The Breakdown - The New Normalcy of Trying A Little Bitcoin

Episode Date: January 14, 2024

A reading and exploration of: https://www.bloomberg.com/opinion/articles/2024-01-11/bitcoin-etfs-are-here-for-real https://www.ft.com/content/59bb430b-a5b1-4469-b05a-482b951109a2 Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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, January 14th, 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. Now, friends, you know that this week, the subject of Long Read Sunday has to be the ETF or associated.

And so where we're going to start is with some excerpts from Matt Levine of Bloomberg fame's column Bitcoin ETFs are here for real. This will not be the full column, but I will grab some pieces that I think are good. Now, Matt represents an interesting voice. He is not a crypto critic like an Elizabeth Warren or anything like that, but he's a He's a generally skeptical human. He's never really bought into any of the crypto hype, and in many ways represents a sort of dispassionate voice that could represent a lot of investors out there who have kind of just

stayed on the sidelines. Matt writes, taking a step back here, there is something really cool about what Bitcoin has accomplished. In some ways, much cooler than Satoshi Nakamoto's original vision for it. The original vision of Bitcoin was that it would be electronic cash, a way for people to send payments to each other without involving a bank or other intermediary. 15 years later, I mean, there has been some progress along those lines. Some people do sometimes pay for some goods and services using Bitcoin.

But it is not exactly taken over the world of payments. El Salvador made Bitcoin legal tender and required all businesses to accept it, and even there it is not that widely used. In big developed economies, despite years of crypto-proslitizing, people still much prefer fiat currency and traditional banks. And yet the price of Bitcoin has gone from zero in 2009 to 46,000-ish today, not on widespread adoption as a payments mechanism, but because people, lots of people. Crypto-evangelists, but also regular retail investors, and quite traditional investment strategists of big institutional

investment firms, view it as a store of value, which means they think its price will go up, or at least not go down, robustly and for the long term. They buy Bitcoin at $46,000, not because they plan to use it as digital cash, but because they think other people will buy it at $47,000 or $470,000 or whatever, which is why people buy Apple stock or treasury bonds or oil futures or whatever. They think other people will buy them so the price will go up. But those things have cash flows or industrial uses. Those things are claims on economic activity. Bitcoin is just a thing a guy made up 15 years ago.

Its function as a store of value is almost purely self-referential. Not this is worth X because other people will buy it for X because other people will buy it for X because, etc. Ultimately leading to other people think its cash flows have a present value of X, but this is worth X because other people will buy it for X because other people will buy it for X all the way down. editors note, in other words, Matt is saying, and it's a little easier to see than to hear, that it never resolves to people somewhere thinking that their cash flows will have a present value, but ultimately just because some other person will have belief in the underlying thing. Continuing Matt writes, Bitcoin is an astonishing social technology.

It would, in the abstract, be useful for the world if there was just an entry in a computer database that we all agreed was valuable just because, with no reference to any underlying commodity or series of cash flows or industrial activity. just a number that was valuable. And so someone invented it. Traditional currency works sort of like that. The U.S. dollar is this sort of social technology. It has value because it has value, not because it has cash flows. But there's a whole ton of complex and longstanding social technology that goes into that. The U.S. has a government and an army and an income tax and a debt stock and a trade balance, which helped to preserve the value of the dollar. Bitcoin expresses the thesis that it would be good to have a valuable database entry without that. Just something was valuable because people on the internet

voluntarily agreed it was valuable, with no government or army or taxes or anything else. And it worked. That did happen. It has value due to a broad voluntary market consensus based almost entirely on itself. In some sense, that consensus is fragile. If a thing is valuable only because people think it is valuable, it could stop being valuable when they stop thinking that. But in another sense, that is true of any social fact. The dollar is valuable, the king of England is the king of England, the U.S. is a liberal democracy, etc., exactly as long as those facts command social consensus. got to what seems like a pretty robust consensus in 15 years. That's just neat. Now the rest is a lot about the SEC part, but what I like about Matt's analysis is that he's taking a thing that critics

so often throw in our face, that Bitcoin is just made up, it's just about people's belief, and saying what we've been saying this whole time, that it doesn't matter that that's the case because we all choose to believe it together. It's nice to see, in other words, a suspension of cynicism on this extremely consequential historical moment. Speaking of suspension of cynicism, our next piece is an op-ed from none other than the Financial Times. Now it's a specific author, Stuart Kirk, in the Financial Times. It's not the editorial board or anything like that.

But if you've been listening to this podcast for a while, you will probably know that the FT is just about the most antagonistic publication in the world when it comes to Bitcoin and Crypto. And yet, on January 6th, they ran this piece. My New Year Resolution is Bitcoin. Yes, I know the dangers, but I'm having some anyway. Stewart writes, Let's begin the year with a bang,

by which I mean I've decided to allocate some money to a spot Bitcoin exchange traded fund if one becomes soon available. I made up my mind while running along the Ex-Markoast last week, steep cliffs plunging into the surf. Many readers will say that's where my retirement savings will end up, but it's time to take more risk. And there is no bigger investment story right now. Google searches for Bitcoin ETF have tripled over the past week.

The world's biggest cryptocurrency started 2024 by trading 7% higher since October at a zero. The catalyst is the expectation the SEC is about to give the green light to multiple-spot applications. Bloomberg reckons there's a 90% chance approval will be given by January 10th. I've changed my view on the suitability of Bitcoin ETFs for retail punters. It used to worry me that they seem to fail at least two SEC tests when it comes to investor protection and market integrity. It still does.

Take safe custody. No one can steal an ETF, of course, and gangs don't have a clue where you hide your cold wallet if you prefer to hold Bitcoin's offline. The digital wallets' ETFs will use are also secure. But thieves can raid the biggest and most popular exchanges, undermining prices. Remember that the sole purpose of a spot ETF is to track a price. It therefore doesn't matter if off-exchange coins are safe. The integrity of the whole system can be violated.

Spot Bitcoin ETFs fail another crucial test too, whether the underlying market can be monitored to a sufficient degree to prevent fraud or manipulation. This is mainly why previous SEC applications were rejected. Sure, blockchains are permanent ledgers, but Bitcoin transactions are pseudonymous and can involve multiple addresses. It's irrelevant that an ETF is transparent, if the asset is. it holds or not. All that said, the more you think of Bitcoin as an investment, whether in an ETF or not, its many flaws don't differ hugely from most of the other regulated assets you own

happily. Regarding ownership concentration, Bitcoin's pales besides Bernard Arnaud's 48% stake in LVMH, let alone his majority voting share. Mark Zuckerberg owns 13% of Facebook, as does Elon Musk of Tesla. Those guys move prices each time they blink. Another reason people say Bitcoin has no place in serious portfolios is because it doesn't exist, just ones and zeros with no intrinsic value. but I own plenty of invisible assets in my other funds that are only worth what others are willing to pay for them. For companies in my FTSC 100 Fund, for example, the tangible book value only accounts for 45% of the total net asset value. In other words, the majority of the ETF doesn't exist either, company brand names, Goodwill, and the like.

That Bitcoin produces no income is also cited as a problem. It is therefore nothing more than a speculative asset. So what? Gold, vintage cars, and undeveloped land are the same. By that definition, so is the house or flat you live in. What's more? a fifth of stocks in the S&P 500 did not pay out a dime last year either. Some never do, including Facebook, Berkshire Hathaway, and Amazon. Finance theory tells us we shouldn't care about dividends

anyway. This relates to another concern I don't share, that Bitcoin is therefore impossible to value. You don't need an income stream to value assets, ask any art dealer. With the same vertical supply curve as a one-off painting, 19.6 million of the maximum 21 million Bitcoin's are already circulating, demand sets prices. Besides what isn't hard to value, analysts are routinely wrong about every asset class, while the majority of active fund managers underperform. In Europe, for example, more than 90% of active equity funds now trail their benchmarks over a decade. Finally, I like the fact that Bitcoin's correlation with the major asset classes is less than 0.25. It's going to be the mad uncle in my portfolio. Sure, it has annualized volatility

approaching 50%, but as returns are so high, risk-adjusted returns remain attractive. So come on, SEC, have some fun, why don't you? Or at least be consistent. There are loads of ways my savings can crash into the sea that you already approve of. Okay, back to NLW here. Well, this is clearly no ringing endorsement Paul Tudor Jones' great monetary inflation thesis. This is, in some ways, more reflective of the moment that we're in, and kind of more important. This isn't some full-throated argument for Bitcoin because of principles or fundamentals. It's just kind of a common sense re-evaluation of things in a new light. And that is exactly the point of this ETF existing. It's going to create a context for hundreds of thousands, if not millions of people, to reevaluate

Bitcoin in a new light, to do as Stewart here has done, and say, is it really so different or worse, or more dangerous or more risky, or more susceptible to manipulation than anything else that I happen to own? Ultimately, millions of people asking themselves that question means an even more diversified ownership base, a more decentralized network, and a more robust Bitcoin. Whatever does to price, that's something to be excited about. So yes, friends, I think times are changing. It's hard to see better evidence than an op-ed in the Financial Times. That is going to do it for this week's Long Read Sunday. Until next time, be safe and take care of each other. Peace.