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Roula Khalaf, Editor-In-Chief of the FT, has chosen to unlock the Editor’s Digest for free in this weekly newsletter, selecting her favorite stories.
If you ever see me in any forum recommending people to buy cryptocurrencies, one of two things has happened: either someone has created a deep fake of me, or I have been kidnapped. In the latter scenario, “buying crypto” would be my secret distress signal. Call the police.
Nevertheless, it is hard to ignore the surprising rally in Bitcoin. Trust me, I’ve tried. Somehow, the price of this token has surged 160 percent (not a typo) to $44,000 this year, despite several major institutions in the space being engulfed in a hellfire of regulatory aggression and lawsuits, in a sharply accelerated rally in the last week or so. This puts every traditional asset class on the planet firmly in the shade.
To be clear, if people want to buy these tokens, I cannot in good conscience stop them. People constantly spend money on Crocs sandals, craft beer, and other things I don’t like. Similarly, betting on a crypto token is as valid as buying a lottery ticket or putting a fiver on the 1.40 at Kempton racecourse. There’s nothing wrong with that. If you want to do it, knock yourself out. I hope it makes you rich. If it does, the last laugh will be on you, so please don’t bother with the usual all-caps emails telling me I’m an idiot – they just join the others in the file.
But under what circumstances does this work as an investment strategy? What does the price increase really signify? When it comes to an asset class like stocks or bonds, investors have largely agreed on metrics and assumptions to address these questions. But this is Bitcoin. Brace yourself for a dizzying exercise in partially reasonable but mostly circular arguments that many rational people sincerely believe.
Zach Pandl is one of these people. He left a career in macro strategy at Goldman Sachs to join Grayscale as an analyst, a company that operates crypto investment funds. “I believe in the future,” he says. But at the same time, “I’m not an ideological person.”
Pandl views the value of crypto tokens in general from the same lens as major currencies, which are largely (and I emphasize largely) determined by real interest rates and money flows. Pandl assumes that Bitcoin’s recent violent rise is in fact due to the US Federal Reserve and the assumption that it is finished raising interest rates and might even cut them soon. “Gold has noticed, bonds have noticed, and Bitcoin has noticed,” he says. So far, so plausible: the very sharp drop in bond yields we have experienced recently increases the relative attraction of zero-yield assets like gold and cryptocurrencies. But for Pandl, it’s about more than that.
Instead, he says Bitcoin is the only “obvious competitor currency” in the event the US dollar is “debased.” For him, the euro, pound sterling, yen, and renminbi don’t pass the test. To believe this, you have to believe two things: that the debasement of the dollar is actually a thing, and that it can be replaced in its central role as the world’s reserve currency by a token that you can’t even buy a cup of coffee with. It’s a stretch.
Apart from interest rates, another key short-term trigger frequently cited for Bitcoin’s recent recovery is that the numerous, highly-publicized failures of crypto projects in the past year, and in particular the $4.3 billion fine against Binance last month, could have been worse. My thought here is, “Apart from that, Mrs. Lincoln, how was the play?” But for crypto proponents not languishing in jail, the fact that Binance still exists at all is a positive.
The big issue, though, is investor demand. I haven’t met a single chief investment officer or portfolio manager at any institutional asset manager who’s interested in Bitcoin. Advocates insist that Bitcoin is attracting this kind of money, but apart from some hedge funds, venture capital firms, and family offices, there’s scant evidence at best. Affluent individuals are probably aware of Bitcoin’s recent leap, but even there, industry advisors are skeptical. “I don’t see a larger demand from client side,” said Christian Nolting, Chief Investment Officer at Deutsche Bank Wealth Management. “I have enough volatility on the bond side, I don’t need crypto for volatility,” he said.
It’s possible that, if US regulators approve the introduction of exchange-traded Bitcoin cash funds by institutions like BlackRock, this could potentially tempt more investors to seek exposure to cryptocurrencies through them. This could genuinely be a breakthrough, but actual demand is not yet evident and could already be priced in.
However, this is just one of the contradictory arguments here. At the same time, we’re told that cryptocurrencies are on the up because sovereign citizens want to avoid state and regulatory intervention and that they’re on the up because they might be about to gain more robust regulatory oversight. It’s apparently simultaneously a bet on a decrease in inflation and a hedge against an increase in inflation. It’s a currency, but also a speculative asset.
These things cannot all be simultaneously true. The fact is, different people buy cryptocurrencies for all these different reasons, and on top of that, there are damn contradictions. The only thing the recent price surge tells you is that an unknown number of people are buying this illiquid token more enthusiastically than before. Numbers are rising.