The Breakdown - Is Bitcoin A Safe Haven or ‘Schmuck Insurance’?

Episode Date: February 26, 2020

Bitcoin is having a terrible, horrible, no good very bad day. Many are using the dump - which from a timing perspective aligns with a broader market selloff among Coronavirus fears - as a way to diminish the “bitcoin as a safe haven” narrative.  In this episode, @nlw revisits that narrative and argues that it is uncomfortably bunched up with the uncorrelated asset narrative, or, as Chamath Palihapitiya calls it “schmuck insurance.” This episode also covers: Central bank digital currency (CBDC) news: Canada says it doesn’t see the need right now but that could change if private cryptos get more traction, while China’s work on a digital yuan is paused due to Coronavirus shutdowns.  The six year anniversary of Mt. Gox’s lost 750,000 BTC coming to light.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, February 26th. And today we are going to be looking at, first, the world of CBDCs. Canada has run a test and come away unimpressed and has some interesting thoughts that might reveal maybe what's in store for the future. of central bank currencies. We also got interesting news out of China that relates to how the coronavirus is impacting their plans, which will bring us to our second topic, which is interpretations of the Bitcoin price in the context of coronavirus. Bitcoin like everything is hemorrhaging right now,

and does that mean, and this is what we'll ask, that the safe haven asset narrative is dead? So that's second. Third, we're going to be looking at the Mount Gox anniversary, the Goxiversary, basically, of the insolvency of the first big exchange to dominate the Bitcoin world. And we'll look back at the history and maybe a little bit about what it meant and point you to some cool resources for those who want to dig in a little bit more. So with that, let's actually dive right into our first topic, CBDCs. Ever since the emergence of Libra last year, we've seen central banks from governments around the world race to figure out what their strategy around digital currencies is going to be, right?

For a lot of them, that means forming research initiatives, some of them cross-border and collaborating with other governments or international institutions like the Bank for International Settlements. For some, it's a more aggressive testing posture, right? You have Cambodia who's saying that they're going to test. And obviously, of course, there's China who has made it clear that they want to be the leader in the world of new digital currencies and plan to get a digital yuan out this year. Canada has actually been one of the more active governments in this conference. They ran a test cross-border settlement trial last May, but ultimately they came away unimpressed. So in a speech called Money and Payments in the Digital Age yesterday, Timothy Lane, who's the

deputy governor of the Bank of Canada, said, we have concluded that there is not a compelling case to issue a CBDC at this time. Canadians will continue to be well served by the existing payment ecosystem, provided it is modernized and remains fit for purpose. So this is obviously quite a departure. This is a bank who's gone all the way through a research period and exploration period and even testing period and has decided, nope, it's not really important to us right now. Now, this has sort of been the U.S. governments and the Federal Reserve's base position on a digital currency that it may just not be necessary. But it is interesting to see a government that's gone all the way through this process and come out on that side. Now, there are two factors that

could change Canada's opinion on this. So they're not leaving this behind entirely. They want to be ready to go at basically a moment's notice. And those two factors that they listed were, one, if cash just sort of disappeared in a more aggressive way, right, if there was actually a need for something that had a higher burden than what is required now. But second, and obviously more important to our conversation is the idea of private crypto gaining widespread adoption. So he said basically, if there were a monopoly that would erode competition and privacy and pose an unacceptable challenge to Canadian monetary sovereignty, that's when you could see a Canadian CBDC.

So effectively, the Bank of Canada is saying that there is a scenario that they can see in the future where a private cryptocurrency is threatening Canadian monetary sovereignty, and that's when we'll need to do a CBDC, but for now they're not. So it's kind of they're taking a reactive posture. Now, a country that is taking a decidedly proactive posture is China, right? China has made it clear that they are going to release a digital yuan, and spectators are very interested and somewhat worried in some cases about what that will allow them to do in terms of continuing to exert economic influence

in the region and beyond. Japan's central bank and Japan's government have been very aggressive and clear with their U.S. partners that they believe that the Chinese digital yuan is a threat to the power balance in the region and is something that needs to be counterbalanced in some way. One question, however, has been how the digital yuan plans might change on the basis of the coronavirus. And there have been two kind of strands of thought on that. The first is obviously that just by sheer weight of the shutdowns and quarantines and everything else

happening, that this research would have to be delayed or would likely get delayed along with everything else. The second strand is that perhaps it creates a higher incentive, at least even, to push forward with this research because cash is potentially part of the way that this virus has spread. Well, it's the former of those that is coming to bear now, at least in the short term, where the Global Times is reporting that effectively sources close to the People's Bank of China are saying that the coronavirus has led to postponement of work across government institutions, including with the People's Bank of China. So this is not an official statement.

This is a report from quote-unquote sources close. But it seems to kind of confirm what we would have all expected, I think, in some ways, that this research might be delayed by the coronavirus itself. This is, of course, to say nothing of the coronavirus. coronavirus beyond China's borders and what sort of economic impact that will be. But with that, let's actually turn quickly to corona for a second, but in the specific context of the Bitcoin price, and more specifically, what it means for Bitcoin status as an emergent safe haven asset. Is Bitcoin a safe haven asset? Or more specifically, will it act like a safe haven asset in the next

recession? This has been a question bandied about for a very long. time, but especially over the course of the last year as part of the institutional argument for Bitcoin adoption or Bitcoin hedging has come back to the idea that it is going to behave in a way that is different than the rest of the asset markets that we see around us. Now, interestingly, this narrative has always been sort of caught between two questions. The first is whether Bitcoin is a macro asset at all. And what I mean by that is an asset that actually responds in any meaningful away with larger macro events, right? For a long time, Bitcoin has just kind of done its own thing, irrespective of what's going on in the markets, and that wouldn't make it a macro asset.

The second question is what type of macro asset it is. Is it a risk on or a risk off asset, right? Does money flow in when people are greedy and feeling comfortable and they want to diversify and find new yield, or does it flow in when people are getting nervous and want to take it out of risky things. So one of those, the latter, is the safe haven asset narrative. This is the idea that Bitcoin will attract people in the same way that a gold does in some sort of crisis because it's digital gold. The second part, the former question of whether it's a macro asset at all, comes back to this idea of whether it's a non-correlated or uncorrelated asset that doesn't actually care and behave. So the interesting thing in why these two different narratives get bunched up

together is that both of them could lead theoretically to investors wanting to hedge into Bitcoin when things get volatile. So you could want to hedge into Bitcoin when things are volatile because you think that it's going to behave like a safe haven, like a digital gold. But you could also want to hedge into Bitcoin when things are volatile because you believe that it doesn't respect that volatility. It doesn't care about volatility. It does what it's going to do and it's not going to move in concert with the rest of the market. So these functionally could look very similar, but they have very different narrative implications. And so this conversation has been confused because it's gotten all bunched up together. The safe haven side of the argument has had

higher traction or not so much traction, but resonance in media over the last, call it, nine months, because there have been a few sort of eye-popping times where BTC has surged when the rest of the markets have gone down. And the interesting thing about this week and kind of the new evidence that we have this week is Bitcoin, like everything else, has just been hammered. It's lost a huge amount of its value. It's lost something like 40% of the value that it's gained in 2020 just in the last few days. And so people are now saying, okay, well, clearly this is the death of the safe haven asset narrative. And I think it's much more complicated than that. So my take on this is first that the base case narrative for Bitcoin. And I say this as someone who spends a lot of time watching narratives,

is as an uncorrelated asset. So what that means is an asset that is interesting to people, even as a hedge, not because it's going to move in the opposite way of stocks, but because it's going to do its own thing regardless of what's happening in stocks. I believe that this has been the core narrative that's driving people's interest, institutional interests, right? Outside interest in Bitcoin for some time, and the flirtation with the idea of safe haven has been driven by one, like I said, a couple of these eye-popping moments. Second, a belief in future potential, a belief that Bitcoin will grow into a safe haven asset. And third, a bet that some investors are willing or going to put down a little bit of a down payment

on that future potential. So Travis Kling from Ikegaa asset management has been on this show before, talking about how it doesn't take very much in terms of asset managers starting to say, hey, you know, maybe it's not a safe haven yet, but I bet a few more people will act like it is this time and put in a little money for that narrative to become self-fulfilling prophecy. Now, I mentioned this on Twitter, and I had a great response from Jeff Dorman over at ARCA who said, safe haven is often incorrectly associated with perfectly negatively correlated. Bitcoin is a safe haven from purchasing power destruction, not stocks.

This is obviously a very different phenomenon and something that shows perhaps a different time preference, right? When people are talking about a hedge into Bitcoin as a safe haven, they're talking about a long-term play. And so with that, I actually want to turn to one of the people who's had this conviction longest that Bitcoin is a hedge away from and outside of the existing system. Chimoth Palahapitia was early at Facebook and started to build a name for himself there and went on to found social capital, which started as a venture firm and then transformed itself into a different type of financial operation. He's the chairman of Virgin Galactic. He's the owner of the Golden State Warriors now. And he is an irreverent thinker, right? He is a iconoclastic thinker in a lot of ways. In 2013 in May, when Bitcoin was sitting at just about $130 per Bitcoin, He wrote an essay for Bloomberg called Why I Invested in Bitcoin. He kicks off this piece since the 2008 financial crisis. We've seen a massive decline in trust in the financial services industry. Lehman Brothers, Bear Stearns, American International Group, the London Whale, Cyprus,

and a host of lesser scandals have prompted consumers to say one thing loud and clear. I don't trust you. Or, you're only in it for yourself. Or, who made you king? Or some very reasonable variant thereof. The point is that this fundamental trial. no longer exists. In its place, rises Bitcoin. He then goes on to explain what Bitcoin is, because remember, this is 2013. For a lot of people, this essay was the first time that they had

read about Bitcoin. He likened its stage of development to the TCPIP in the 70s. He talked about the type of activity that was happening at that time. He was talking about the fact that there were going to be illicit uses on top of really interesting uses. But he also had this line, which a huge number of people have resonated with ever since, and a recommendation. He said, I've told my friends that it is entirely rational to allocate 1% of your assets to Bitcoin, as I have. Call it Schmuck insurance. As the 2008 crisis proved, schmucks can cause a world of damage. So now, here we are almost seven years later. Bitcoin has gone from this week, or I guess last week, 10,000 down to now, just under 9,000. But still, a huge, huge change in those seven years

from when it was $130 a Bitcoin and he was writing this. And so what has changed, if anything, about Chimath's point of view? Well, he was on CNBC this morning and people were looking to rake him over the coals for the safe haven or uncorrelated thing. And I think it's worth just listening to what he had to say. Everybody should probably have 1% of their assets in Bitcoin specifically. And I think it is just a fantastic hedge. So if you go back to the conversation this morning, when you see the amount of leverage the financial industry is running

and you think about all these dislocations and all these exogenous things that are happening that you can't predict, there's a lot of risk to the downside. And it would be great that an average individual citizen of any country in the world has an uncorrelated hedge. So as you can see, basically, nothing of his take has changed. He's still recommending that 1% schmuck insurance, which is pretty phenomenal to see seven full years later. So what does this mean about Bitcoin's status as a

macro asset or a safe haven asset? I think we're seeing a return, a recalibration to the idea of Bitcoin as uncorrelated or non-correlated. Frankly, we might actually see even that challenge a little bit if really everything continues to crash on fears of coronavirus, maybe that narrative will change. But for now, it feels to me like a reset back to what I see as the long-term base narrative of Bitcoin, which is not safe haven. That is a future potentiality. That is a future possibility. That is a future narrative to speculate and bet on for Bitcoin, but the base case narrative of Bitcoin as uncorrelated. Speaking of history, however, I want to close out with another event from six years ago this week

that would totally tip the entire crypto markets into tumult, which is the exposure of Gox and the insolvency of Gox and the 750,000 Bitcoin that all of a sudden showed up disappeared. Six years ago, in February of 2014, Mount Gox, which was the basically basically a OG Bitcoin Exchange, right? It wasn't the first, but it was the first big Bitcoin exchange seemed to be on the ropes. In a story by June Ian Wong on Coin desk, he wrote, Mount Gocks, the world's original and once-largest Bitcoin Exchange appears to be in a state of disarray after its suspended Bitcoin withdrawals to work on what it said were technical issues. Meanwhile, the clamor of angry customer voices is growing. That was written on February 8, 2014.

And just a few weeks later, something entirely different and entirely bigger would emerge. On February 24th, Ryan Selkis, who you now know from Masari, but who earlier in his crypto life worked with DCG and worked at Coin desk, wrote a memo on his quote-unquote TBI Daily Bit. This is a tumbler that he kept. The note was called Bitcoin's Apocalyptic Moment. Mount Gox may have lost 750,000 Bitcoins. So Selkis published this note and he basically excerpted the introduction of a quote, unverified report. So he was saying that it was unverified and that he hadn't been able to prove

that the document was real, but it was coming from a reliable source. The document was called Crisis Strategy Draft. And from the introduction, it said, at this point, 744,408 Bitcoin are missing due to malleability-related theft, which went unnoticed for several years. The cold storage has been wiped out due to a leak in the hot wallet. With Bitcoin and crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back five to ten years and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public. That was the note from this report that Ryan had received, and his comment was,

this is catastrophic and I am sorry to share this. I do believe that this is one of the existential threats to Bitcoin that many have feared and have personally sold all of my Bitcoin holdings through Coinbase. To do so and not give you the same information would be dishonest and immoral. I'm a risk-tolerant investor, but I believe this will be catastrophic for Bitcoin, both as a currency and as a fledgling industry. If this is a hoax, it is one that I am fully blindsided by. I fear, however, that it is not. Crazy times. And this would, this was a cataclysmic moment for the industry. Now, of course, we have the benefit of hindsight six years later to know that this two Bitcoin would survive, as it always does. However, that was

not clear then. And think about this six years ago, this fledgling asset, which was, you know, something like $680 or $800 between there during this month leading up to this, was so young and so full of promise, but this would just absolutely wallop the industry. It would have ripple effects that would last for a very long time. It would set up a new generation of exchanges to come in its place. I think sometimes we forget because we're living in it that there actually is already history to this industry. And it's history that we should know and that we can learn from. So do yourself a favor. Go check out the note from Ryan. I'll make sure to link to it. Go read CoinDesk's coverage, right? They were up and running when this was happening.

happening. Pete Rizzo, the former editor-in-chief, linked back to a piece from that time. June Ian Wong, who's at Coin Desk now and who was a writer back then, has great pieces there. Go listen to Ryan, who actually describes this whole situation on the latest Charlie Shrem podcast. It's a really, really fascinating moment in the history of this industry. And something that I think might be a little bit helpful anytime we see price drops to remember just how much Bitcoin has already been through and what it may be able to handle. in the future. With that, I'll wrap up for today. I hope you guys are having a great week. Happy Hump Day. We're almost through to the other side. And I will be back tomorrow with another

episode of the breakdown. Peace.