Bitcoin Isn’t Crazy Enough Yet

Let’s say the bitcoin bubble has just burst.

From its peak of $4,921 earlier this month, the digital currency is already down 16 percent at $4,076. Over the next two months, imagine it continues to slump to barely more than half its peak valuation. After a brief recovery, the price slides again, until by the start of 2020 it’s dropped by another third, to below $2,000. For 20 years it then languishes around that point, never to recover its September 2017 levels in inflation-adjusted terms.

Full disclosure: I don’t, and wouldn’t, invest in either gold or bitcoin. Still, as someone once said, markets can remain irrational longer than you can remain solvent — and trying to shake other investors out of their unreason is as pointless as fighting the tide. Rather than asking whether digital currencies make sense philosophically, we should be asking whether they stack up as investments.

As Gadfly argued last week, with a conventional market in digital-currency-settled derivatives emerging, the best argument for owning those currencies is the same as the best one for owning gold: Their potential to have negative beta, to rise when stocks fall and vice versa. If a negative correlation to equities can offset periods of underperformance in shares, they can go a long way to improving returns.

Suppose you bought a basket of digital currencies, and held them alongside gold as the negative-beta slice of an investment portfolio, valued at no more than (say) 3 percent of the total. Would that make sense?

If all digital currencies are going to be worth zero in five years, clearly not.

That’s the argument made by those who say cryptocurrencies don’t have any “fundamental value.” Gold is genuinely useful in niche medical and electronic applications, and it’s been coveted aesthetically since the dawn of civilization. Central bank bullion holdings are another 31,500 metric tons of proof that the yellow metal is more than just a fad.

What’s supporting a floor price for digital currencies, though?

One answer to that question was given by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon in his anti-bitcoin spray last week:

If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars … So there may be a market for that, but it’d be a limited market.

Not that limited, though. As demonstrated by the popularity of bitcoin in China, people living in countries with closed capital accounts show a great deal of interest in moving funds outside of official exchange controls. About 40 percent of the world’s population and 20 percent of its gross domestic product are in such jurisdictions.

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