Today we consider bitcoin.
I found myself writing the following phrase to begin this morning’s missive.
“Bitcoin has been stuck in the $8,000-$12,000 range since May.”
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Then I thought that, while true, it’s kind of insane...
Bitcoin is so volatile that the odd 40% drop feels like a quiet year
Bitcoin has been trading between about $8,000 and $12,000 per coin since May.
Using the mid-price of that range – $10,000 – as the base price, I am effectively saying that bitcoin has been stuck in a 40% ($4,000) range.
Imagine my saying that gold, or the Dow or the housing market was “stuck in a 40% range”. It takes several years, a global pandemic and an extraordinary amount of financial intervention to move any of those markets by as much as 40%.
Yet so normalised is bitcoin’s volatility, that I’m now describing the cryptocurrency’s 40% range trading as “stuck”.
Who needs leverage when you’ve got bitcoin?
In any case, bitcoin is – by its own standards if nothing else’s – quiet at the moment. It began the year at $7,000, enjoyed a great run into February, taking it north of $10,000, collapsed with the coronavirus panic, and lost nearly 50%.
The rebound took it from below around $5,000 in March to north of $12,000 come August, since when the market has pulled back and found support around $10,000.
And this feels like a quiet year.
I guess that’s because, for all the volatility, the 200-day moving average is as flat as a pancake, indicating that – on this timeframe at least – the market is going nowhere. The 50-day moving average is rising.
Quite interesting is that since February, bitcoin has been behaving like it’s a tech stock listed on the Nasdaq. You could pretty much overlay the bitcoin chart over the Nasdaq and see that whither one, thither the other. They’ve both been going the same way.
On a long- and intermediate-term basis, the Nasdaq is in an uptrend, on a short-term basis the picture is less clear. It’s fallen a bit, then rallied.
Tech is all about the power of scalability – and so is bitcoin
For all their bubblicious qualities, I’d be very careful shorting tech stocks because they have the ability to go so much higher. It’s a scalability thing. Anything digital is so much more rapidly scalable than anything analogue. You can design a really good app, stick it in the app store and it can be sold anywhere in the world, pretty much instantly, a billion or more times over.
Let’s say on the other hand you design a really good dog lead or a picture frame or a sandwich. To sell a billion units, you have to somehow make and distribute a billion dog leads, picture frames or sandwiches. It’s a lot harder.
I’m convinced scalability is the reason that so many Nasdaq stocks have been so unstoppable.
The same logic applies to bitcoin. The US dollar or the pound – any fiat currency – has limited scalability because of national borders. No such limitations affect bitcoin. It was designed to be cash for the internet and the internet is, effectively, borderless.
You can send and receive bitcoin to anyone anywhere as long as you both have an internet connection. As such it has the potential – and I don’t say this will happen, just that it has the potential – to become the default cash system for the internet. The scalability of that is just too great to ignore.
Then, on the other side of the coin, it is almost infinitely divisible, yet in limited supply, so the potential for gains is so enormous that I say you just have to own some – whether it’s having a quiet year or not.
In fact, quiet years in bitcoin are generally a good time to stake a position. Bitcoin has this tendency to go quiet for a couple of years, then go bananas. You want to buy it when it’s quiet.
As things have evolved, bitcoin’s purpose as cash for the internet has sort of disappeared. 31% of bitcoins have been inactive for at least three years, says Guy Hirsch, US managing director for multi-asset brokerage eToro. Some of those bitcoins will have been somehow lost, but a large portion will belong to people who do not see them as cash, but more like digital gold – as something to hoard. “Hodlers”, as they are known.
Bitcoin has become the backbone of the cryptoverse, rather like gold was to the monetary system of the 19th century. Most people’s route into the booming and ever-expanding crypto economy from fiat is via bitcoin. It has a sort of portal status.
The rise of “decentralised finance”
The latest craze to have gripped the crypto economy is “defi” – decentralised finance. There are now over 100,000 bitcoins, worth over $10bn, locked up in it.
In theory, “defi” is the self-sovereign future. It’s accessible to anyone in the world with a smartphone and internet connection. And you will find every type of financial service available – interest-paying savings accounts, lending, trading, insurance, betting, prediction markets, even a lottery. You name it, there’ll be an app for it. Actually a “dapp” – decentralised app.
You can use some apps in conjunction with each other – hence it being called “Lego money”. For example, you could buy a stablecoin with one app, then lend it on another to earn interest, all using your smartphone.
It’s the usual story: rather than being set by institutions, the rules of each dapp are set in code, and the code can be read on the blockchain for you to audit. Assuming you are capable of such a thing, which few are.
Normally the apps are built on the ethereum blockchain – which is why the ethereum cryptocurrency has woken up over the last six months as the defi craze has spread. (Though the ethereum platform is notoriously rickety – and it is kind of crucial to the whole thing.)
It’s a full-time job trying to track and understand the whole sector, and to keep your finger on the pulse. I poke my head in and just feel like grandad.
If you don’t have the time or the inclination to get involved, and most of us don’t, yet you can sort of feel the whole thing has immense potential – and is tremendously scalable – the easiest way to get exposure is simply to own bitcoin.
So, there’s yet another reason, as if you needed it.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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