Is Bitcoin back?

Bitcoin is back:

I won’t even pretend that this is sustainable. Nothing has changed for crypto in my book. It is as worthless and useless as ever. With the same inbuilt contradiction: that if it succeeds it can only fail, given it’s only purpose is subvert a fiat currency system that it does not control. Regulatory risk is as extreme as ever.

But let’s set that aside for a moment and try, as best we can, to understand what signal is being sent here. Nobody knows what BTC is for the simple reason that it isn’t anything: neither a store of value nor medium of exchange. But proponents argue that it is digital gold so let’s start there:

At least to date, BTC is roughly tracking the gold price. In this sense it is some kind of store of value versus fiat currency, represented in its structural inhibition for multiplication. That it is tracking gold tells us that it is particularly a hedge against debasement of the global reserve currency, the US dollar.

JPM takes a look at who is buying this time around:

… recently published work by Bitwise, a cryptocurrency asset manager, to the SEC as part of an application for a bitcoin ETF suggests that bitcoin trading volumes on many cryptocurrency exchanges are significantly overstated by ‘fake’ trading, e.g. exchanges reporting volume of trades that never took place or via wash trades, and that genuine trading volumes could be around 5% of the reported total. Similarly, the Blockchain Transparency Institute publish monthly market surveillance reports, and estimated in April 2019 that less than 1% of reported volume for some exchanges represented real trades…the importance of the listed futures market has been significantly understated.

…market structure has likely changed considerably… with a greater influence from institutional investors.

This reminds me very much of other commodities futures markets that have been overrun by speculators. Futures are supposed to be forward hedging contracts that suppress volatility for real economy users. But in the era of financialisation they have become tools of leveraged speculation that instead increase volatility.

BTC seems to fit this description quite nicely, except when we consider that BTC futures are a derivative of a derivative on gold which is itself a physical derivative of the US dollar. So in that sense BTC has become a CDO cubed, a synthetic asset driven entirely by other synthetic assets, that adds leverage with each derivation, until it becomes an epically dislocated instrument of wild fluctuation barely clinging to an asserted link to reality.

That this is put forward as store of value is surely the ultimate joke played upon financial capitalism.

Still, while gold rises, it seems BTC probably will too, at least until such a time that it is finally extinguished by some regulator somewhere. So, if your buying BTC then you’d better ask where gold is going.

That question is answered very simply. Its value derives from the underpinnings of the value drivers of the US dollar. They are weakening today as the US Federal Reserve moves into an easing cycle. There are two scenarios to consider in this regard:

• the business cycle persists as the Fed cuts sub-100bps and some kind of trade deal is reached with China;
• a global shock transpires, including a major stock market correction, and the Fed is forced to ease aggressively as no trade deal is reached.

In the first, gold and BTC are likely to rise as the US dollar softens but not overly far as other central banks pile in as well and supported the value of the USD.

In the second, gold will fall as the crisis transpires and the USD gets a safe haven bid but, afterwards, it will go a lot higher as the Fed cuts back to zero and relaunches QE plus, possibly, helicopter money. Whether BTC would follow the same pattern is up for grabs. On the pullback who knows? On the subsequent rocket very probably.

Don’t get me wrong. I wouldn’t recommend anyone buy BTC. It is nonsense. But if you’re looking for an extremely high stakes gamble (that could go to zero at any moment) on US monetary disorder then BTC looks like it.