The Breakdown - Crypto Narratives Becoming Reality

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, August 24th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly. slash breakdown pod. All right, friends, back with another long read Sunday today. And today, once again, we are turning to the other breakdown, the breakdown newsletter written by Byron Gilliam,

Starting point is 00:00:45 for a discussion of the question, are crypto narratives becoming reality? Byron writes, gold is proof that belief sustained over millennia creates real value. Crypto is hoping to take a shortcut. I'm going to turn it over to the AI version of myself to read this and then we'll come back and discuss it. Central banks are buying gold in the 21st century for the same reason Romans bought it in the first. It has value because people perceive it to have value. That circular logic has proved so durable that the purchasing power of gold is virtually unchanged since antiquity. In that sense, central banks are buying gold now because Romans were buying it then. Perception has become reality through repetition. The bet with crypto is that it can pull off the

Starting point is 00:01:26 same trick, but faster, compressing millennia of belief into a few short decades. Lately, it started to look like it might. Recent research offers empirical evidence that people are using crypto to protect against the risk of government default. A 10% increase in sovereign CDS spreads is associated with a 2.9 to 4% increase in crypto app downloads, 10%. It doesn't take much to move a credit default swap 10%, so that correlation suggests people are quick to turn to crypto at any sign of a debt crisis. Importantly, the correlation tests positive for causality. Crypto adoption jumps in months following news related to sovereign risk. The researchers established cause and effect by studying credit risk events like inflation shocks in Argentina, Turkey and Venezuela,

Starting point is 00:02:13 and sovereign debt crises in Sri Lanka, Greece, and Ecuador. Advocates have been telling these stories for years as proof of crypto's utility, but with limited effect likely because the evidence was only anecdotal. But the data now supports the narrative. In short, the study confirms that when bank depositors are reduced to stealing their own money, people really do turn to crypto. Other studies also suggest that crypto's narratives often line up with reality. Bitcoin, for example, has long been framed as an escape hatch from irresponsible economic policymaking by corrupt governments. And that is, in fact, how people use it. We document a flight to Bitcoin, FtB phenomenon, one study concludes, whereby local demand for Bitcoin increases with local economic

Starting point is 00:02:56 policy uncertainties. FTB is driven by investors' lack of confidence in government as FTB is stronger in countries where the confidence in government is low and corruption incidents surge, the authors explain. It gets even better for the broader crypto narrative. Bitcoin ownership shifts from centralized exchanges to decentralized wallets amid such turbulence. What could be more crypto-narrative confirming than that? Another study even cites crypto as a reason for corrupt governments to change their ways, concluding that the control of corruption appears to discourage cryptocurrency adoption. Crypto advocates sometimes celebrate government dysfunction as another confirmation of their narrative, and who doesn't love having their narrative confirmed. But if crypto could frighten governments

Starting point is 00:03:39 into good governance reforms, that would be an even better story, I think. The same study finds that higher emigrant ratios in lower-income countries are associated with increased cryptocurrency usage, with the implication that people find crypto useful for remittances. Remittances is one of crypto's original use cases, but it's always been surprisingly hard to quantify. Western Union still hasn't been fully undermined by crypto, but seeing the empirical evidence makes the remittances narrative more substantial. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know.

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Starting point is 00:04:56 share of the future. Finally, another study backs one of crypto's grandest storylines, that it puts money and finance beyond the reach of government control. Studying the relationship between international sanctions and crypto usage, the authors conclude that sanctions can act as a significant motivator for countries to adopt cryptocurrencies. Satoshi set out to create non-sovereign money, and sanctions evasion is proof that it works as such. If these academic studies feel, well, academic to you, you're probably reading from a developed economy. All of the studies found their results primarily in emerging markets. In the U.S., by contrast, Bitcoin's digital gold narrative took a hit in 2023

Starting point is 00:05:36 when it failed to hedge against 9% inflation. But the study on sovereign default risk showed that people mostly use Bitcoin to hedge inflation risks resulting from a sovereign debt crisis, and not, say, supply shocks. Even with CPI at 9%, no one doubted the U.S.'s's ability to service its debts, so people didn't feel compelled to swap their dollars for Bitcoin. But there are signs that crypto's value proposition is starting to be recognized in developed countries, too. In just the last year, the lead author of the paper on sovereign debt observed, we've seen the crypto narrative migrate from being just an emerging market story to one that folks in advanced economies are contemplating too. The signs are mostly anecdotal so far, but also impossible to miss.

Starting point is 00:06:19 Larry Fink referring to Bitcoin as a flight to safety asset class, Jim Kramer recommending both Bitcoin and Ethereum as a hedge against deficit spending, even the U.S. government itself starting a strategic Bitcoin reserve to hedge against its own irresponsibility. The risk of U.S. default remains small, but not so small that Wall Street, CNBC and the U.S. Treasury can resist hedging it with Bitcoin. The more that behavior is repeated, the more the perception of crypto will become its reality. All right, back to Real NLW here. This is a topic that I've been interested in a long time,

Starting point is 00:06:53 this idea of narrative reflexivity and self-fulfilling prophecy. Part of what has made crypto so interesting, or rather, part of what has made to me the intersection of traditional finance and crypto so interesting is that you have these fascinating different bedfellows. On the one hand, you've got folks who are in it for just the money, right? And many of the folks on Wall Street are obviously just in it. for the money, they see this as a trade, they see it as an opportunity. It's the same folks who

Starting point is 00:07:20 treated it completely as risk on and sell it the first sign of trouble. But at the same time, for lots of folks, an increasing number of folks, what Bitcoin in particular but all crypto assets mean in general is really important. They're not viewing it just as a trade. They're viewing it as a long-term transformational force. And the reality is, the more people who get involved even for cynical reason, the more reinforcement of those people who are not there for cynical reasons, but who are there for philosophical reasons get. If you needed any proof of the power of narratives to change things, just look at the speeches that we saw in Wyoming this week. From fighting tooth and nail against us just a couple of years ago, to now Fed governors talking about how not only is there

Starting point is 00:07:59 need for positive regulation of crypto, but for the Fed to actually take a look at its own rails and think about how crypto can help it. In China, we have the Chinese government considering whether they want to enable yuan-back stablecoins in order to propagate Chinese currency around the world because they're watching that happen for the United States dollar. This is something that just a few years ago was just talked about on podcasts like this one, the idea that stable coins could be a vehicle for the transmission of global soft power, and now it's become totally normalized. You've got the Treasury Secretary in the U.S. talking about it. You've got China considering it. Narratives have power. Memes have power. Now, this doesn't mean things change overnight. We've been around for a very short

Starting point is 00:08:38 period of time, and yet it still felt like a long time, and a lot of these ideas have taken tenuous hold it best. But if anyone doubts that Bitcoin can become what we believe it can become because it isn't there now, I would just say, let's wait and see. Anyways, guys, that's going to do it for today's slightly shorter LRS. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Crypto Narratives Becoming Reality

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