DAR Crypto Weekly — 2/14/20
Central Banking and the Opt-Out Society
Market Overview
Digital asset prices soared again this week with the total industry market cap up 9% to $301.25. Large-cap winner on the week were Tezos (XTZ +44.1%), Ethereum (ETH +24.5%), and Binance Coin (BNB +23.2%). Relative laggards in the large-cap category were Ethereum Classic (ETC +0.6%), Bitcoin (BTC +4.7%), and Tron (TRX +5.8%). Other noteworthy positive movers across the industry were Hedera Hashgraph (HBAR +162.6%), Chainlink (LINK +31.6%), and Huobi Token (HT +27.1%). Other notable laggards on the week included ICON (ICX -12.8%), Synthetix (SNX -15.4%), and IOTA (MIOTA -2.4%).
DAR Research and Events
Over the years, there has been an ongoing debate on whether Bitcoin should be considered as a “risk on” or a “risk off” asset. That is, does Bitcoin’s price offer superior performance when times are good, like equities, or does it offer protection, when times are tough, like US Treasuries? Bitcoin has had a limited history which transcends neither an economic recession nor bouts of high inflation. In Game of Thrones parlance, Bitcoin is a “sweet summer child that has not tasted the hardships of winter.” In order to more determine Bitcoin’s role as a risk on or off asset, we took a granular look at risk off periods, stock market drawdowns, since 2011. Our findings probably aren’t what you’d expect if you only heard the community mantra of “Bitcoin for protection.” Reach out to find out how to get access to our work here.
A Quick History on Central Banking in the US
The Federal Reserve System and its current head Jerome Powell are often the source of political and public ire these days. Being blamed for asset bubbles, strong (or weak) dollar, high housing costs, and wealth and income inequality, one only must only be casual consumer of news to see piling on from President Trump to those on Main Street. Nowhere is this more pronounced than those aligned with Libertarian political and economic views, most notably former representative Ron Paul who in 2009 penned the best-selling book “End the Fed.” Students of history will know that the current climate isn’t even the biggest indignation the Fed has endured though. Chairman William McChesney Martin was once physically shoved against a wall by President Lyndon Johnson for being too conservative.
With that as a backdrop, we want to point out that it was barely over 100 years ago that the US created the Federal Reserve System (1913) and it wasn’t until 1951 that the Fed gained full independence from the US Treasury. It’s an important historical note that the Fed was created directly in response to a continuing series of banking crashes and financial panics that plagued the end of the 1800s and early 1900s. Experiments with a central bank in the US date back to 1791 with the creation of the First Bank of the United States, under Secretary of Treasury Alexander Hamilton, but concluded in 1836 after the Second Bank of the United States’ 20-year charter ended without renewal following continued criticism from President Andrew Jackson. The open banking period from 1837 to 1913 produced a series of financial panics culminating the panic of 1907 which was only ended by efforts coordinated by a private individual, the powerful financier J.P. Morgan.
Monetary Policy — A Blunt Instrument
We point this out for a bit of education, history, and perspective in today’s social and economic climate: the cure that society once begged for is now being blamed for a myriad of societal problems. No doubt the Fed has not been faultless over its history from tightening of credit during the Great Depression to a history of inability to identify asset bubbles. Know this though: the Fed’s main tool for economic influence is monetary policy — interest rate targeting and inflation expectation setting. It’s important to keep in mind that monetary policy is a blunt tool and likely lacks the precision to address specific societal concerns that are top of mind: income and wealth inequality, access to affordable healthcare and education, and the cost of housing. If anything, the long reliance almost exclusively on monetary policy rather than fiscal policy most likely distorts some of these imbalances. It’s great that the stock market is at an all time high, but what if you don’t own any stock? Only 55% of Americans own any stock at all according to a recent Gallup poll. What society may actually need today is the precision of fiscal policy, which unfortunately may be off the table until the widening political divide can be narrowed.
Chancellor on Brink of Second Bailout for Banks
We don’t think it’s a coincidence the message in Bitcoin’s genesis block was one of political and economic importance. Nor do we think it’s a coincidence Bitcoin was created with a fixed supply structure, something not even achievable by scarce resources like gold. Fixed supply structures, however, can produce wild fluctuations in price, because the supply function is inelastic. Furthermore, unlike the continual 2% erosion of purchasing power associated with inflation and the US dollar, the fixed supply structure encourages hoarding behaviors, rather than use as a medium of exchange. While we often get the push back of “Bitcoin isn’t even being used to facilitate commerce”, we point out that commerce (medium of exchange) and store of value are both valid use cases. While Bitcoin’s rise may say something about disillusionment in central banking absent medium of use cases, we think it’s more interesting to think about those that are voluntarily opting out of one system into another one. Given the size of M1 and M2 balances around the world (US M1: $4T, US M2:$15.5T), plus other asset classes (equities, bond, real estate), small moves out of one ecosystem can have disproportionate impact on the price of Bitcoin ($187B) and the crypto ecosystem as a whole.
That’s all the time we have this week. Please reach out with any questions, comments, or feedback on our work. Get our weekly wrap and daily news delivered directly into your inbox here.
