Bitcoin is a maturing asset: a look at the extreme market events
Also more debt doesn’t equal more growth and economists are bad at predicting recessions.
Welcome to the Friday edition of the Ecoinometrics newsletter.
Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets.
Today we'll cover:
Bitcoin isn’t as volatile as it used to be.
The US is hitting diminishing returns on its debt.
Even the chairman of the Fed says you should ignore their forecasts.
Each topic comes with a small explanation and one big chart. So let’s dive in.
In case you missed it, here are the other topics we covered this week:
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Bitcoin is a maturing asset
Bitcoin has been called a lot of things. A currency for criminals. A ponzi scheme. A facilitator of money laundering. A bubble. An extremely volatile asset…
Well about the last one, you’d really be making an argument in bad faith by saying BTC is extremely volatile nowadays. You just have to look at the data.
Currently Bitcoin is about as volatile as NVIDIA or Tesla. Sure that’s four times more volatile than Berkshire Hathaway. But also that’s not an exceptional number.
And if we zoom out to look at the whole distribution of volatility values during each of the 4-year halving cycle we observe something even more interesting, Bitcoin is having less and less extreme events as time goes:
During the 1st halving cycle Bitcoin spent more than 2 months with a one-month volatility over 150%.
During the 2nd halving cycle Bitcoin spent only about 1 month with a volatility over 150%.
During the 3rd halving cycle (current) Bitcoin has spent 0 days with a volatility over 150%.
So far in the cycle (less than a year until the end) the one-month volatility has topped at around 125%.
Thus there is this clear trend where while Bitcoin’s average volatility remains relatively high, it is no longer experiencing periods of extreme volatility.
For an asset that’s trading on a multitude of venues, with very little rules, no circuit breaker, and a global market opened 24/7/365 you cannot ask too much.
Now that extreme events are a thing of the past the big question is whether or not the average volatility is going to slowly go down. Given that Bitcoin is still in the ramping up part of the S-curve of adoption it might take a while. So let’s keep an eye on it.
More debt doesn’t equal more growth
When it comes to economics, countries around the world compete on one main metric: the Gross Domestic Product.
The GDP kind of represents the value of the total output of a country. And in the game of growth everyone is trying to juice their number.
In that battle the US is still on top with an economy that’s extremely dependent on debt for growth. The only problem is that debt isn’t generating the kind of growth it used to.
Actually it seems that the more debt the US is creating, the less effective it is a generating growth.
Back in 1970, $1 of new debt created correlated to an average of $5 added to the US GDP. Fifty years later, $1 of new debt created amounts on average to $1.2 added to the US GDP. That’s a 76% drop in the effectiveness of the debt for generating growth.
It is like the US debt is having diminishing returns on economic expansion for the past 50 years.
Now how the mechanisms by which the federal debt is influencing the GDP can be quite complex. It ranges from direct stimulus of large infrastructure projects to indirect effects by attracting capital to the US. But whichever mechanism is broken the result is there.
The US is getting pretty close to the level where more debt no longer equals more growth.
Economists are bad at predicting the future
Based on the known economic data and the expectation of the Fed tightening sequence hasn’t yet fully found its way inside the US economy I still believe it likely the US is going to be hit by a recession.
I’m saying that just at the moment where every economist and their mom is clamoring that the Fed is achieving a soft landing…
Don’t make the mistake of listening to what economists are saying about the future. Economists are notoriously bad at predicting the future.
I’m not the one saying that. You know who is saying that?
Former Fed Chairman Ben Bernanke.
He said the following during a Senate committee hearing:
While he was still Fed Chairman of the Federal Reserve.
Just two months before the US officially entered the Great Recession.
Here is the quote:
“Our forecast is for moderate, but positive growth going forward through the next few quarters. Economists are extremely bad at predicting turning points, and we don’t pretend to be any better.”
Fed Chairman Ben Bernanke, November 2007.
Look, I don’t have a crystal ball either, but exactly because of that I’d rather be extra cautious with my investments.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
Cheers,
Nick
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