Misconceptions About Bitcoin's Performance as a Store of Value
Responding to misconceptions about bitcoin's performance as a store of value.
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In This Week's Roundup:
• Responding to misconceptions about bitcoin's performance as a store of value.
Bitcoin as a Store of Value
Every time there is a volatility event in global financial markets, such as last Monday's 12.4% crash in the Nikkei 225 (which we covered in depth last week), and bitcoin falls more than most other assets, some try to make the point that bitcoin is empirically failing in its promise to be a store of value. They argue that it behaves more like triple-leveraged NASDAQ than it does gold, the asset it is so often compared to.
During 2022, when inflation was running at a 40-year high of 9% and bitcoin was crashing, people said that it had failed to work as protection against inflation. But what they fail to mention or consider is that gold, an asset with a 2,000 year history of being a good store of value and protection against inflation, also suffered a peak-to-trough drawdown of 17%.
And in 2008 during the GFC, before bitcoin was invented, gold, the canonical "safe-haven" asset, fell 33%... before rebounding 180% over the next three years as quantitative easing was introduced and the dollar was debased.
So what is going on here?
Did 2008 or 2022 invalidate gold's two-thousand year track record? Of course not. Nor did 2022 or August 5,2024 invalidate bitcoin's now 15 year track record. In all of these instances, more variables are at play, and a more nuanced discussion of what actually does drive the price of bitcoin and other assets, over various time periods, gets us closer to a more complete understanding of how bitcoin will perform in various types of acute, or slow-rolling, financial system or market crises.
Zoom Out
Being a "store of value" implicitly means considering the long-term. If you're fortunate enough to live in a jurisdiction with fiat money that is not suffering from hyperinflation, storing value from today to tomorrow is not a concern. Storing value across years and decades is the concern. As such, store-of-value assets should have their performance measured across years and decades (or, economic cycles), not days and weeks. Often-times, disagreements in financial markets can be boiled down to a difference in time horizon.
In a highly leveraged global economy, such as we have, there is not enough fiat money to repay all the fiat denominated debts. The world is short of money, like being short a stock.
When you short a stock, you borrow it and need to pay it back at some point. When you're "short" fiat money (i.e. you have debts), you borrow it and need to pay it back at some point. It is the same concept.
Everyone once in a while there is a short squeeze on fiat money. This can happen for any number of reasons.
Banks can tell borrowers that they're not going to refinance loans because they doubt the borrower's ability to repay, and borrowers must come up with the money to repay their loans. Brokers can tell their clients that the value of the assets securing their margin loans has fallen to unacceptable levels, and they must either post more collateral or repay the loans. This is a margin call.
No matter the precise details, it is all fundamentally the same thing: a reduction in the amount of available credit in the economy. When loans must be repaid, borrowers must raise cash to cover their short money positions. This is effectively your "short-squeeze" on fiat.
What does a short squeeze on fiat, the unit of account for everything else, look like? It looks like a drawdown in all other fiat-denominated assets. Including bitcoin.
This is what happened in Japan last week. Traders had borrowed a lot of money, and all of a sudden either decided to or were forced to repay the money they had borrowed. This created a short squeeze on fiat (spe-cifically, Japanese yen), which made all fiat-denominated assets fall in price, in fiat terms. Including bitcoin.
Like a short-squeeze on a stock, these short squeezes on money tend to be short-lived. Call them acute financial or market crises. They are also negative liquidity crises. Think of "liquidity" as the total amount of money sloshing around the global economy, looking for a home. Or, more precisely, global M2 money supply.
Like a short-squeeze on a stock, these short squeezes on money tend to be short-lived. Call them acute financial or market crises. They are also negative liquidity crises. Think of "liquidity" as the total amount of money sloshing around the global economy, looking for a home. Or, more precisely, global M2 money supply.
In a short squeeze on money, money is raised from every available place (by fire-selling assets, for example) to cover shorts (repay debtsy. aunng these events, there is not enough available money in the system.
You can read and download the full report here.