Why Bitcoin ?
Today's article will focus on an asset that has generated so much ink. Loved unconditionally by some, criticized as a mere speculative bubble by others, Bitcoin has not finished making waves. However, the current period, from both a geopolitical and economic standpoint, encourages us to take a closer look at alternative assets, and Bitcoin embodies this concept perfectly.
If you're already convinced by Bitcoin's proposition, I probably don't have much to add. If you're skeptical about it, you likely won’t change your mind. But I at least have a thesis that will explain why I love what Bitcoin represents, and why, in my opinion, it is indispensable in today's environment.
Genesis block
Satoshi Nakamoto, the mastermind behind Bitcoin, created the first transaction block himself. The idea behind Bitcoin has been political from the very start, although it is neither "left" nor "right." Anyone who believes the financial system is problematic can find common ground in Bitcoin's promise, regardless of their political orientation.
The story is well-known: embedded in the first transaction block was a hexadecimal message:
5468652054696d65732030332f4a616e2f32303039204368616e63656c6c6f72206f6e206272696e6b206f66207365636f6e64206261696c6f757420666f72…
When decoded into ASCII, it reads:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.
This message serves as both a timestamp and a declaration. It speaks to the dissatisfaction with traditional financial systems and, perhaps, to the motivation behind creating Bitcoin as a decentralized, alternative currency.
To return to this headline, in French:
The Times 03/Jan/2009 La chancelière est sur le point d'accorder un second renflouement aux banques.
This message is still just as relevant, 14 years later, in an era where a few banks are failing and are, of course, bailed out by the government. Just like in 2009, when the banks' inability to properly manage their risk was bailed out with public money.
Les énormes quantités d’argent frais déposées quotidiennement chez SVB ont été placées sur le marché monétaire pour gagner au moins un petit rendement, mais c’était avant que la FED décide de monter ses taux en flèche pour contrer l’inflation. Les banques sont alors assises sur d’immenses pertes latentes, et les start-up ont besoin de liquidité qu’elles cherchent à récupérer, car leur business auparavant florissant peine dans ce nouvel environnement de taux longs.
Toujours plus haut était la seule devise des marchés. Il n’y a pas que les valorisations des start-up qui étaient déraisonnables, mais également des milliers d’altcoins, des NFT, des Rolex, des Lego… Tout était bon pour spéculer, le cash était le pire investissement.
Le chaos de l’industrie crypto
“Sérieusement, essayer de nous vendre la fiabilité de la crypto après la chute de FTX et de Luna ?”
The winners? The shady VCs. The losers? Us.
And it’s important to separate Bitcoin from the majority of crypto projects that have been massively invested in by VCs. Bitcoin is fundamentally different: no fundraising and no one to represent it. Without falling into maximalism and throwing away everything that’s not Bitcoin, Ethereum is also an extremely interesting project, just fundamentally different, but that’s not the topic for today.
As Robert Shiller, an American economist, said during the dot-com bubble:
“Nothing important has ever been built without irrational exuberance.”
"Rien d'important n'a jamais été construit sans exubérance irrationnelle."
This irrational exuberance must come before the true value can be felt.
Now that trust in our elites has eroded, with inflation rates worldwide reaching double digits, banks going bankrupt, and inflation still far from the targets—fiat money, since the end of the Bretton Woods agreements, is only collateralized by our trust in it. Thanks to Bitcoin, we no longer need to trust our bank, but we’ll come back to this point later.
Nevertheless, one might be disappointed by Bitcoin’s promise. It was presented as a shield against inflation, and here it is down 60% from its ATH during a period of inflation. In my opinion, it simply suffers from the boundless monetary expansion and the peak it reached because of it. Does this mean it has failed? Not for me. The Bitcoin ecosystem is more alive than ever, and it remains the most decentralized and disinflationary ecosystem that exists. No operating hours, no CEO, no account freezes, no central entity to manage it, usable by anyone at any time. Its promise is still being kept.
Holding money in a bank is not without risk, because you have to trust the banks to manage their risk. And as history has shown us many times, they are incapable of doing so. With Bitcoin, you can forget about reserves, interest rates, and counterparty risks—it’s just code. It is self-backed.
A CDS on the financial system?
This is an idea developed by financier Greg Foss, who imagines Bitcoin as a CDS (Credit Default Swap) on the entire fiat monetary system. And I find this example particularly relevant.
For those who don’t know what a CDS is, a quick reminder: CDS are derivative products that serve as insurance. They are used to protect against the non-repayment of a debt. We already discussed this in an article for Journal du Coin in October 2022, when Credit Suisse was already in trouble and the price of CDS on its debt exploded.
Greg Foss believes Bitcoin should be seen as insurance against the default of all fiat currencies. When the risk on fiat currencies increases, Bitcoin benefits from a premium. Does this sound crazy? Yet, searches for Bitcoin have recently exploded, with the troubles of SVB and Credit Suisse.
Comparison between searches for Bitcoin, Credit Suisse, and SVB on Google
If you’ve seen The Big Short (which I highly recommend), a movie where we follow a handful of winners who speculated on CDS during the subprime crisis, you’re familiar with this risk. In 2008, if you had CDS on Lehman Brothers, you made a lot of money, but it was crucial that your counterparty—the person from whom you purchased that CDS—was able to pay you.
Bitcoin is therefore even better than a CDS because it has no counterparty (as long as you store it on a key). It’s insurance against the failure of the global system.
That’s why I believe the worst allocation you could dedicate to Bitcoin is 0%.
As my former manager (whom I greet if he’s reading this) liked to remind us:
Bitcoin is an option without theta.
What this means is: Bitcoin is a hedge on the entire financial system with no time limit. If you leave it in a portfolio composed of multiple other assets, it will either have a significant positive impact or a negligible negative impact. You have no reason not to hold any at all.
