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.

Literally taken from the Times:

It is also interesting to note its price, which was only £1.50 in 2009, and now stands at £2.50. A 66% increase.

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.

With zero interest rate policies and astronomical valuations for tech start-ups that often didn't even generate a profit, Silicon Valley Bank (SVB) became a monstrous entity. The bank didn't speculate in the mortgage market, but adapted to the daily madness of the financial markets.

The huge amounts of new money deposited daily at SVB were placed on the money market to earn at least a small return, but that was before the FED decided to jack up rates to counter inflation. Banks were now sitting on huge latent losses, and start-ups needed liquidity, which they sought to recoup, as their previously flourishing business struggled in the new long-rate environment.

Higher and higher was the markets' only motto. It wasn't just the valuations of start-ups that were unreasonable, but also thousands of altcoins, NFTs, Rolexes, Lego... Everything was good for speculation, and cash was the worst investment.

Translated with DeepL.com (free version)

The chaos of the crypto industry

“Seriously, trying to sell us on the reliability of crypto after the fall of FTX and Luna?”

I can hear you grumbling behind your screen. And it’s true that the crypto industry is an even more fragile variant of the established financial system. Most crypto projects have only served the VCs (Venture Capitalists) to offload their surplus liquidity during a period of free money. The words "blockchain," "decentralization," and "metaverse" were shining, and that was all it took to convince them. We were literally creating money out of nothing.

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

Bitcoin is already a defense against the financial system. In a way, it is like a CDS on the system, but the key difference with Bitcoin is that it has no counterparty.

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.

This article was written by The Macronomist.