Exploring transformation of value in the digital age
By Michael J. Casey, Chief Content Officer
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It struck me that the good news – in relative terms – of the recovery in traditional financial and crypto markets brought on by a more optimistic expectation for the Federal Reserve’s policy outlook might not actually be all that great news for some of the more doomsday-based arguments for buying bitcoin. This week’s column breaks that down and suggests we need to look elsewhere beyond some kind of Wall Street strategy justification for buying bitcoin.
This week’s “Money Reimagined” podcast episode is another sole effort from me, with Sheila due to return next week. It’s based on an interview I did during the World Economic Forum in Davos with the director of the MIT Digital Currency Initiative and my old boss at the MIT Media Lab, Neha Narula. Have a listen after reading the newsletter.
Fed Policy Win Could Harm Bitcoin’s Wall Street Narrative
(Rachel Sun/CoinDesk)
Economic data and other indicators, including a knockout employment report Friday and a more upbeat mood in financial markets, point to a real possibility that the U.S. Federal Reserve will defy earlier expectations and successfully engineer a soft landing in the world’s biggest economy.
If so, that could yet again force bitcoin-favoring investment advisers to return to the drawing board on how to frame this hard-to-categorize asset as something newcomers can understand and hold in their portfolios.
Consider the various buy-bitcoin narratives that have been hoisted upon Wall Street: There was the once-common description of it as an inflation hedge. Then there was the related but more nuanced digital gold story. Finally, there’s the long-game idea that you should own bitcoin as a warrant or option on a future collapse in the dollar-centric international monetary system.
Let’s break that last one down. Some saw the economic situation in late winter 2022 as a perfect storm to bring to an end the age of the U.S. economic and monetary hegemony, and thus as a test of the theory of bitcoin as an option on monetary collapse.
Come 2023, the economy isn’t great, but it’s really not that dire, either. Even with hundreds of thousands of layoffs in the tech and financial sectors, Friday’s report put unemployment, incredibly, at a 53-year low. Meanwhile, inflation, though still high, is easing. The U.S. consumer price index showed an annualized advance of 6.5% in January, down from 7.1% in February.
So why does bitcoin have any value at all? What is the fundamental value proposition that continues to drive people to buy bitcoin?
I think it lies far, far away from Wall Street. Right now, bitcoin is proving it has value in developing economies where financial freedom is under attack, such as:
Nigeria, where the government has taken draconian steps to ban cash to force adoption of its digital currency, people have reportedly flocked to bitcoin to protect their wealth. One measure of that demand: a huge premium for bitcoin in Nigeria over the price in dollars in the U.S. – almost double.
Lebanon, whose banking system has all but collapsed. There, I’m told, wholesale wine prices are often quoted in bitcoin.
So, if you’re now feeling like financial conditions are restoring your appetite to invest, and are looking to justify adding bitcoin to your portfolio, don’t try to map it against the standard risks and opportunities in a traditional Western financial market.
Instead, look to the many places in the world where the local financial system is deficient due to politics, insecurity or a general failure of institutional infrastructure.
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Off the Charts: Risk-on or Uncorrelated: Which Is It?
A simple chart comparing a year’s worth of bitcoin trades to a year’s worth of index readings for the S&P 500 is enough to show that it’s hard to nail down how bitcoin should be categorized. It shifts frequently.
Right now it seems that bitcoin and stocks are nicely correlated, with both rising as investors’ moods improve. But note that it took longer for bitcoin to catch onto the S&P’s rally.
Now also note the diametrically opposed movements in December, when the FTX scandal drove bitcoin’s price down below $16,000 at the very same moment that U.S. stocks were heading higher.
And it’s clear that the sell-off in bitcoin in the first half of 2022 was well correlated with the same in stocks as the early phase of the Fed’s rate cuts took hold. But when bankruptcies at firms such as Celsius and Voyager heralded the arrival of crypto winter in the actual summer, bitcoin simply didn’t participate in a short-lived rebound in stocks.
The Conversation: With a Little Help from My Friends
This Twitter thread from digital artist Sam Spratt is instructive about how value is being created in the unique new non-fungible token (NFT) art market.
On the one hand, it talks about the capacity for digital technology to create common and differentiating features across a collection of assets within a set, in this case Spratt’s Skulls of Luci, and how this feeds on the storyline to foster a unique set of value.
On the other hand, it also highlights the role played by a close knit group of people, early collectors, artists and enthusiasts, who buy into and otherwise support each other’s projects and give them the grounding and financial support they need to get started.
When the story of how NFTs changed the face of art forever, accounts of this small set of pioneers will be central to it.
Relevant Reads: A Modicum of Relief
Over the past 30 days, from the trough in early January to the peak price early Thursday, bitcoin’s gain ran to 46% while that of the broader CoinDesk Market Index of crypto tokens was 45%. Those sorts of gains have already been helpful to an industry that, by the end of 2022, was shell shocked by scandals and bankruptcies. Three CoinDesk stories at the end of the week illustrate this.
Jocelyn Yang reported in her afternoon market wrap Thursday that the post-market rally inspired by an unexpectedly upbeat Fed press conference gave a boost to tokens of DeFi and smart contract platforms such Avalanche’s AVAX and Uniswaps’s UNI.
Aoyon Ashraf reported that mining giant Marathon Digital seized the opportunity posed by a higher bitcoin price to sell some of the bitcoin it had mined, offloading 1,500 bitcoin in January. Like many mining companies, Marathon has been cash-strapped. This will be a welcome infusion of funds.
Will Canny reported on what might be the first of the newly re-emboldened forecasters putting a large target for their year-end forecast. Crypto services company predicted that bitcoin could reach $45,000 by year-end. That would change everything for a lot of people.
