much money in the system went into crypto assets. Stablecoins are this generations pets.com. NFTs are the Beanie Babies.
Crypto is now collapsing because the Fed is tightening. The thesis was completely backwards.
One of the other arguments for BTC to keep rising in price is that mining would get more expensive as fewer undiscovered coins remained and this would provide a floor for valuation. This seems like a reasonable argument but there is a big problem with it: it hasn’t worked!
The cost of mining has gotten substantially more expensive (in several ways) and yet it hasn’t raised the price of BTC. The most obvious way in which mining costs have gone up is the cost of energy required in mining operations is up significantly. Yet, BTC prices have gone straight down since oil and gas prices have spiked.
Additionally, there have been crackdowns on mining such as in China for regulatory reasons and pressure to reduce emissions with cleaner fuels or buying carbon offsets. One would think as miners have had to shift to more expensive substitutes that the price of BTC would rise. But it hasn’t. So one more failed bullish thesis.
One of the other theories was, even if there wasn’t inflation, people would prefer to transact in BTC for privacy and related reasons. Yes, part of this was the illicit activity argument, but there was also the simplicity logic. Who wants to report when they make a large bank deposit?
Now, imagine living in a country with capital controls that restricts offshore transactions entirely. BTC was supposed to come to the rescue.
And yet, as China has put through more stringent capital controls and Russian boycotts have left citizens with their money trapped, the anticipated flood into Bitcoin hasn’t emerged. Why not? Maybe because oligarchs don’t actually believe that BTC is a store of value?
If there were ever a real world use case for increased BTC demand, this should be it, but it’s been a big dud. If not now, when?
Remember when part of BTC’s appeal was that blockchain ensured ownership could be tracked and you didn’t have to worry about theft or counterfeiting? Yeah, that’s worked out well!
If crypto is no longer safe, then why would I rather own it than fiat currency? I get something less liquid, more volatile, and less accepted by merchants with the same risk of theft? No thank you!
Then, of course, we have the stablecoin debacle. Stablecoins are this generation’s version of phony financial arbitrage. It sounds great on paper, but only works as long as people believe it will continue to work (sort of like a fiat currency!).
They are subject to bank runs just like every similar financial engineering product invented in past cycles. The end is entirely predictable and innocent people get hurt.
They also are proof that crypto is not a currency. They are more like banks. Instead of FDIC insurance, holders rely on ledgers, but, as noted, you can still have your account compromised and you can still have a run on the bank.
While you can have a run on a currency, that is usually confined to emerging markets that have done dumb things like issue dollar debt without enough reserves to maintain the exchange rate. In other words, the same flaws stablecoins have but at least they’re used widely for every day transactions.
Regardless, stablecoins have violated their basic premise as a safe store of value and there is no reason for them to exist. I’d rather own a CDO squared. At least they were tied to real underlying assets.
Crypto is a cause, not an asset class. When an investment becomes a cause, price discovery is affected by emotion, rather than an honest rendering of the return potential.
Emotion took the price up too far and now it will it take it down too far. Let’s be honest, there’s a pretty common demographic to crypto ownership that I’ve described before. It is young, male, adrenaline seeking, and overconfident.
You might suggest they are people who might have done poorly in this study that I won’t cite by name but you may find an entertaining read.
So the only obvious conclusion here is that Bitcoin (and other cryptos) is a risk asset, not a currency or a inflation hedge. That is why it sells off in bear markets. It is a product of aggressive Fed money printing, not an antidote to it.
It’s not just a risk asset. It is the most derivative of all risk assets in this market. Maybe the most overvalued risk asset in history?
I mean even AMC or GME at their peaks were like $30B in market cap each. That’s kid’s play. Crypto was $2 TRILLION!!! Even now, there is still $1T of wealth that could disappear.
I predicted in that earlier post that BTC could decline 99%. I still believe that to be a reasonable outcome. This isn’t creative destruction. It’s flat out destruction.
Sure, Bitcoin will continue to exist, but it will carry on as a niche thing for the true believers who refuse to surrender or the criminals who need it for illicit activity.
Sorry, Fidelity, but people won’t be trading it in their 401ks. You’re too late. The story is over. Time to move on to the next fad.