‘Number go up’: bitcoin’s startling surge is inexplicable as ever

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If you ever see me, on some forum, recommending that people buy cryptocurrency, then one of two things has happened. Either someone has created a big fake of me or I have been kidnapped. In the latter scenario, “buy crypto” would be my secret distress signal. To call the police.

However, it is difficult to ignore the surprising rally in bitcoins. Believe me, I've tried. Somehow despite a whirlpool hell fire Due to regulatory aggression and legal conflicts affecting several of the key institutions in this space, the price of this token has risen 160 percent this year (not a typo) to $44,000, in a rally that is has accelerated dramatically over the last week. . This comfortably eclipses any traditional asset class on the planet.

To be clear, if people want to buy these tokens, I don't hold anything against them. People spend money on Crocs sandals, real beer, and other things I don't like all the time. Similarly, betting on a crypto token It is as valid as buying a lottery ticket or betting five tickets each way on the 1.40 track at Kempton Racecourse. Nothing wrong with that. If you want to do this, knock yourself out. I hope it makes you rich. If so, the last laugh will be yours, so don't bother sending the usual all-caps emails telling me I'm an idiot; they will simply be included in the file with the others.

Still, what are the circumstances under which this works as an investment strategy? What does the price increase really mean? When the asset class is, say, stocks or bonds, investors have agreed upon widely agreed upon metrics and assumptions to answer those questions. But this is bitcoin. Prepare for a dizzying exercise in partially sensible but largely circular arguments that many reasonable people sincerely believe.

Zach Pandl is one of those people who left his career in macro strategy at Goldman Sachs to work as an analyst at Grayscale, which operates cryptocurrency investment trusts. “I believe in the future of this,” he says. But at the same time “I am not an ideological person here.”

Pandl generally analyzes the value of crypto tokens through the same lens as major currencies, which are broadly (and I stress broadly) determined by real interest rates and fund flows. Pandl believes that bitcoin's latest violent rise is actually due to the US Federal Reserve and the assumption that it will no longer raise rates and might even lower them soon. “Gold has noticed it, bonds have noticed it, and bitcoin has noticed it,” he says. So far everything is plausible: the big drop we have seen recently in bond yields increases the relative attractiveness of non-yielding assets like gold and cryptocurrencies. But for Pandl it's about more than that.

Instead, he says bitcoin is the only “obvious competing currency” should the US dollar “degrade.” For him, the euro, the pound sterling, the yen and the renminbi do not pass the test. This requires one to believe two things: that the devaluation of the dollar is actually a reality, and that its central role as the world's reserve currency can be replaced by a currency that cannot yet be used to buy a cup of coffee. It's an exaggeration.

Aside from interest rates, another key short-term factor often cited for bitcoin's latest rally is that the multiple well-publicized failures of crypto projects over the past year, and last month in particular, $4.3 billion fine on Binance, it could have been worse. My thought here is "other than that, Mrs. Lincoln, how was the play?" But for those cryptocurrency advocates who are not in jail, the fact that Binance still exists is a positive.

However, the most important one is investor demand. I have yet to meet any chief investment officer or portfolio manager of any institutional money manager who has any interest in bitcoin. Boosters insist that bitcoin is making this much money, but beyond a few hedge funds, venture capital firms, and family offices, the evidence for this is scant at best. Wealthy people are probably aware of bitcoin's latest jump, but even then, industry advisors are skeptical. "I don't see any more demand from clients," said Christian Nolting, chief investment officer at Deutsche Bank Wealth Management. "I have enough volatility on the bond side, I don't need cryptocurrencies for volatility," he said.

It's possible that if US regulators approve the launch of bitcoin cash exchange-traded funds by institutions like BlackRock, that could tempt more investors to seek exposure to cryptocurrencies through them. This could potentially be a watershed moment, but true demand remains to be seen and could already be priced in.

However, this is just one of the contradictory arguments here. At the same time, we are told that cryptocurrencies are rising because sovereign citizens want to avoid government and regulatory intrusion, and they are rising because they may be on the verge of gaining greater regulatory oversight. Apparently it is simultaneously a bet that inflation will fall and a hedge against its rise. It is a currency, but also a speculative asset.

Not all of these things can be true at the same time. The fact is, different people buy cryptocurrencies for all these different reasons and more, contradictions be damned. The only thing the latest price surge tells you is that an unknown number of people are buying this illiquid token with more enthusiasm than before. The number goes up.


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