The Breakdown - Avoiding the Narrative Trap: Bitcoin Is More Than an Inflation Hedge

Episode Date: June 13, 2020

Today on the Brief: Why bitcoin sold off A bank-the-unbanked narrative for the digital dollar It’s Dave Portnoy’s world and we’re all just living in it Today’s main topic: Why inflation isn’t the only bitcoin narrative that matters. When bitcoin’s halving coincided with the most aggressive central bank policy of all time, it set a clear narrative framework for bitcoin as an inflationary hedge. This was captured by people like legendary hedge fund investor Paul Tudor Jones, who warned of a “great monetary inflation.”  In this episode, NLW argues 1) that inflation could be a dangerous narrative to focus on too closely due to a number of countervailing deflationary forces, and 2) there are a variety of other narratives that are just as important to bitcoin, including: Censorship resistance  Seizure-resistant asset Currency controls and reshoring  Nations looking to escape USD system Independent banking  Peaceful protest

Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and CipherTrace. The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. Welcome back to the breakdown. It is Friday, June 12th, and today we are going to be talking about why inflation isn't the only Bitcoin narrative that matters, but first, let's do the brief. First up on the brief, why Bitcoin sold off? So what happened? This one is not going to come

as a surprise. Obviously, you were all in your blockfolios, I'm sure, all of yesterday. Bitcoin dropped something like 6%, from 9,800, 9,900 down to 9,100, 9,000, 900 at the low. And there are a few different reasons that people are saying that that might be. The first is correlation with an equity sell-off. We saw stark markets kind of have a pretty, pretty, meaningful correction after running like an absolute freight chain. Yesterday, the Dow Jones fell 1,800 points. And the best reason we think for that is that the Fed's guidance on Wednesday was really pretty gloomy, right? They were trying to tamp down expectations on this idea of a V-shaped recovery. And it seems like the market finally got the message and started to shift some of its

behaviors, particularly around stocks that have more indication of actual fundamental economic value. So things like industry stocks and bank stocks went down pretty significantly. So we're still in an environment, as much as we call Bitcoin a totally uncorrelated asset. The reality is that there's commingling of who owns Bitcoin. And so there is some amount of correlation when the stock market sells off. So too does Bitcoin. At least that's part of it, or it seems like it's a part of it. So that's part one, a potential reason for the Bitcoin sell off yesterday.

The second has to do with dump fears from stolen coins. So yesterday hackers moved something like $4.1 million worth of stolen Bitcoin from BitFinex, something like 400 Bitcoin were moved. And there was another big transaction of about $1.3 billion that was executed by an unknown wallet. And these things scare people. They worry that there's going to be a dump on the market. And that might have explained part of it as well. A third piece, according to CoinDesk at least, has to do with the technicals.

And obviously that's not my area of expertise. But it seems based on this article in CoinDesk that the fact that the fact that, that the Bitcoin has failed a few times now to really establish this foothold above 10K since May 11th means that this sort of correction might have just been expected. So three potential reasons, as always, I think, when it comes to an asset as complex, let's say, as Bitcoin, trying to ascribe too much to any short-term movement is likely to leave you in a bad place. But three potential reasons why Bitcoin sold off yesterday. Next up on the brief, the digital dollar in Congress. So we talked about this the other day, how this was happening. There were a few different

people testifying. Effectively, the House Financial Services Committee wanted to hear from experts like Christopher Giancarlo and a few others about why they should be interested in a digital dollar and what a digital dollar offers. And so why this matters and why I'm bringing it back now is that it's very clear looking at some of the transcripts from the session that there is a logic and an argument emerging around the digital dollar that has to do actually with effectively some of the things. things that Libra was talking about when it came before Congress, this idea of banking the unbanked. From comments from the people who are there presenting to chairwoman Maxine Waters, it's really clear that the interest in this particular piece of fintech has to do with a desire to have a

better system for distributing aid and being able to get people what they need in emergency situation. So just an interesting narrative around the digital dollar that I think is worth watching. Finally on the brief, the Portnoy Party rolls on. And Breakers were kind of first on this, but obviously we've been watching Dave Portnoy, who was the founder of Barstool Sports and hadn't really bought a stock before the quarantine. When he started his live stream, which he calls Davy Day Trader Global, it was almost immediately clear to anyone watching that he was going to be an interesting force in these markets in these times.

And yesterday, I think this was embodied in the fact that he had feature stories about him in both the Wall Street Journal and Bloomberg as kind of the ringleader or the embodiment of this Robin Hood rally that we've been discussing all week. And so why does this matter? Well, I actually think it matters because there's a narrative consensus forming around the Robin Hood rally that this is all degenerate gambler types. It's all people who, like Portnoy, didn't have sports to focus on, so shifted their focus elsewhere.

And I'm not totally sure that that's the case. And not because I have different information, but because I wonder to what extent this is just that type of demographic versus people who are young professionals. You know, maybe they work in companies where they don't hold significant equity, and this feels like a way to get some upside in their own life, to own a little bit bigger piece of their future. I wouldn't be surprised if mixed in with the people who are legitimately kind of were just interested because of people like Portnori and were bored and got into this to kind of play around a little bit and use the free fees of Robin Hood to start dabbling, I wouldn't be surprised if a lot more are actually, like I said, young professionals who are trying to assert some agency over their future

in a market that seems ripe for opportunity. So I think it's an important question because that will determine to some extent what type of longevity this force in the market actually has. With that, however, let's shift to our main topic, why inflation isn't the only Bitcoin narrative worth considering. First up, what are narratives? To me, narratives are ways that we make sense of the world around us. narratives consolidate a lot of information in a small package as a way to understand and explain phenomenon. In the context of Bitcoin, narratives are the motivation for getting involved in Bitcoin, right? Narratives explain why Bitcoin should be interesting to someone. And what this means is that when you have a dominant narrative, it's going to often dictate who gets interested in Bitcoin and why.

Narratives are on ramps effectively for people to get interested in Bitcoin. Conversely, when narratives are quote-unquote disproven, right? Or when people feel like a narrative has been proven to be false or proven to be not as true as it seems, they can have the opposite effect. They can turn people off. We saw this at the beginning of COVID-19. There was a lot of narrative turmoil for Bitcoin. Some people thought that Bitcoin was going to act like a hedge against a stock market downturn. There were lots and lots of voices in the Bitcoin community who had been saying for years that that's not the type of hedge that Bitcoin is. And instead they were talking about the hedge against inflation, the hedge against fiat debasement, and so on and so forth. However, there were

still this set of people who thought that Bitcoin was supposed to go in the opposite direction that the stock market was going. Well, of course, that didn't happen. And at the beginning of COVID, Bitcoin actually had its most correlated period in history, or at least recent history. Now, we've talked a lot on the show about why that is and why in a downturn like that, in a liquidity crisis in particular, you don't get a choice of what you sell. You have to sell anything that you can sell, and Bitcoin being a relatively liquid asset was liquidated alongside everything else. We've spent the last couple of years trying to get institutions involved, and so we shouldn't be surprised when institutions have to sell their positions alongside every

other position that they're selling because they need that cash. And that's what we saw. That's what we saw on Black Thursday when Bitcoin crashed all the way down below 4,000 very temporarily. It wasn't long, however, before lo and behold, a new narrative formed. And really, we have Paul Tudor Jones to thank for giving this such crystallized form. In his investor letter, he called something the great monetary inflation. That was his fear for what was coming on the backside of all of this money printing. And really what started to happen is that the Bitcoin halving was coming up right at the same time as we were seeing the money printer engines of central banks around the world rev at the same time. Money printer gober became the most popular meme of the moment for not just Bitcoin

Twitter but FinTwit and just the financial industry in general. And that was contrasted with this regular, predictable monetary policy of reduced issuance. It couldn't have made the contrast between the Bitcoin monetary policy and the monetary policy of central banks any clearer. So all of a sudden, we started to consolidate around this very powerful narrative, this contextually powerful narrative of the great monetary inflation. So why then am I now having this conversation about inflation not being the only narrative matters? So why am I now then having this conversation about why inflation, or specifically the hedge against inflation, isn't the only Bitcoin narrative that matters?

There's a bunch of reasons. But at core, it comes down to this idea that the inflation debate is itself particularly fraught right now. Let's talk about what that means. There is one popular narrative which is embodied in the money printer Go Burmeme. It's embodied in this idea of the great monetary inflation, that while yes, right now, we are in a deflationary moment because of the crisis, at some of the moment, at some of the point it's going to shift to an inflationary moment because all of a sudden demand will be back,

people will have their jobs again, and then that will coincide with all of this money sloshing around the system, and we're likely to see those prices, consumer prices rise very significantly. That's one part of the narrative. However, there's a lot of countervailing forces. First is the deflationary pressure of the loss of jobs. We still have more than 20 million people unemployed in America. And as much as people are rooting on this V-shaped recovery in the stock markets, it's not clear how many of these jobs are going to be gone forever or shifted forever. Places that are opening back up are doing so under very strict rules and regulations, often with significantly reduced capacity.

On top of that, you have businesses that just aren't able to reopen at all and had to shutter their doors, so that represents a whole different type of job loss. On the third hand, you've got people who are in white-collar jobs, professional jobs, farther up the chain, who are either in the industries that were most effective, like travel and tourism, who are just now potentially coming up on their own wave of unemployment. Bloomberg did research and found that there were about six million of these jobs that were at risk those chickens haven't come home to roost yet for. All of this is to say that the deflationary pressure of a loss of jobs is something that is severe, and we're not even

talking yet about the fact that we're seeing cases of COVID rise in places that opened up, Arizona, Texas, Florida, California. They're seeing some of their biggest weekly increases in COVID again. And people keep calling it a second wave as though the first wave ended, which is just an absolute joke, but that's not really what this podcast is about. Still, countervailing force number one is deflationary pressure from loss of jobs. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over 4 million customers, including top financial institutions.

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We have lived through this immensely traumatic moment where out of the blue all of a sudden everyone had to stop working. And there were a lot of people for whom that was either economically devastating or economically terrifying. That could have pretty significant impacts on what we choose to spend our money on or not spend our money on more specifically. So we have this other deflationary pressure just by people who don't want to go out and spend as much money as they did before. For as much we talk about pent-up demand, and I do believe that that is a force, you're also going to have some number of people who have a very different attitude towards their own financial resilience who are going to make very

different decisions, which again creates a potentially deflationary pressure rather than an inflationary pressure. A third countervailing force, which will be familiar for anyone who heard my interview with Jeffrey Snyder last week, is the demand for global dollars and the shadow banking system. There is so much debt around the world that is denominated in US dollars that truly we don't really know how many dollars the world can absorb. And it may be tremendously more than we think. It may be that it's nearly impossible to really create inflation because there is just so much demand for the U.S. dollar because of its particular role as the world's reserve currency. I mean, this is basically Snyder's thesis, that central banks are totally impotent except for

what they do to create self-fulfilling prophecies, because when it comes to real monetary policy, the shadow banking system has so much capacity to absorb whatever they throw at it that the idea that they actually have a financial or economic lever to pull just doesn't make sense. All of these are, again, countervailing forces to why we might not see the type of inflation that the money printer go berm meme might suggest. A second part of this, though, is that how inflation manifests itself can be not exactly what we expect. Usually when we say inflation, it's shorthand for consumer price inflation, because that's how we've seen it manifest in other parts of the world, but that's not always the case. People thought after quantitative easing in 2008,

2009, 2010, that there was going to be significant inflation then, and there wasn't in that context where we saw inflation was in asset prices. You heard that clip yesterday, from from former Fed Governor Kevin Warsh talking about that, that that's where this impact was. It was in asset prices. And that certainly is a form of inflation. In fact, one that we should really be focused on and have a lot of discussion about because I think it's instrumental to understanding the consequences of the decisions that we make as it relates to central bank policy. However, it's not the inflation that we're talking about when we talk about Bitcoin as a hedge per se. So that's another reason to maybe get complicated with this.

The point of all this is to say that when it comes to inflation, it's really hard to know how it's going to play out. It's really hard to know when it's going to play out. And most of all, I want to remind us that inflation hedge isn't the only Bitcoin narrative. It's just the one that has been most featured recently because of this money printer go Burmeme because of people like Paul Tudor Jones. But it is, again, not the only narrative. So what are other Bitcoin narratives that are relevant for this moment. Well, a lot of these come from me, but I actually asked on Monday for people on Twitter to answer this question. What are the other Bitcoin narratives that we're not giving enough attention to because we're so focused on this inflation hedge? And people had great

answers. So I'm going to go through some of those. I'll link to the threads so you can see for yourself, too. The first and I think most obvious one to me in some ways right now is censorship resistance, the idea that Bitcoin represents as a non-sovereign money, a censorship-resistant form of money. We are having an increasingly tense conversation about censorship. You've got the U.S. president taking on Twitter. You have the U.S. president talking about designating Antifa, which is, to the best of my ability and the best of the ability of people like Jake Hanrahan, my guest from Popular Front earlier this week, more of a group of people with a shared ideology than any sort of real powerful organization or movement. Anyways, we're trying to potentially

designate them as a terrorist group, and that opens up a Pandora's box of all types of financial controls and hold aside whatever you might think about Antifa, because that's not at all the point that I'm trying to make. The idea that we might start having the ability to designate domestic organizations as terrorist organizations, what that does in terms of the financial toolkit that the government has to pursue and look into regular average citizens who have not been proven guilty of anything, is pretty significant. We talked earlier in the brief about this digital dollar that we're debating. That would have huge impacts on the U.S. government's ability to actually surveil money. In other parts of the world, by the way, surveillance money is already a thing.

Transactions on WeChat Pay or AliPay in China are much easier for the government to watch than transactions on Bitcoin. This is all even without Bitcoin being a privacy-focused blockchain. You're seeing people like the Human Rights Foundation support more privacy efforts because this censorship-resistant piece is so important. This is, to me, the most obvious other narrative that feels very pertinent right now, but there are a lot more. Closely related in some ways to censorship resistance is the idea of seizure-resistant money. If you look back through the modern history of authoritarianism, one of the most common

threads is that authoritarians seize the assets of the people or group that they're trying to victimize, that they're trying to control, that they're trying to dominate. Bitcoin makes that much, much harder. And again, in the space of this particular conversation, I don't want to get into the hold a gun to your head and tell me your private key code type argument, but I think that it's very fair to say that when it comes to seizure resistance, Bitcoin is far ahead of other types of assets like gold bars, for example, jewelry, et cetera. A third alternative Bitcoin, narrative that I think is likely to become more and more important has to do with the economic weapon of currency controls, specifically in the context of reshoring and just a general restructuring

of the global economy to be more looking inward rather than looking outward, right? We're headed likely into a period where not just in the U.S., but in many different regional pockets, you're going to see more localism, more regionalism, more reshoring when it comes to supply chains, economies, etc. In those contexts, there are likely to be more and more efforts from governments to keep things happening in their local currencies and to use currency controls as a way to try to have those economies not as dependent on the rest of the world. To take one example of this right now, we see Argentina. Argentina has really strict currency controls because they're trying desperately to keep things moving in the peso, but there are huge problems. An article in the Buenos Aires Times

today was talking about how Argentine importers have to pay for shipments in dollars, and they're complaining because the import prices are tied to the unofficial exchange rate, which has become recently twice what the official exchange rate is. So they're losing more and more revenue to actually get the goods that they need. This is the same story that we talked about in Lebanon. What really matters is the unofficial exchange rate, what people are actually willing to exchange dollars for in the local currency, and if that starts to break from whatever the official exchange rate is, it can wreak havoc on markets. This is happening in Argentina right now. According to this article, Argentines are expecting prices to rise 47% over the next 12 months, which would be the highest level

of expectation since 2006. Now, we can have a good debate about whether governments should have tools like currency controls to shape economies. But holding that aside, the reality is that they're going to be so many places around the world where people are desperate to escape the local currency regime and look to things like Bitcoin to do so. So I think that's an important part of the Bitcoin narrative. A fourth alternative narrative is almost the inverse of this, where you might see small nations that are actually looking to escape the U.S. denominated World Reserve system. Imagine that Argentina in that same scenario starts squirreling away Bitcoin because it wants to have access to a different type of financial system, right? It wants to remove itself from the

U.S. world. This is not inconceivable. In fact, it's highly likely that we start to see a little bit about this. If you're interested in this topic, by the way, which I'm not giving nearly enough time, go back and listen to my episode with Preston Pish. He gets into this in much more detail, and I think it's really fascinating. So, interestingly, the third and fourth alternative narratives for Bitcoin are almost inverse of each other. It's the local people being able to use Bitcoin to escape the local currency regime and local governments or national governments using something like Bitcoin to escape or at least disconnect or provide some resiliency in the larger U.S. Denominated World Reserve System. On top of these, people had a whole lot of other kind of smaller

narratives as well that mattered. The idea of independent banking and having 24-7 access to your own money, Nick Newman, the CEO of Kasa said, having sole control over your money rather than relying on an IOU from a bank or other trusted authority is a massively underrated part of Bitcoin. Other people pointed to predictability, the unwavering monetary policy, the uncorruptibility of that monetary policy. Other people talked about digital scarcity. Go back to my conversation with Nick Carter earlier this week about how Bitcoin created a mechanism for property rights, digital property rights that couldn't be or didn't need to be enforced by an outside power, but instead were enforced programmatically. That's a huge innovation.

Someone else wrote about a borderless life, people who move around the world, which is a digital nomadism, kind of. I think all of these are really profound in their own way. They're really interesting. And serve to reinforce my point that there are so many parts of the Bitcoin narrative. There are so many narratives around Bitcoin that it does us no good to just get lost inside of one, especially again because we run the risk of if inflation doesn't all of a sudden start to happen, people just dismiss it. like we were the ones who were Chicken Little waiting for the sky to fall when there's so much else that matters about this right now. I want to close, however, on one more narrative, which was

one of the most popular ones that came up on this Twitter thread, which is the idea of Bitcoin as a peaceful protest and a way to opt out of a system that you disagree with. Burger Crypto put this really nicely. He said, Bitcoin offers you a way to peacefully say no against the current monetary system and political powers. Just as with demonstrations, a single voice doesn't do much, but as the group grows larger, the collection of voices becomes a single strong voice. Michael Kreger, who I think maybe has the best Twitter bio I've ever read, it says Poet Laureate of the Debt Apocalypse wrote in February, Americans have been conquered by the ruling class not via the sword, but via debt. Debt is the primary weapon used against the masses.

I call it financial feudalism. The oligarchy uses debt offensively to increase wealth and power, while the masses must use debt defensively to survive, if more people understood precisely how the game is rigged at the highest level we might get somewhere. In this context, if you believe that to be the case, Bitcoin is a way to opt out at least partially from that system to exert yourself and exert what you want to see as a better future. To Berger's point, a single voice might not do much, but as this group goes larger, it becomes a more and more unignorable force. And so on that note, I want to close with this clip from a protest that was flying around Bitcoin Twitter the other day. Whether Bitcoin can actually solve this, quote unquote, is a huge topic. In fact, it's one that I took on a

couple weeks ago that you can go find. But I think that hearing things like this make it clear that when we're talking about redesigning the world, restructuring society, this question of what basis our economy is built on is going to be an important one. And so I thought that these words were really powerful to hear in the context of demonstrations and people who are trying to go out and advocate for a better world. So we'll listen to that. And then I just wanted to say, I appreciate you listening. And until tomorrow, guys, be safe and take care of each other. You know, my condolences to all the families who lost their loved ones. And I got some ideas on how we all move forward. I got three points I'd like to present to y'all. These are my macro ideas. These aren't

These aren't full solutions. We're going to need people for the micro ideas to get the finer details. My first solution, I want to present an alternative financial solution to everyone today. The elites of this country and globally use the financial system to oppress us. They are killing us with our own money. There is a new financial system that I want to present to you that's open to everyone. All you need is a phone to start using it. I want everyone to please start learning about a new financial system.

This system is called Bitcoin. It was created for this very purpose. So the elites do not have control of the financial system anymore. With Bitcoin, they cannot turn on a printing press and give our dollars to their friends for bailing them out because they weren't being responsible. You cannot bail people out. The elites cannot bail out their friends anymore. Please learn about this system. This system is called Bitcoin.

It was created for this very purpose. A great resource is a man named Andreas Antonopoulos. You can look him up on YouTube. Please learn and support this system. You don't have to put all your money into it. Like my brother said earlier, you can put weekly $5, but we will no longer let the elites kill us with our own money. That is absurd.