Ecoinometrics - March 22, 2021

Keeping scores...

Mar 22, 2021

Here is a piece of advice. If you read an analysis of Bitcoin in 2021 and half of the points seem to come straight out of 2016 maybe you should ignore the conclusions.

Want an example? There you go...

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Now let’s dive in.

BofA on BTC

Here are some key points from Bank of America’s take on Bitcoin, stop me if you have seen them somewhere before:

Bitcoin’s price is driven purely by supply and demand. No shit, my mind is blown.
Bitcoin won’t work because it can only process 14,000 transactions per hour.
Bitcoin is too volatile to be a store of value.
Bitcoin is not tied to inflation.
Bitcoin is correlated to risk assets.
Bitcoin is not green.
Bitcoin’s pseudonymity means it can be used for money laundering, corruption, bribery, fraud, breaches of data privacy… and Bitcoin also eats babies…
Bitcoin’s days are counted because central banks are going to roll out Central Bank Digital Currencies.

Oh boy. Where to start?

It feels like I keep repeating myself on those topics.

At the same time I continue reading the same arguments against Bitcoin, so what am I supposed to do…

Let me dedicate a short paragraph to each of the points raised in BofA’s analysis.

Supply and demand. No comment.

The limitation on the number of transactions per hour is only an issue if you consider Bitcoin to be a mass payment processor at the network level. For Bitcoin as a store of value or Bitcoin as a settlement layer this is a non-issue.

Most of the volatility in Bitcoin comes from the fact we are in the adoption phase. People who understand the bet see that by getting in during the adoption phase and riding the volatility they’ll end up with a larger share of the full blown store of value later. That’s an asymmetric bet. Not enough people understand this.

Regarding Bitcoin’s ties to inflation it is again too early to say. The long term price action of BTC is dominated by the S curve of the adoption process. This effect is so strong that natural growth is more than keeping up with inflation. It will be time to worry about quantifiable ties to inflation when Bitcoin reaches a size comparable to the gold market. For now it is a moot point.

As with all financial assets, in times of liquidity events all correlations go to one. This is what we saw in March last year. But over the long term Bitcoin has been pretty much uncorrelated to all major asset classes. Hence using the March event to argue that Bitcoin is correlated to risk assets does not make much sense.

Bitcoin is not green. It isn’t yellow or black or blue either. Bitcoin is orange. I don’t have anything to add on the debate of BTC vs the environment. Nic Carter has a lot of good takes on the subject, check this one out if you want to learn more. But I want to point out that at a fundamental level mining does not require the use of a specific kind of energy. So if it needs to switch to more ‘green’ sources there is no fundamental reason this could not happen.

Regarding money laundering and the likes, Bitcoin is just a tool. Satoshi Nakamoto didn’t invent money laundering or bribery. The advantages of having an internet native currency running on a permissionless global network far outweigh the risks that some of it could be used by “bad actors”. Moreover I don’t think that using a blockchain based system which is based on immutable records of every transaction is that smart if you are engaging in illegal activities…

Finally the fear that Central Banks Digital Currencies will overtake Bitcoin is absurd. CBDCs are an evolution of fiat currencies in which central banks aim to disintermediate from the banking system to have more control over the flow of money into the system. That’s the main goal of CBDCs (more on that here and here), not to replace Bitcoin. So if anything CBDCs are a threat to banks.

Conclusion: this BofA analysis is missing the play. Investing in Bitcoin now is a bet on adoption. Bitcoin has the technical characteristics of a good store of value. The only thing it needs to become an actual store of value is wide adoption. But we are getting there.

Read the article.

Return on hodling

For those keeping scores at home let it be clear that it hasn’t been a bad bet to invest in Bitcoin as a reserve asset.

Two thirds of the public companies that are hodling Bitcoin are already up more than 2x on their treasury.

When you see those numbers the main question is: why aren’t there more public companies doing the same thing?

Consolidation

How does this kind of price action look to you? To me it looks like consolidation below $60k.

At least it doesn’t look like the end of the bull market. So even though BTC is down for the week there is no particular reason to be worried about it.

Actually consolidation was the word last week. The SP500 and the NASDAQ are slightly down. Gold is slightly up. BTC is slightly down. But when you look at the size of the changes all those moves are small by historical standards.

Except for the 10-year yield of course...

Look at this streak. The US 10-year yield is up for the 8th week in a row…

Good for you if you have been short the bond market all this time. But this move isn’t finished yet.

The Fed signalled last week that they aren’t going to do anything about rising rates until something breaks. Where and when will it break first? Your guess is as good as mine.

As long as the rising rates do not trigger a liquidity crisis I don’t see any negative impact for Bitcoin. So let’s see how that plays out.

That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.

Cheers,

Nick