“BUY BTC.” The logo stamped on this week’s leaked version of the Grand Theft Auto 6 trailer, depicting a faux glamorous world of speedboats, supercars and “shoot-em-ups”, was well timed. Bitcoin’s price has almost tripled this year to around US$42 000, where it was before the 2022 Terra debacle. Frothy six- to seven-figure price targets are back. With Coinbase Global’s boss touting bitcoin as “key” to the West’s future and El Salvador’s Nayib Bukele demanding his critics apologise, you’d think an actual use case had been found.
Except — it hasn’t. And at the risk of sounding like the Simpsons’ “Old Man Yells At Cloud”, there are plenty of reasons to be cautious about this umpteenth upward swing on the crypto roller-coaster ride at a time of economic slowdown and possible recession.
The bull case preached by the laser-eyed and luna-tattooed crowd is, as before, driven by sentiment and speculation rather than utility. Bitcoin may be a glorified pet rock in terms of money-ness, but people like to hoard it and trade it as a risky hybrid of gold and Nasdaq start-up in the hope of outsized gains. The optimistic view is that any news will be good news as bad actors like Sam Bankman-Fried or Changpeng Zhao get flushed out, mass-market spot ETFs get closer, and potential interest-rate cuts lift risk appetite. With a rising price providing a positive feedback loop, who wouldn’t want to take a punt?
Yet looking back at bitcoin’s history, what seems to have really propelled its price to records in recent years has been unprecedented monetary easing by central banks and an increase in money supply to new highs, neither of which look likely to happen again soon. A paper by S&P analysts published in May found a positive correlation of 0.75 — not quite causation, but suggesting more than coincidence — between money supply growth and crypto assets since 2017, with virtual money “performing well” in times of expansionary monetary policy. As a hedge against economic shocks, the record was less clear — let’s not forget bitcoin fell 50% when Covid-19 first hit in March 2020 — and as a hedge against inflation, the results were inconclusive and not as good as gold.
And if easy money is bitcoin’s secret sauce, there doesn’t seem to be much of it around. The US Federal Reserve’s balance sheet peaked at nearly $9-trillion last year and has since fallen to around $7.8-trillion. Fears that still-high borrowing costs will coincide with a recession have squished demand for many other speculative assets that boomed during the pandemic, from NFTs to second-hand luxury watches. Hence the “Rolex recession” concept: the average price of a second-hand Rolex has been sliding since 2022. Over the past month, this corollary of the crypto-wealthy’s financial health is down almost 10% year-on-year. It seems a little cavalier to start drumming up enthusiasm for bitcoin if we enter an environment where real cash, not the virtual kind, is king.
The counterview
The counterview is that there might be some kind of optimal rational bet to be made when it comes to crypto: allocating a small slice of one’s portfolio, around say 1%, on the off chance that the crypto planets aligning might make sense. And maybe financial advisors will be under pressure to discuss such a strategy with their clients if and when ETFs get approved in the US.
But there’s still an opportunity cost in throwing good dollars after virtual ones. At a time when speculation is expensive and the climate is in crisis, it seems a little out of step to be buying a token whose network’s annualised carbon footprint is equivalent to an entire country’s. The world could do a lot with the $1-trillion currently tied up in crypto markets. As the Cop28 conference gets underway, economists estimate $1-trillion/year is needed to support developing countries in their fight against climate change. Research last year suggested $1-trillion of wind turbines could power 300 million homes, or the US twice over.
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For now, the hype is winning. In an allusion to The Hitchhiker’s Guide to the Galaxy by Douglas Adams, Tyler Winklevoss on Tuesday tweeted: “Bitcoin at 42k is the answer to the ultimate question of life, the universe and everything.” It may not be long before that answer starts to look a little — or even a lot — less reassuring. — (c) 2023 Bloomberg LP