I have written about the plethora of results this week and it’s been busy. Thus far, the standout quirk in the results announcements had to be Tesla. I’m not about the delve into a long diatribe of Tesla’s results suffice to say that the element of specific quirkiness was the role Bitcoin played in the company’s Q1 numbers.
Elon Musk has long been a proponent of cryptocurrencies in general and Bitcoin in particular. Tesla was one of the first major companies to hold Bitcoin on its balance sheet as well as offer to sell its product in exchange for Bitcoin. In the most recent quarter, it was responsible for almost $100bn worth of earnings with many detractors decrying the fact that Tesla makes more from regulatory credits and crypto trading than from cars.
Notwithstanding one’s views on cryptocurrency as well as Musk’s unique ability to prime his legions of followers via social media, the presence of Bitcoin in the discourse has raised a question in my mind, the question of Bitcoin relativity.
What if we counted in Bitcoin?
One of the key arguments behind the proponents of Bitcoin is the one of the rapid debasements of fiat currencies and the need for a decentralized non-sovereign global standard. I, for one, certainly subscribe to the narrative that the current monetary and fiscal experiments prevalent on a world stage may still have unintended consequences. In fact, Bitcoin, in and of itself is a consequence of the current policy backdrop.
However, what has always struck me as odd is that if one posits that Bitcoin needs to be seen as a ‘store of value’ and as a ‘medium of exchange’, why do we still measure the value of Bitcoin in fiat currency like the US Dollar?
Surely as we transition to a world of crypto dominance and independence from fiat money, we will need to start measuring our ‘real world’ assets in terms of Bitcoin. Perhaps the cognitive dissonance arises from the fact that when Bitcoin rises, it makes you feel good, and that’s a heck of lot better than realizing that the inverse is that the value of EVERYTHING else is declining in Bitcoin terms…. Your house, your cars, your 401k and your salary! Truly a deflationists dream?
Let’s run the numbers:
Those of you who have been following me for a while will know that in January, I wrote this piece (What is money?) where I looked at the world post Bretton Woods and going off the gold standard. I also mapped the value of the US dollar in purchasing power terms, since 1971 to now.
This was a stark picture for many in that the US dollar today is worth only 15c of the 1971 dollar. As such, I would like to run a similar exercise with Bitcoin. While it took 5 decades for the slow debasement of the dollar, bear in mind that it is said that almost 60% of all dollars ‘created’ have been done so in the last 2 years.
As such, it stands to reason that if we were to consider Bitcoin as the comparative standard, that the trend we saw in purchasing power terms of the dollar is merely inverted in the current Bitcoin price.
The legendary story of the most expensive pizza’s bought, for 10000 Bitcoin is analogous to what we are trying to show here. The chart below shows the value of the SP500, Gold, Oil and for good measure, Lumber, in Bitcoin terms over the course of the last 5 years. For simplicity’s sake, we include index points as a price where applicable.
In 2016, the price of Bitcoin in USD was around $451. The SP500 was at 2065, gold at $1289, oil at $46/bbl and lumber futures at $295. As such, the S&P would have cost around 4.5 Bitcoins, an ounce of gold came in at around almost 3 Bitcoin, oil cost 0.1 Bitcoin and lumber at 0.65 Bitcoin.
Today, the S&P would cost 0.07 BTC, gold 0,03 BTC, Lumber 0.02 BTC and oil would be 0.001 BTC. Yes, that’s right. Bitcoin rising against the dollar by over 100 fold in the last 5 years has meant that everything else has gone down to around 1% of what it was worth back in 2016. That’s way worse than the 1971-2021 dollar parity argument of 0.15c to the dollar!
For those that like to think in terms of hard assets, if we used house prices in the US, in around 2016, it would have cost you 475 BTC to buy a house. Today, it would cost you around 5 BTC!
Whats the catch?
So the nub of the argument for me is as follows. It’s nice to watch the value of your BTC go up against the dollar, but if you’re a purist, you would need to start thinking in BTC terms as your base currency.
If we do this, the picture is one of mass deflation for any asset price that hasn’t kept pace with the base currency, which in the case of BTC is pretty much everything. With most earnings still in fiat currency, one’s own ability to build up ‘savings’ of your base currency in BTC will continue to be eroded as the price rises.
That’s one of the key drawbacks for me in terms of the volatility of BTC prices. Over the last two weeks, BTC has traded from a record high of around $64000 to a low of around $49000 and is now back to levels of around $55000 at the time of writing. That’s a range of around 15%, which is more risky than many emerging market fiat currencies.
In a rising market, no one cares of the volatility but if that were purely downside risk, it makes the use of BTC as a reserve currency less appealing. Think of it. If you ‘earned’ your keep in BTC at the peak of $64k, not more than a week later, your purchasing power was eroded by 15%. That’s a lot to stomach.
At this stage, the argument is esoteric. The polarization in markets around Bitcoin is either that you’re a believer or not. I prefer the nuance. I believe in the role an asset like Bitcoin plays in the larger discourse of debasement of fiat currency.
I also think that it is in its infancy and that there is a long road ahead to a point where crypto is accepted not just as a financial asset, but also as a store of value and a medium of exchange… the very definition of sound money.
In the interim, one needs a strong constitution to ride out the volatility and also fully accept that ‘money’, whether its fiat currency or crypto, is susceptible to devaluation from a number of forces. The regulatory and taxation scepter looms large for crypto and no doubt, the industry and market will push back… the question is who will blink first and who will be left holding the can?