The Breakdown - Sorry, Bloomberg: Here Are 6 Reasons Why 2020 Is a Great Year for Bitcoin

Episode Date: June 15, 2020

Today on the Brief: Stocks down on coronavirus fears Demand destruction The looming retirement crisis Our main theme:  Bitcoin is up more than 30% on the year. After a crash alongside equities, it has proved incredibly resilient. There are famous new entrants to the space like Paul Tudor Jones II.  So how can a Bloomberg editor argue the year has been bad for bitcoin?  In this response podcast, NLW argues that most of the arguments are about narrative, not the underlying fundamentals. He presents six reasons why not only has it not been a bad year, but the exact opposite is true: Demonstrated institutional uptake Demonstrated resilience  New champions  Narrative fundamentals   Need in emerging markets  End of economic orthodoxy

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 Monday, June 15th. And today's main topic is a rejoinder to a piece by Joe Wisenthall from Bloomberg this morning on six reasons why this had actually been a bad year for Bitcoin. saw this. I know Joe, I know that it was bait, and I'm still going to take it. So that'll be our main topic as both a rejoinder to his points, but also six reasons why I think this has actually been a very good year for Bitcoin. But before that, let's get into the brief. First up on the brief, stocks are down on new coronavirus fears. We've seen numbers rising in a number of southern states,

in particular, Arkansas, Texas, Arizona, which has an extremely fast infection rate right now. And because of that, stocks are getting nervous. If we saw even another partial attempt at a shutdown, it could be just totally disastrous for the economy. So the Dow is down 2%, 1515 points. The S&P 500 is down 1.5%. NASDAQ is down 0.8%. What's more volatility, which is kind of like Wall Street's fear monitor, is up. The CBOE volatility index or VIX is up 11%. I'm going to talk about this later, but Ryan Selkis from Masari called this the COVID Fear Index earlier, and I think that's a brilliant way to look at market movements right now. So we'll come back to that idea. So long story short, as coronavirus cases go up and fear of more shutdowns goes up, stocks and other parts of the market are

going down. Next up on the brief, I want to talk about an idea called demand destruction, which has to do with how we understand the likely recovery of markets in the wake of COVID-19, although in the wake of COVID-19 might not be the best way to describe it as we were just discussing. So let's turn to China for a second. I was reading a Bloomberg piece this morning about what's going well and what isn't going well in their recovery. So on the positive side, new home prices are up. On the positive side, they're seeing a growth in industrial output. It rose 4.4% year over year since last May. In that same month, retail sales fell, but they fell less than they had at April. So it suggests that there's some amount of recovery. What's down, and this is really important, is demand.

So this Bloomberg article argued that the single biggest problem in the Chinese economy is the lack of demand. And we're starting to see issues with demand in the U.S. as well. Demand destruction refers to the idea that in certain types of economic crises, what's impacted is actual underlying consumer behaviors. And on the other side of the crisis, there simply isn't the same type of demand for certain industries, certain products, certain services that there was before. And unfortunately, it seems like we're going to have a lot of that in the U.S. One of the terms for this is reallocation shock.

So reallocation shock is a type of joblessness that occurs when the demand for the industry has shifted fundamentally, right? It's not coming back because it's just a different demand level. And we're seeing that play out in the U.S. New research from Bloomberg economics suggests that some 30% of the U.S. job losses that occurred between February and May are the result of this type of reallocation shock. So hospitality industry jobs, for example, that aren't coming back because there isn't going to be the same level of demand for those restaurants, for those hotels, for, you name it, on the other side of this crisis. This dovetails with other research, including from the Becker Friedman Institute at the University of Chicago, that estimated that some 42% of recent layoffs in the U.S. will be permanent. So these are huge numbers, right?

And this is what you have to keep in mind when you hear people talking about a V-shaped recovery. Clearly, we have seen enormous bullishness in the public equities markets, but that may not translate to what's actually going on in the economy, and how long those two things the economy and markets can stay out of sync is an open question. And of course, it brings us right back to the point where we started, which is coronavirus fears. In Beijing, we've seen 79 confirmed cases of COVID-19 over the last few days in an area that includes a very popular food market, and these are, at least by the official reports, the first locally born cases in 56 days. So you see that, you see cases rising in certain parts of the

U.S., you see certain countries where this is still just running absolutely rampant, like in Brazil, and all of a sudden you could have markets telling a very different story than they were last week. Last up on the brief today, I want to highlight something that I've been thinking about a lot, which is a retirement crisis or a potential retirement crisis. And the idea here is that that all stock market participants are not created equal in the sense of what their ability to bear risk is. Even folks who have been trained to trust their futures to the markets may not be in a position to be able to deal with the volatility that we're seeing. If you have designed your retirement on a presumption of 7% returns for perpetuity and all of a sudden

the market is crashing 20 or 30%, even if it recovers quickly, it can be extremely. extremely spooking to say nothing of actually just extremely destructive if you've designed your life to be on kind of a razor's edge. Many people who are now approaching retirement or who have recently retired are facing the difficult decision about whether to bear with the market during these crazy swings or to try to move to something like cash that is less likely to hurt them in the short term, even if it's not going to make them anything in the long term. According to new stats from Fidelity Investments, it seems to be the case that a number of investors who are are over 65 are more nervous than younger investors when it comes to their holdings. So

nearly a third of investors who are aged 65 and up sold all of their stock holdings sometime between February and May, which is compared to only 18% of investors across all age groups. So nearly double the percentage of retirees effectively sold their entire holdings during the market crash than the average across all age group. So that means that the younger group sold far less, or there were far fewer people who sold all of their assets. I've brought this up on Twitter before and routinely see that there is a ton of fear, both among people who are older and of this generation, as well as their younger kids who are looking nervously at how their lives have been designed or how their parents' lives have been designed, and whether it's really financially

sustainable. So this is more a meta-ongoing issue with some new numbers than a breaking news story, but I think it's something that's really worth paying attention to. But with that, let's shift to our main topic, six reasons why 2020 has been a good year for Bitcoin. All right, so let's set the stage. Joe Wisenthal is a senior editor at Bloomberg and writes part of their newsletter every morning. And this morning, he took to the newsletter to write

six reasons why he thinks that this has been a bad year for Bitcoin. Now, of course, the easy critique is that Bitcoin is up, something like 38% on the year and is outperforming basically every other market. So what is he talking about? But I think it's worth diving in a little deeper and not just because Joe is trying to troll us, which at least in a little way he clearly is. Joe has a love, hate, on again, off again relationship with the Bitcoin Twitter crowd, partially because he just likes riling us up, which I totally appreciate, but partially because Joe is interested in Bitcoin, but I think for different fundamental reasons than some others. Whereas a lot of folks in this space are here for the sound

money inflation hedge argument, what gets Joe most interested, having watched his commentary evolve over the last few years, is the censorship-resistant properties of it, the idea that transactions that other people wouldn't want you to do are enabled in Bitcoin. He thinks that's a powerful force. And I think that there's a portion of people for whom that censorship resistance is as important, if not more important, than some of those sound money properties. So it would be wrong, I think, to dismiss Joe as a boring critic of Bitcoin, and it's worth engaging, not least of which because I have a daily podcast and we got to get material from somewhere, right? No, but seriously, I think that there are interesting arguments and they're interesting

arguments to break down. So first, let's look at his six arguments. The first is that there have been no new highs despite all this volatility. So the argument is basically, look, with everything going on, why hasn't Bitcoin achieved new highs? Isn't this what it was made for? The second argument says that there's really high correlation to the stock market, right, to the S&P 500. And And if Bitcoin is such a great portfolio hedge, why has it been doing and tracking pretty similar to stocks? Number three was that Bitcoin has performed in line with other digital assets like Ethereum, which asks or begs the question, why is it so much more special than other digital assets?

If it's really this digital gold, shouldn't it be outperforming everything? Fourth was a critique around the having, the Bitcoin having was this big, hyped up event, and yet it hasn't seemed to have any sort of impact at all when it comes to price. The fifth reason in Joe's estimation that Bitcoin was having a bad year is that Fed growth hadn't led to inflation, and that was one of the primary reasons that people are interested in Bitcoin is, if MoneyPrinter go burr so hard, why aren't we seeing inflation that would make a sound money so much more appealing to the masses? And sixth and finally was his notion that because the stock markets are behaving in such crazy ways right now with the Robin Hood Rally and the Wall Street Betts generation,

a lot of the energy that might go into Bitcoin from a speculative standpoint is finding its way into traditional markets instead. Instead of just giving my critiques of each of these arguments, I'm actually going to start with Ryan Selkis' counterpoints. Selkis, again, the CEO of Masari, and he wrote a thread that was kind of point by point on this, and I think he captured a lot of what I would have gone for, so I'll just add a few notes where I think that there's something additional to add

from Ryan's points. But let's start with number one, no new highs despite volatility. And what Ryan's point was, which is really important, is that what Bitcoin is supposed to be a hedge against matters. And when we identify it as a hedge just generally against stocks doing poorly, we have the wrong type of narrative for what Bitcoin is likely to do. In other words, Bitcoin isn't really a liquidity crisis hedge. It's a hedge to most people against currency failures.

And that's something we haven't really seen, although, and I'll make this point later, we're starting to see interesting kind of currency wobbles, if not outright failures in a number of emerging markets, which is creating a really interesting context for digital assets in general. So the point here, the counterpoint is that this isn't the type of volatility that Bitcoin was designed to hedge against necessarily. That brings us to correlation with the S&P 500. Why, if Bitcoin is such a great hedge, is it so correlated? And a number of other people have made this point because Joe's not the first one to bring

this up. And effectively, it comes down to this idea of the purview or the time period of the view. So in the short-term things stay correlated, different assets stay correlated because there is a flight to liquidity. And the classic example of this is gold in the great financial crisis sold off heavily before having a really, really strong bull period after the markets had settled down a little bit. Ryan put it in a different way, which I really loved and I mentioned at the beginning of this in the brief. He said, in general, the first points of this argument, suffer from a garbage timeline where literally every asset has moved in lockstep with one variable, the COVID Fear Index. It's simply a silly four-month period to draw any sector-specific conclusions

about any macro trend. I love this notion of a COVID Fear Index, and I think what we're seeing in equities today totally validates that point, right? You are seeing stocks go down on the fear that cases are going up. We're seeing these random resurgence in China, and maybe the numbers in total are still low, but what they spark is fears of huge government reaction again, like shutdowns, which would be economically devastating. Effectively, we're in a moment where really what matters is what people think about COVID and its likelihood to return or it's likelihood to be a factor in economics and what the Fed is going to do about it and pretty much nothing else. I have another point about correlation, but I'm going to save that for my reasons why this has been a good year.

The third critique is that Bitcoin has had a similar performance to Ethereum, meaning that it hasn't distinguished itself. Ryan Selkis' critique of this has to do with the way that crypto markets move in general, which is basically everything drafts off of Bitcoin. And really, Bitcoin is the asset that shapes the market. And there may be momentary spikes and things that move around. But really, if Bitcoin is going up, other assets benefit as well as people diversify and take gains and try to look for larger spikes, and so on and so forth.

Importantly, though, there have been many others who have made the exact opposite argument. So Joe picked out a very specific asset, but Bloomberg, in a recent report, said that Bitcoin has made a clear case that it has differentiated itself. It said in a bullet point called Bitcoin breaking away from the crypto gaggle, the Bitcoin Foundation for Price Appreciation is firming on a standalone basis versus the broader crypto market. Relative to the Bloomberg Galaxy Crypto Index, which is a index that tracks a set of cryptos, the firstborn, i.e. Bitcoin, is above the 2017 peak. In other words, Bitcoin is outperforming the index of other crypto assets by a bigger margin than ever since 2017 before the last alt season kicked off. So really, this

seems to be a case of cherry picking a particular asset rather than looking at the total situation. Joe's number four critique, the Bitcoin having didn't make an impact. Everyone is already familiar with the rejoinder to this one because we were having this conversation for six months before the having actually happened. Part one, and this is Ryan's point and everyone else's point, having impact has tended to lag historically when it comes to when we see or if we see Bitcoin price appreciation in the wake of a having event. But much more importantly, much, much, much more importantly, and this is something I've

discussed frequently on this show, that the having matters. more as a narrative event than as an economic event. It creates a shelling point for people to discover the idea of Bitcoin and come into the space which creates its own sort of self-fulfilling prophecy by creating more demand. This was incredibly true this year as we saw Paul Tudor Jones come in and make note of the fact that Bitcoin's issuance was being reduced by half programmatically and boringly and predictably while the central bank money engines were getting revved up around the world. It is a narrative moment as much as it is a monetary policy moment, and we should treat it as such. Number five, the idea that Fed growth hasn't led to inflation, which undermines a popular

Bitcoin narrative. There's a bunch to say about this, but first, Ryan's point. So Ryan is basically saying that there's a timing issue, and we haven't seen it play out. And I would add that, you know, I did a whole show last week about why I think we should be paying attention to more than just the inflation narrative because the discussion of inflation versus deflation is so fraught. We're in such a strange moment right now where there are so many forces for both inflation and deflation at the same time that it's really, really difficult to sort out where in these cycles we are. But I think a point that I want to make about Joe's critique

is he said it's been a really bad year for Bitcoin, but really a lot of these things come down to it's been a bad year for popular Bitcoin narratives. At least that's really the argument. None of these things in some ways have anything to do with Bitcoin. It has to do with public perception of Bitcoin and whether what Bitcoiners said would happen or said the value of their asset was was proven in the market. And as much as I do believe that narrative shape reality,

there is a difference between saying this has been a bad year for a certain type of narrative and it's been a bad year for the foundations of the asset. I think it's really, really important to differentiate between the two. And really, Joe, so far, has pretty much talked entirely about Bitcoin narrative. So even when I'm disagreeing, really what we're debating is not whether it's been a good or a bad year for Bitcoin, but whether it's been a good or a bad year for popular Bitcoin narratives. And as another popular Bitcoin meme says, Honeybadger don't care.

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about how these two things might interplay last week. But Ryan put his take this way. He said, the stocks over shit coins meme that comes from insane levels of retail money hitting the market could be a sign that the, quote, unwashed masses are sick of crypto. Interestingly, Maya is a hobby, another former guest of the show, made a really important point in saying, qualification, unwashed Western masses. I still haven't seen any signs that Asian crypto retail has jumped shipped to stocks.

Now, my take based on what I've seen is that this is not a huge number of crypto traders moving into this space. This is first-time traders. People have never had a brokerage account with the stock market ever before, right? And the numbers seem to bear that out, that this interest has been organic. Now, it may be driven, I think, by the same factors that drove 2017 and drive, in fact, any mania, right? a desire and a pent-up demand to be able to participate in the gains of markets, an interest in getting a kind of free ride as things are going crazy, some weird sense of community as there's this unique historical moment. Sure, like all of those things, you can map them onto 2017 crypto

or 2020 Robin Hood Rally. But my instinct is that it's not so much direct competition. Now, when it comes to whether it will be net net-net good long-term, I think there's a huge number of scenarios. go back and listen to the show on Thursday. I can see it playing out where it's good for Bitcoin and Altcoins. I can see it playing out where it's just good for Bitcoin because people get nervous about the ridiculousness and absurdity of these markets. I can see where it's good for Bitcoin because people start to flood out and it creates demand for other types of hedges.

So there's all different scenarios that might play out. But I think it's a much more interesting debate to have at least because truly in this case no one can know for sure and it's going to be what it's going to be. So those are some counterpoints to Joe's initial points, but I wanted to basically get into my six reasons why I think it's a good year for Bitcoin. Before that, though, I want to quickly run through Matt Odell's tweet that goes through his six reasons. So he tweeted out in response to this clearly.

It was the most obvious sub-tweet of all time. The reasons that Bitcoin is having a good year this year is, one, trust in governments is at an all-time low. Two, de-platforming and censorship at all-time highs. Three, negative rates are now a mainstream expectation. Four, death spiral didn't happen. Five, privacy tools have improved. And six, Bitcoin hasn't died.

I'm going to get into a number of these arguments in mind, so I'm going to move through them. But I wanted to at least share that additional perspective on why there are actually positive counterindicators for why this is a good year for Bitcoin as well. But now let's talk about my six reasons why it is a good year. Number one, demonstrated institutional uptake. I've made this point before, but I think one thing that gets missed when we talk about the correlation and the sell-off of Bitcoin in the March period, especially around Black Thursday,

is that we have spent the last two to three years trying to beat down the door of traditional Wall Street and institutions and say, hey, you should be interested in Bitcoin. The fact that they had to sell in a liquidity crunch means that some portion of that work had gone well, right? We wouldn't have seen that type of sell-off if it was just the random traders and long-term hoddlers that we've had in Bitcoin forever. It was the institutional folks that we've spent so much energy trying to convert to this space who had to sell off because they had to sell what they had, not what they wanted to sell. That's a good thing based on what we've been trying to achieve. So I think that ragging on that sell-off as a net negative for Bitcoin

rather than as an indicator of demonstrated institutional uptake, maybe, maybe, maybe. misses the point, or at least part of the point. Number two, demonstrated resilience. This thing went down to 3,800 in his backup at 9,000, and we're bored because it's stuck between 9,000 and 10,000 as stock markets go crazy and bankruptcy stocks go nuts, right? Bitcoin is unbelievably resilient, and it's proven itself to be again. And importantly, it did this as widely seen as the last free and open market.

Bitcoin didn't get a bailout. It doesn't have a money printer. it doesn't have shutoff valves for when things start to go crazy, right? It doesn't have any of these things, this infrastructure that make traditional markets less free and open, even if they're theoretically more protected. Bitcoin has just been doing its thing, trading 24-7, and it's doing great. It's not just doing okay, it's doing great. That is such a strong sign of resilience that I think it's worth noting.

And I think this goes back to Matt Hodel's point about Bitcoin hasn't died. That's an easy and kind of obvious thing to say, but this is what he means. It's that every time it doesn't die when other people think that it might, it becomes and proves itself to be more resilient. Third, new champions. This is in some ways perhaps the most obvious, but there have been a variety of new actors who have gotten more vocal about their interest in Bitcoin. Paul Tudor Jones, the famous hedge funder, is obviously the most notable among these who wrote that the fear of a great monetary inflation, which are his words, was driving him to get interested in different stores of value. And when they did research, they were impressed with Bitcoin as a store of value.

And so now they're going to be open to allocating more into Bitcoin. This is a big deal that gives a ton of new people in that space who are influenced by people like Paul Tudor Jones the freedom to and the permission to go check out this asset to get more involved. So it's very hard to argue that you haven't seen these new champions emerge who come from a very different belief set than a lot of the folks who are. involved with Bitcoin, and that's a powerful and positive indicator. My fourth reason why this has been a good year for Bitcoin is called narrative fundamentals.

And what I mean by that is that I've said this a million times, but we have a tendency to rip between narratives, right, to reject something that seems like it wasn't the right narrative in favor of something new very, very quickly. And that sort of headspinning narrative shift has been picked up on and used against Bitcoin by critiques of Bitcoin. I think, however, what's happening this year is that because we are going through these live fire moments of so much economic turmoil, we're actually digging down into the core of what Bitcoin means. And what I mean by that is the number of people who could have given you basically the same argument that Ryan Selkis did, that Bitcoin isn't a hedge against a liquidity crisis, but is about fundamentally a hedge against currency failure, is massively increased from how many people could have said that six months ago. People are learning more and more about this asset.

We're honing in on and narrowing on the narratives that really matter. And by virtue of that, the properties of this asset that really matter. And that's a good thing. It's good to not have the same level of all over the place kind of narrative wishy-washiness or soundbiteness to our narratives that we had perhaps in the past. The more that we have the full story rather than just the soundbite, the better advocates and evangelists were going to be. So I think that this return to or maybe discovery of narrative fundamentals is a good thing.

Fifth, I want to talk about need and emerging markets, demand in emerging markets, use cases, and emerging markets. And this is one where perhaps you might have some critique because really the biggest beneficiary in the digital asset space of emerging market instability has been USD denominated stable coins. We have seen a huge rise in stable coins around the world around this crisis because there is such a huge demand for dollars that it turns out that even synthetic approximations of dollars are in demand. And that's not the same as demand for Bitcoin, but I think it comes from a similar place. The demand for those things has a few different reasons for it. One is it could just be

dollar-denominated debts where people literally need something that's close to a dollar to pay the money that they owe. But it also, I think, is a protection and a hedge against currency fluctuations. And we're seeing a number of parts of the world where the strength of the dollar relative to everything else, plus everything going on economically, is putting extreme stress on local currency regimes. You're seeing this in Lebanon. You're seeing this in Argentina. And these are places that are seeing an increase in the use of both USD stablecoins and Bitcoin.

And I think that there's a couple reasons why Bitcoin is still an important part of this equation or isn't just mitigated by the demand for USD stablecoins. One is that this creates infrastructure. If you have to buy tether, you are now part of the digital asset ecosystem, and it's much easier to get on-ramp and into other assets like Bitcoin. So that's part one. Part two has to do with what you're trying to do and hedge against. If you are in a local currency regime that is failing and you want to move into something

more stable like the US dollar, where you have more acumen about what currency failures actually look like, and you're going to be much more sensitive to the move. in 4x markets and what currencies do. And to the extent that you become convinced that Bitcoin is something that's going to operate outside of other potential currency failures, you might get interested in that. So I don't want to go so far as to say that we've seen explosive use of Bitcoin in these emerging markets when clearly the biggest piece of the puzzle this year has been USD stable coins. But I do think that they're kind of part of a hedge story and a hedge infrastructure that is only going to grow, and I think it's positive for those spaces as a whole,

and Bitcoin specifically too. Sixth and finally, this year has brought an end to a whole lot of economic orthodoxy. We are now firmly in uncharted territory, both from a real and a narrative perspective. All it takes is looking at all these crazy different types of special purpose vehicles created by the Fed to see that there are sacred cows being slaughtered everywhere, and in that type of environment where things are so up for grabs, the appeal of this non-sovereign, non-state asset that is so fundamentally predictable and clear in your expectations of it, it's just a lot more relevant.

So I think that this move to a period of the end of economic orthodoxy is to the benefit of Bitcoin. Anyways, guys, there it was. I took the bait. You've won Joe, even if people agree with my points, which presumably they likely do because this is a macro and Bitcoin podcast. But either way, I appreciate everyone listening. I appreciate Joe engaging in good faith.

Let me know what you think. Hit me up on Twitter at NLW or email me. Until tomorrow, guys, be safe and take care of each other. Peace.