Why is Bitcoin "digital gold" crashing right now?

[Fella]

Not much of a "currency" if you can't pay your bills with it! Any sign of the general population using it to like, purchase something?

Seems to me that Bitcoin is, since 2013, stuck in the speculative stage.

I have on occasions thought about buying Bitcoin "digital gold " just for a bit of fun , but it just seems easier to buy gold .Bitcoin seems unnecessarily complicated to me and I've read about it a few times and thought meh that just seems like hard work.
I'm still in my 30's and I find it complex (maybe that says more about me !)
I think it needs to be simplified if the general population are to start using it.

 

[tecate]

Not much of a "currency" if you can't pay your bills with it! Any sign of the general population using it to like, purchase something?
Seems to me that Bitcoin is, since 2013, stuck in the speculative stage.

This particular thread is concerned with the notion of digital gold. Use as means of exchange and unit of account are other use cases. The fact that its not all pervasive in this moment for use as a day to day currency this very day doesn't mean that it won't be.

I have on occasions thought about buying Bitcoin "digital gold " just for a bit of fun , but it just seems easier to buy gold .

Gold will continue to have its place in portfolios that are not ready for digital assets. With bitcoin there is of course greater risk as its formative but there's a case to be made to gain a certain level of exposure to that risk as the potential upside is far greater than gold.

Bitcoin seems unnecessarily complicated to me and I've read about it a few times and thought meh that just seems like hard work.
I'm still in my 30's and I find it complex (maybe that says more about me !) I think it needs to be simplified if the general population are to start using it.

You're absolutely right. The usability issues with bitcoin are well known and there's a hive of bright minds working on making bitcoin more easy to use. That it has such problems right now doesn't mean that they can't be solved - it just may take some time to iron out, like so many applications of technology and innovation in the past.

 

[Firefly]

This particular thread is concerned with the notion of digital gold. Use as means of exchange and unit of account are other use cases.

If was used by the general population to buy stuff & pay bills it probably wouldn't be crashing....

 

[tecate]

If was used by the general population to buy stuff & pay bills it probably wouldn't be crashing....

Isn't everything crashing right now?

 

[Firefly]

Isn't everything crashing right now?

You tell me!

 

[tecate]

You tell me!

Ok, everything has crashed... equities, gold, silver, bitcoin, oil.

 

[Firefly]

Ok, everything has crashed... equities, gold, silver, bitcoin, oil.

Equities aren't used to buy stuff by the general population
Gold isn't used to buy stuff by the general population
Silver isn't used to buy stuff by the general population
Oil isn't used to buy stuff by the general population

I meant currencies.....

 

[tecate]

I meant currencies.....

The discussion is about 'digital gold'.

As regards FIAT currencies, check any FIAT currency attached to an economy that's disproportionately oil-based. They're all down. Check any currency against the world reserve currency - they're all down against it.

The US dollar has been debased 2512% since 1913. The printing has gone into overdrive - so you can expect that process to continue. #QEInfinity Meanwhile, Lebanon has gone into sovereign default. Ecuador and Italy are close to following it.

 

[Duke of Marmalade]

Semantics your Dukeness. If bills have to be paid, bills have to be paid. Remember you're talking about highly leveraged positions in equities needing to be covered.

I'm going to buy your explanation that bitcoin's failure to act as digital gold is because the bitcoin community are steeped in leveraged positions. It fits in with a theory that bitcoin is nothing more than a playground for speculators. It serves absolutely no other purpose. One almost feels sorry for criminals who have been duped into thinking that it is a suitable vehicle for their hard earned, if ill gotten, gains.

 

[tecate]

I'm going to buy your explanation that bitcoin's failure to act as digital gold

There's been no such comparative failure. You know that already.

because the bitcoin community are steeped in leveraged positions.

I'd encourage you to review previous posts on this thread. Links have been provided to market commentators confirming that there has been a scramble towards covering losses in the conventional markets.
As regards the bitcoin community 'being steeped in leveraged positions', do you have actual facts to back up that statement? Leveraging comes from the conventional markets. Some use of same has seeped in to the crypto world. However, the difference is that within the crypto sphere, there will be no lender of last resort should that happen to a significant extent and go badly wrong. Many proponents of crypto welcome such a correction if it's ever needed as it will only happen the once.

It fits in with a theory that bitcoin is nothing more than a playground for speculators. It serves absolutely no other purpose. One almost feels sorry for criminals who have been duped into thinking that it is a suitable vehicle for their hard earned, if ill gotten, gains.

Tell us how you really feel, your Dukeness. :-D
According to a recent report, just 1% of bitcoin transactions in 2019 were attributed to illicit activity.

 

[Duke of Marmalade]

According to a recent report, just 1% of bitcoin transactions in 2019 were attributed to illicit activity.

That assuages my concern for that much maligned, and rightly so, community.

 

[tecate]

That assuages my concern for that much maligned, and rightly so, community.

The Duke of Mar-malaise has spoken.
However, my fears for the sovereign integrity of your Dukedom are not assuaged given recent utterances...

Federal Reserve: "We have infinite cash"
Bank of England: "Unlimited quantities of money"
European Central Bank: "There are no limits"

Update 25/03: FT article -> 'The Federal Reserve has gone well past the point of 'QE Infinity'.
Bitcoin doesn't have a buyer of last resort. If it had, many here would ridicule the hell out of it. I don't see one mention from BTC naysayers addressing the ills of the conventional financial system.

 

[RobFer]

I'm going to buy your explanation that bitcoin's failure to act as digital gold is because the bitcoin community are steeped in leveraged positions. It fits in with a theory that bitcoin is nothing more than a playground for speculators. It serves absolutely no other purpose. One almost feels sorry for criminals who have been duped into thinking that it is a suitable vehicle for their hard earned, if ill gotten, gains.

For criminals, cash is always king.

 

[tecate]

For criminals, cash is always king.

For sure. In 2019, only 1.1% of crypto transactions were deemed to be illicit.

 

[tecate]

People are beginning to realise that arbitrarily increasing the money supply has long term consequences:

Investment Strategist Jared Dillian's opinion piece in Bloomberg titled "Money Has No Meaning Anymore".

 

[tecate]

Just as an update to the original query set out in this thread, bitcoin has now recovered to the pricepoint it was at prior to the crash of all markets on March 12. It's now up 5.7% since Jan. 1, 2020.

During out and out panic selling, it doesn't hold its value and is correlated to the equities markets. Some have run the numbers to find that in these conditions, historically bitcoin on average stays correlated for 25 days. That said, gold also went down with the markets only to recover later. Bitcoin is well known for its volatility yet oil has been more volatile over the past 2 months. Last week oil futures posted at negative -$37/barrel.

As it stands, bitcoins formative claim as digital gold (or a largely uncorrelated asset in its own right) remains intact.

 

[tecate]

Firstly, for anyone reading this and unsure what the bitcoin halving is, here's an explanation.

Apparently the main driver of the bitcoin bounce is the "halving" expected around May 20th.

It's May 12 your dukeness. There was little talk of the halving coming out of the covid conundrum. It was coming back up in any event. Now that the halving is fast approaching, there has been more consideration of it. However, I don't think that's in any way feverish.

On a more organic basis, towards the end of last month, we reached the latest milestone of in excess of 3 million bitcoin wallet addresses with a balance of more than 0.1 BTC.

All the usual suspects are running countdown clocks and constantly reminding their gullible patrons of the boost to price from earlier halvings, even going so far as to justify this based on supply and demand arguments. Really can't get my head around that.

This is a concept you're not used to Dukey - it's called Quantitative Tightening - not this Q.E. unlimited social experiment brought to you by the Fed/ECB/BoJ/BoE, etc. Can you tell me please why anyone had to pay taxes all these years when it seems the ECB could have just printed this off?

The new supply is going to fall from 3,600 per day to 1,800 per day. That is out of a total supply of 17,000,000. Besides we have known about this halving coming for 11 years - the fact that the price ramps up in the few weeks before it actually happens is just another manifestation of the total irrationality of bitcoin pricing.

The notion of an efficient market hypothesis is a fair point. Some believe it's priced in - and some don't. However, you're wrong to single out the bitcoin market for irrationality given what we're seeing right now in the conventional markets. The worst jobs figures ever are released and the market goes up! The conventional markets are the greatest live example of irrationality right now - powered by hopium and magic money.

Reminds me of the share splits during the dot.com bubble. A rumour that a company with a share price of $50 was going to issue one new share for every share held would result in a price rise. And then the split would happen. Instead of having one share worth $50, you would end up with two shares worth $60. I remember a guy saying to me in all seriousness about a company he had invested in "One more share split, and I will be a millionaire".

It's an interesting anecdote Brendan but it betrays a misunderstanding of the bitcoin halving. The halving is Quantitative Tightening. Bitcoin miners expend energy and resources in confirming bitcoin transactions. A reward of 12.5 BTC is provided every ten minutes for the confirmation of blocks of transactions. As of block 630000 (expected to be reached on May 12), that reward is cut in half to 6.25 BTC.

It's a case of reduced supply. If we assume the same demand as pre-halving, reduced supply is likely to induce an upward pressure on price (albeit not immediately afterwards). That's the opposite of the analogy that you present with.

With Bitcoin back at $9,000 maybe it's time to short it again.

Fill yer boots.

Do I sell off some of my buy and hold shares to do so?

Entirely speculative on my part but I suspect that the steaming mess in the conventional markets has not ended - and will play out over the coming weeks/months.

If the stock market crashes, will Bitcoin crash? Or as it's "digital gold" maybe it will rise.

I thought this was ground we'd already covered but apparently not. Bitcoin crashed hard in those market panic conditions only to recover later. Gold crashed in those market panic conditions only to recover later. People have ran the numbers. Over its 11 year history, bitcoin has largely been uncorrelated with the conventional markets. As it stands today, it is once again, the best performing asset class in 2020 - as it was in 2019 and as it has been over the course of the last decade.

In a note to clients on Thursday, Chris Wood - Global Head of Equity Strategy with Jefferies (the world's 9th largest investment bank) - wrote this:

"Investors should own both gold & Bitcoin... [BTC] should be a source of diversification... its decentralized nature... [&] fixed supply, makes it a hedge vs central bank manipulated fiat $."

I guess he and his clients are the latest in a long list of 'greater fools'.

I wonder what event will trigger the realisation that it is a bag of hot air?

I ponder a similar question but yet one that is the antithesis of yours => 'How long will it take for yourself and his Dukeness to get to that Eureka! moment? The one that goes along the lines of an understanding that bitcoin is hard digital money which is divisible, censorship resistant and digital gold (or an uncorrelated asset class in it's own right).

 

[tecate]

I have also corrected the effect of the halving which will be a mere drop of 900 a day in the supply of new bitcoin which the miners dump as soon as they have wiped off the dirt. If that can have a pricing effect when the existing supply is 17,000,000 it is a very strange dynamic indeed.

Ok, so miners have to release newly minted bitcoin onto the market in order to cover substantial costs and make a profit. That emissions rate will be cut in half. Essentially, the bitcoin inflation rate will reduce from 3.7% to under 2%. Clearly, it will have to have some effect on pricing (if we assume demand to be the same as pre-halving times).

Of course the halving is influencing the price but not because of fundamental supply/demand dynamics but because of all the hype stirred up by the Coindesks of this world.

I don't believe there is any media without bias although the extent of that bias can vary. In that regard, Coindesk are not doing so bad. But if you were to criticise Coindesk, you should equally criticise the markets p0rN eminating from CNBC in the conventional game. As to 'stirred up hype', I'm not seeing much of that. The reality is that the macro economic situation and what we are seeing in terms of the application of Modern Monetary Theory (MMT) and infinite QE is the bigger consideration for anyone looking at bitcoin right now.
The irony - bitcoin was supposed to be the great monetary experiment - when in fact its the conventional monetary show that's going down a road where nobody knows the destination.

As to Chris Wood, all I can recall is that when I researched this about two years ago the vast, vast majority of respected economists were in the BOHA camp. Do you know of any converts?

In the space of that two years, I've seen people who have come from the conventional side of the house start to see the potential in bitcoin. These have tended to be gold bugs and macro investors - who have built their careers on identifying emerging trends/changes. Guys like Raoul Pal.
As regards 'respected economists', you're likely to be referring to Keynesian economists given that's the system we have inherited. Bitcoin is the antithesis of what they're proponents of. They'll tell you that its deflationary and that's bad. However, are they seeing the bigger picture in the context of technological progression? Maybe deflation is unavoidable.
We've had utterances from market analysts supporting the notion that bitcoin is a hedge against the conventional system. We've had serious players like Fidelity, Goldman Sachs and many others move into the space. Back in 2018, you said that if this wasn't anything more than hot air, why wouldn't the likes of Samsung make bitcoin mining chips. It turned out they already were.

I tried to give CW the benefit of the doubt that he was merely reflecting the reality that in the medium term at least bitcoin will behave like an uncorrelated asset even though it is fundamentally a BOHA. Rather like recommending disinfectant companies because of a surge in Trump induced demand whilst knowing it is a nonsense. But no, he is a cultist himself waxing about its decentralised nature blah, blah, blah.

Ok, let me get this straight. To your mind the Global Head of Equity Strategy for a leading investment bank is a 'cultist'? Firstly, he works for an investment bank - they tend to be conservative to say the least! Secondly, I had never heard of him mentioned in crypto circles up until his note to investors earlier this week.

On QE and fiat money in general I must admit I am a bit concerned at the resort to the printing presses. You pose an interesting question - why have taxes at all if we can simply print the stuff? I will ponder a response - haven't got one yet.

Keep me posted.

But this is not Weimar/Zimbabwe/Venezuela Take 4. The QE has until now been an attempt to fight deflation. WZV money printing was to finance hopelessly unsustainable public expenditure. Admittedly the COVID supports will show up as budgetary deficits and therefore potentially inflationary, but with inflation way below target we have some headroom. And there will be COVID induced deflationary effects with cuts in wages and demand.

The Fed and ECB may be a hell of a lot savvier than the Zimbabwe's or Venezuela's of this world. However, that doesn't mean that they can't get it wrong. And it's not just the Fed. There is a political influence there - direct political influence from Trump. What if going in to the next election, Trump tells them to keep the taps on - just a tiny bit longer than they should?
They managed to keep inflation down post-2008 but now the stakes have been upped quite a bit. We're dealing with unheard of volumes of monopoly money. They also backed themselves into a corner as interest rates were already floored - so what other monetary instruments have they left in the toolbox? They never weaned themselves off QE - and now that they've taken the biggest hit of it ever, will they ever be able to?

Deflation could be equally bullish for bitcoin. What if treasury bonds in the US go negative - and trust in institutions starts to erode?

 

[Duke of Marmalade]

tecate I think we have both been proved very wrong in the past.

Bitcoin scholars advise that Bitcoin was created in reaction to the QE policies post 2008 recession. Bitcoins' fixed supply, and decentralized nature (the Fed cannot print more Bitcoins) lend it as an alternative to QE

I am counting you as one of those "bitcoin scholars" or at least a fellow traveller. Well, more than 10 years after the printing presses were first turned on in earnest, no sign of the predicted hyperinflation.
For my part, when I first became engaged in this bitcoin stuff here on AAM more than 2 years ago, I was a full blooded BOHA supporter of the Boss. Although bitcoin has fallen by more than 50% since then, I admit that I have not seen the expected BOHA moment.
Getting back to topic, I followed your links and generally became more acquainted with the thinking of bitcoin scholars. They are certainly obsessed with the halving but it seems to me that almost as a response to the sentiments of OP, as a community they have pinched themselves and asked "hey what is going on here? We are behaving like the establishment. Is this not Tiocfaid ár lá, is this not the digital gold coming we have promised ourselves?" Hopefully, for the sake of us all they are wrong and the conventional system makes a reasonable recovery. That will be the BOHA moment - the realisation that the conventional monetary machinery which has served society so well over the last century is flexible enough to withstand the bitcoin scholars' worst predictions for it. Boss, fill yer boots.

As an aside I note your following comment:
"What if treasury bonds in the US go negative - and trust in institutions starts to erode?"
Is it not a contradiction for people to pay an institution they don't trust to mind their money?

 

[Duke of Marmalade]

Ok, let me get this straight. To your mind the Global Head of Equity Strategy for a leading investment bank is a 'cultist'?

Anybody that spouts any of that mantra is a cultist to me.

“Cryptocurrencies, by contrast, have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations – which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless.

What is your view of a Nobel Laureate?