Pro Perspectives 12/17/20

December 17, 2020

What’s going on with bitcoin?

Since yesterday morning, the value of bitcoin has ripped by almost 25%, to nearly $24,000 (at the highs today). 

That’s  a quadrupling in value since March, when global central banks, led by the Fed, pulled out the monetary policy bazooka (an explicit devaluation of money).  

So, bitcoin offers a disruptive currency alternative.  It also offers an inflation hedge.  And as an asset with little to no correlation with major asset classes, it offers some diversification.  

These are legitimate reasons to buy bitcoin.  With the above in mind, we’ve heard many influential investors come off of the fence, in recent months, in support of the case for bitcoin.

Does that warrant this chart? 

Does anyone think the events of the past three months warrant a view that we’re going to see 144% inflation?  The Fed doesn’t think we’re going to see anything over 2% inflation in “the long run.” 

Paul Tudor Jones, one of the great macro traders of all-time, made the comparison of bitcoin to gold and the Swiss franc. 

Interestingly, both gold and the swiss franc have historically been safe-havens — a parking place for money when global investors become uncertainty about global risk (including geopolitical risk). 

On the health care crisis front, with a vaccine in distribution the world is a lot less uncertain today, than it was nine months ago.  If we believe the election is done deal, then the world today is much less uncertain than it was in September.  Yet, bitcoin has more than doubled since September. 

What gives?

Part of this safe-haven value in bitcoin, is “hiding.”  Back in 2017 bitcoin soared as Chinese citizens circumvented government ramped enforcement of government capital controls, which restricts individuals from moving more then $50,000 out of the country in a year.  The Chinese (especially the wealthy) looked to bitcoin as a way to get money out of China.  In fact, China cryptocurrency exchanges were said to account for 90% of global bitcoin trading. 

Then the Chinese government responded with a total ban on crypto trading activities in China.  A few months later, bitcoin futures launched, which gave hedge funds a liquid way to short the madness.  Bitcoin topped the day the futures contract launched.  A few months later, it was worth 1/6th of its value at the top.

Now we have a new high in bitcoin (three years later).  And we discussed the rational reasons for buying bitcoin.  But I suspect the furious recent rise might have something to do with money looking for a safe parking place/hiding place.  The Department of National Intelligence is due to share its report on foreign election interference to Trump and to Congress any day now.  And under a national emergency declaration Trump signed back in 2018 (here — and renewed in September of this year), if any foreign entity is found to be interfering or undermining a U.S. election, or if any American is found to be aiding a foreign entity, assets can be frozen by the Secretary of Treasury.