Nodding my head...
This week we discuss bitcoin, review facts about bear markets, and track sandwich sales as a proxy for the economy.
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Nodding my head…
As bad as public equities seem at this point, its nothing compared to the mayhem in the crypto markets. We’ve seen funds go under (and owners seemingly abscond), life-savings lost in the Terra/Luna disaster, and exchanges freezing withdrawals. Bitcoin, the most well known cryptocurrency is down 70% from its peak, while lesser known coins are down 80-99%.
I have a mild interest in crypto. I’ve never invested any client money into it (nor plan to) and personally really only own a tiny fraction of a bitcoin and some Ethereum. But when certain ‘markets’ crash like this, I do take another look to see if this is truly the end or is this a potential to make an investment somewhere down the road.
As part of this ‘research’ (I put it in quotes as its usually done on weekends while Netflix is on in the background) I listened to this podcast hosted by journalist Bari Weiss. Titled “Is Crypto Over?” it was a debate between bitcoin bull Anthony Pompliano and crypto skeptic Michael Green (ex-Theil Macro). It was a fascinating debate - but one where I found myself nodding along to both the bull and bear arguments. I don’t know if that means that I was truly open minded or that the story on bitcoin (which the debate focused on) is just so unclear that either argument stands a chance of winning.
I’d highly recommend giving it a listen but here I’ll give you the highlights.
Argument 1) Bitcoin as a replacement to the dollar
Bull argument: Fed flip-flops and changes in policy make it difficult to plan investing/consumption for both individuals, SMEs, and large corporations. Bitcoin has no fed nor ability to change supply, it has a “programmatic monetary policy.”
Bear argument: Argument assumes that the only volatility caused in planning is because of the printing of money - there are many factors. Bitcoin’s volatility also makes planning hard.
Argument 2) Bitcoin as a savior to struggling/embattled countries
Bull argument: Bitcoin helped fund Ukraine’s defense through quick and easy donations, helps residents of banana republics own a much more valuable asset then their local ccy.
Bear argument: Doesn’t help people escape those situations. Yes they may have bitcoin but its not a solution to their problems. Also these are edge cases.
Argument 3) Bitcoin as a storer of value
Bull argument: Yes volatility was high and if you bought at the peak you would have lost money, but bitcoin over any 5 year or so period has been only been appreciating.
Bear argument: The medium exchange theory breakdown when if you do accept bitcoin and it falls 70% in value - will lead to even more business going bankrupt. Also most people who have bought bitcoin are actually making losses on it.
Argument 4) The purity of the bitcoin algorithm
Bull argument: Algorithm (and more specifically the release schedule) is set and can’t be changed.
Bear argument: Algorithms don’t work when the market is in disarray - just like mortgage backed securities were priced using algorithms.
Argument 5) Bitcoin everyday use
Bull argument: While transactions for goods and service has been low, on-chain transaction volume last year was greater than Mastercard’s network. People are using it as a medium of exchange.
Bear argument: No real day-to-day uses of bitcoin besides sending and receiving it. Further there is a perverse incentive to hoard it so newcomers have to fight over smaller supply and bid-up the price.
There were other arguments about the holders of bitcoin but this got a bit personal and political. But if I reflect on the five key arguments above, I have to say both the bull and the bear cases have merit. Has bitcoin done incredibly well over the medium-term? Yes. Is it a significantly better prospect than failed-state currencies? Yes. Will/can it stop excessive money printing? Yes. Is it cheaper/quicker to transfer bitcoin than make an fx transaction and transfer? Yes.
But even the bull had to admit that bitcoin’s price is highly speculative and is linked to how well the market does. Further, is the industry full of fraud and hucksters? It is. Can bitcoin be replaced by governments launching their own digital currencies? Yes. Does the industry’s neutrality come into question with exchanges failing and calls for regulations from participants? Yes.
My key takeaway here is that I don’t think it can be argued with logic whether bitcoin (or crypto in general) is dead or will play a huge part in our lives. I think the only rational thing to do (as an outsider) is to wait and watch. Is this like the internet in the 2000s where the crash still lead to a revolution of how we live and work or is it just another fad for the history books? I think only time will tell, and for now I am not making any bets.
Farrer Fun Fact
Commodity Crash: Despite a hot CPI print, it does seem that there is quite a correction in commodity prices underway (the above does not even include base metals like copper). This could lead to a softer inflation print next month. (source)
Articles and Videos of the Week
This was a solid post on facts about bear markets. Its a quick read and helpful to keep in mind in this environment.
Bloomberg created a fun widget called the “Pret Index” which tracks how various Pret a Manger stores are doing based on their location. Airport locations are booming, but city-center ones? not so much… This implies travel is hot but the ‘return to office’ trend is weak.
This was a great discussion on Netflix and Disney. Its great to see bulls being realistic about the potential bear cases and headwinds.
We’re surprised given the market how few ‘frauds’ have been uncovered. This post reminds us of one of largest frauds in recent history, Wirecard. In it the author describes how he put 2+2 together with some scuttlebutt and informed journalist Dan McCrum (who eventually cracked the case wide open).
The melt-down in public markets is now starting to create a ripple on effect in private markets, with several startups in India cutting jobs and units. This article discusses the topic.