The Capital Note

Explaining the Bitcoin Surge

Representations of virtual currency Bitcoin, March 13, 2020 (Dado Ruvic/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: bitcoin surging, Senate rejects sound money, and schools close in New York City.

Bitcoin $20,000?

Bitcoin is usually billed as a hedge against global calamity. Something akin to digital gold, the cryptocurrency’s fixed supply shields it from macroeconomic volatility. But the coronavirus sell-off earlier this year hit bitcoin as hard as it did stocks and bonds. And now, as the global economy appears poised to recover from the pandemic, bitcoin is approaching record highs. That’s not what you’d expect from a doomsday hedge.

The cryptocurrency surpassed $18,000 today, up nearly 150 percent this year and approaching its late 2017-peak when cryptomania sent the price of the digital currency above $20,000. The surge is a result of increased adoption by corporations and financial institutions, which now see sufficient demand for crypto to include it in product offerings.

Payments company Square generated more than $1 billion from bitcoin sales in the first two quarters of 2020 alone. Last month, PayPal included Bitcoin in its offerings, allowing consumers to fund purchases with cryptocurrency.

Consumers have various reasons for purchasing bitcoin on large fintech platforms. There is a niche but sizable pool of buyers that just likes crypto — for aesthetic reasons (think libertarian-minded computer geeks who like bitcoin’s underground mythos) or for practical reasons (gambling, purchasing contraband) or for “financial” reasons (get rich quick). These are not the doomsayers concerned about the integrity of the global financial system: If you thought the world were collapsing, you wouldn’t want a large corporation to be the custodian of your big hedge.

So as consumer demand picks up, demand for bitcoin will follow. That’s part of why the cryptocurrency is correlated with stocks and bonds. And while there are sophisticated financial buyers who seem to see bitcoin as an investment, they see it less as digital gold than as a risky consumer technology to speculate on. Paul Tudor Jones, the billionaire hedge-fund manager who endorsed bitcoin earlier this year, compared it to “investing with Steve Jobs and Apple or investing in Google early.”

His bull thesis is partially an inflation hedge and partially a bet on the crypto community: “You’ve got this group . . . that is dedicated to seeing bitcoin succeed in becoming a commonplace store of value and transactional to boot.”

Investors such as Jones have flooded into cash-settled bitcoin futures, whose open interest on the Chicago Mercantile Exchange recently hit a record high of $976 million. Bitcoin remains an investment product, still untenable as a medium of exchange. But by every indication its recent strength has been driven by a belief among corporations and investors that consumers want crypto.

Around the Web

New York City school closure leads to a late-day decline in financial markets.

In the Financial Times, Michael Mauboussin comes to the defense of value investing, a once-popular strategy that has recently fallen out of favor. Mauboussin argues we’re using the wrong metrics to define value:

[M]any investors and market observers still unfortunately conflate value investing with the value factor. Value investing is buying something for less than it is worth. The value factor is an ersatz measure of gaps between price and value. Worse, the relevance of the value factor is fading.

Earnings and book value no longer mean what they used to. Tangible assets, such as factories, were the foundation of business value in Graham’s time. Yet intangible spending, such as research and development, has been on the rise for decades.

Boeing’s 737 Max will resume flying after two fatal crashes last year: “The decision ends a devastating saga for Boeing, which had predicted billions of dollars in losses stemming from the Max crisis even before the coronavirus pandemic dealt a ruinous blow to global aviation.”

Random Walk

Yesterday the Senate blocked the nomination of Judy Shelton to the Federal Reserve Board of Governors. A long-time critic of the Fed, Shelton has frequently voiced support for a return to the gold standard, by which the value of the dollar is pegged to gold. That led three Republican Senators to vote against her. In Capitalism and Freedom, Milton Friedman explained why:

 [An] automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist.

This conclusion is supported not only by the general historical evidence…but also by the specific experience of the United States. From 1879, when the United States resumed gold payments after the Civil War, to 1913, the United States was on a gold standard . . .

In retrospect, the system may seem to us to have worked reasonably well. To Americans of the time, it clearly did not. The agitation over silver in the 1880s, culminating in Bryan’s Cross of Gold speech which set the tone for the 1896 election, was one sign of dissatisfaction. In turn, the agitation was largely responsible for the severely depressed years in the early 1890s.

— D.T.

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