The Bitcoin crash is rational

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Macro Morning

Via Bloomberg:

Bitcoin’s rise was meteoric this week — and its decline has been just as swift.

It’s easy come, easy go in the crypto world, where a frenzy over Bitcoin pushed its price to nearly $14,000 on Wednesday, its highest level since January 2018. The largest digital asset then reversed course in a matter of minutes after a prominent cryptocurrency exchange reported an outage. The retreat accelerated Thursday and put the coin’s price back to nearly the same level as just five days ago.

Maybe. But then, if BTC is “digital gold” as its apologists claim then it should have risen and should now be falling, just like gold:

The moves are obviously amplified but if BTC is “digital gold”, acting as store of value, then it should track gold in trend and it is, both the rise and now the fall.

In the crazy-arse world of crypto this could pass for “rational”.

In my recent musings, and for the sake of argument, I have accepted that BTC is “digital gold”, a store of value. It is, after all, tracking the yellow metal roughly speaking, and appears to be responding to fluctuations in the perceived stability of the USD, the same underpinning that drives gold. This relationship is obviously tenuous given BTC is the absolute opposite of a safe haven, but that’s the market narrative nonetheless.

So, if BTC is some kind of perceived undollar, like gold, then will it rise and fall in tandem with the value of the USD and by how much?

The evidence is so slim that I can’t offer any. What I will say is that gold does not always trade in a one-to-one relationship with the value fo the USD so we certainly shouldn’t expect BTC to do so. Rather, gold runs relative to the stability or otherwise of the underpinnings of that currency. For instance, during the post-GFC QE period, gold rose much more than the USD fell as monetary debasement defined market narratives.

Another input into this equation is fiscal policy and the US budget, whether or not its prospects are for ongoing repair or deterioration. Relative US growth is also important. As is relative geopolitical power and the use of the reserve worldwide.

So, let’s assess each of these:

  • US growth is fading but America First is still a set of policies that will deliver it primacy versus other DMs, in particular, EUR, so that’s BTC negative.
  • the US budget is a mess, with Trump’s tax cuts aborting cyclical repair and setting up for massive deficits once the business cycle ends, so that’s BTC positive.
  • US power is much stronger than most believe and, despite El Trumpo unilateralism, will survive him comfortably. That said, the perception is what matters so that is probably also BTC positive for the time being.
  • Use of the USD reserve is as strong as ever so that is a BTC negative.
  • The big one is monetary stability. On this front, assuming the base case of no cessation in the trade war, I expect global growth blowback will, via ebbs and flows, erode the US business cycle with the Fed being convulsively forced to cut on its market “put”. This is very gold and BTC positive.
  • That said if this got so bad that it triggered a stock market accident with a pretty decent US corporate debt shakeout then gold would likely suffer as the USD attracted a safe haven bid. Whether BTC would follow this pattern is anybody’s guess! This would be even more the case if the global shock came from Europe or China or elsewhere.
  • But, if this were to ultimately result in the return of US QE then it would be VERY gold and BTC bullish.
  • If things were so bad that the Fed shifted towards “helicopter money” then I’m not so sure. Although monetary debasement would concern markets, the positive effects on growth, inflation, fiscal repair etc might actually send the USD up and gold/BTC down, especially if silly Europe stuck to its austerity guns.

In short, if BTC is “digital gold” then the outlook is pretty good and, given it has no value whatsoever, there is no way of gauging when it will outrun those fundamentals, so it could go really silly.

Of course, the Bank of International Settlements might rally global central banks to ban it at any minute, a rising possibility the higher BTC goes, and it will fall to zero one-second later.

David Llewellyn-Smith

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