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Stock prices move based on what a company earns and stories about what that company will earn in the future. The company only tells us four times a year how much they actually earn; the rest of the time, stories do the work. Narrative is an extremely powerful force in markets, and its relevance scales up in accordance with the murkiness of an asset’s “true” value.
Nothing is murkier than bitcoin. Narrative is more crucial to this asset than for any other product in existence, and it’s why this moment is the biggest in bitcoin’s history to-date.
Bitcoin’s story throughout its fantastic rise from sub-$1,000 has been that it will be a necessary hedge to a future in which central banks led by the Federal Reserve will abuse the monetary system and devalue currencies. “Have fun staying poor,” the coiners taunt online, implying those with U.S. dollar-denominated assets won’t be able to keep up with “digital gold” as central bank profligacy floods the world with useless paper dollars.
It’s been a compelling narrative the past ten years as it seemed that no matter what we tried, we just couldn’t get enough economic momentum for the Fed to extricate itself from the market. The economy has had a variety of nuances throughout bitcoin’s lifetime, but for the most part, it’s been characterized by moderate or weak growth and supportive – in some instances, arguably overly supportive – monetary policy. Without any disruptive or sticky inflation, there was never much need for an inflation hedge. What better story with which to sell something than a doomsday use-case that had no way to be disproven?
Until now. We are now facing a vexing degree of inflation. And as some were surprised to learn last week, the Fed stands ready to act. For bitcoin, this is, at long last, its earnings report. An opportunity to discover the truth behind the story that’s been told for so long. The result: the Fed is preparing to unwind its easy policy and bitcoin’s in the midst of one of its worst crashes ever. It’s trading activity resembles nothing like gold. Instead, it looks like a worse-performing version of the riskiest parts of the stock market, which are also well off their record highs.
Bitcoin does have an inherent value to those who need to transfer money without the consent of a third party. But that hasn’t been the core of the bitcoin narrative for a long, long time. It’s been “digital gold” and “inflation hedge” for years. As that narrative is permanently disproven, bitcoin will have an arduous road ahead.
Put in terms of this market philosophy, narrative destruction in bitcoin will exact a heavy toll. Or perhaps more directly to the cause and effect: Jay Powell is taking out the trash, and crypto is first on his list.
A quick thought on the short-term price action: it looked like bitcoin might have finally exhausted selling pressure in the break below $30,000 and sharp subsequent rebound, but there’s been little follow-through, and that’s bad. One of the reasons this price level is very important in my opinion is because it marks the biggest deviation from one popular model of bitcoin price behavior, known as the stock-to-flow model. I personally do not find this model compelling, but many do, and right now it calls for bitcoin to trade at $100,000 by year-end. If this is invalidated, I think much of the bitcoin community will be in shock and we could see panic-selling until we retest $20,000. But at that point, why not just keep going, when the narrative of the past four years is unraveling?
