Buttonwood

The anti-at punto

The boundary between crypto and at money is more permeable than you think

 


 

May 27th 2021 | words 817

 

 

 

FINANCE HAS its squabbling tribes, much like the rest of society. A contest that attracts a lot of attention just now is the demographic-cum-digital divide between crypto kids and fiat dinosaurs. The crypto kids believe that blockchain-based finance is the future and a haven from the inevitable degradation of fiat money. In the opposite corner are the titanosaurs of the fiat world, the central bankers. Im sceptical about crypto assets, frankly, because they are dangerous, said Andrew Bailey, the Bank of Englands boss, this week.

 

This is a good moment for the dinosaurs. The dollar price of bitcoin, the mainstay of crypto assets, fell from $58,000 or so in mid-May to around $33,000 in the space of a couple of weeks. The steepest part of that decline came after Teslas chief executive, Elon Musk, said his firm would suspend its policy of accepting bitcoin for purchases of its cars. A pledge by Chinese regulators to crack down on the mining of bitcoin gave the sell-off additional impetus

 

The consequences have so far been few. Because there has been no visible collateral damage, crypto has been widely seen as a side-show in financial markets. This view is too dismissive, though. Crypto, like gold, is built on a collective belief about its value. But so to an extent are all asset prices. And crypto is moving past the point where it can be considered its own self-contained world.

 

To understand bitcoins ascent it helps to go back to the work of Thomas Schelling, a Nobel-prizewinning economist and game theorist. Schelling contended that people are often able to act tacitly in concert if they know that others are trying to do the same. Many situations throw up a clue, a focal point, around which people can co-ordinate without explicitly agreeing to do so. For instance, if asked to pick a positive number, people will offer a variety of responsesone, seven, 100 and so on; but if asked to choose a number that others will also select, there is a preponderant choice: the number one.

 

This insight applies to certain assets that lack intrinsic value. The investment case for gold, said Schelling, can best be explained as a solution to a co-ordination game. Gold bars have value because enough people tacitly agree that they do. Their value is bolstered by their scarcity, and their longevity. Willem Buiter, a prominent economist, once aptly called gold the six-thousand-year-old bubble. Bitcoin is newer, but similar. Yes, the technology behind it is ingenious (although Ethereum, the next-most-valuable crypto asset, arguably has the more compelling user case). And, yes, bitcoin is used in transactions, if no longer for Teslas cars. But its selling points are scarcity and fame. It is a natural focal point. As with gold, you can make a theoretical case that it is proof against paper-money inflation.

 

The latest gyrations seem to confirm that crypto is a walled garden unconnected with the rest of finance. But if you look more closely a different pattern is emerging. There is already a pathway linking crypto prices with gold. Flows into exchange-traded funds (ETFs) that invest in gold started to revive just as money was flowing out of bitcoin futures and ETFs, according to a recent analysis by Nikolaos Panigirtzoglou of JPMorgan Chase, a bank. That suggests that institutional investors are shifting back into gold after a flurry of interest in crypto, because bitcoin prices had risen too quickly. Viewed this way, the fall of bitcoin and the revival of gold are a relative-value trade within the broader set of inflation hedges.

 

Furthermore, it is hard to shake off the feeling that crypto-crashes now matter. This is the third bear market in four years, but a lot more money is now involved. The market capitalisation of cryptocurrencies tracked by a specialist website, coingecko.com, was more than $2.5trn in mid-May. A fortnight later it had fallen to $1.5trn. That is a big loss in anyones money. Crypto prices are creeping up again, so those losses are already being eroded. But at each new peak, the asset class looms ever larger. And a dollar lost in crypto investing is the same as a dollar that was once earned or borrowedeven if, at present, it is hard to know precisely who bears the loss.

 

There is something else to consider. Cryptocurrencies are highly speculative assets. It is thus hard not to think of their prices as a signal of shifts in risk appetite more broadly. Beliefs matter for all sorts of asset prices, whether in dollars or bitcoin. You might be able to dismiss this crypto-crash. But the next one will be harder to ignore.

 


 

VOCABULARY


squabble

squabble / skwbl; NAmE skwbl /

verb [V]

~ (with sb) (about / over sth) to argue noisily about sth that is not very important

(),

SYN bicker :

 My sisters were squabbling over what to watch on TV.   

squabble noun

family squabbles   

 

There were endless squabbles over who should sit where.  

 

 

cum

cum / km /

prep. 

(used for linking ten nouns ) and; as well as

a bedroom-cum-study   

 

fiat

fiat / fit; fait / 

noun [C, U]

(formal) an official order given by sb in authority

(),,

SYN decree 

 

degradation

degradation / degrdein / 

noun [U] 

1. a situation in which sb has lost all self-respect and the respect of other people

,()

the degradation of being sent to prison   

 

2. (technical ) the process of sth being damaged or made worse

,():

environmental degradation   

 

sell-off

'sell-off 

noun 

1. (BrE) the sale by the government of an industry or a service to individual people or private companies

()

2. (NAmE) (business ) the sale of a large number of stocks and shares , after which their value usually falls

() 

 

impetus

impetus / impits / 

noun 

1. [U, sing.] ~ (for sth) | ~ (to sth / to do sth) something that encourages a process or activity to develop more quickly 

SYN stimulus 

to give (a) new / fresh impetus to sth  

 

The debate seems to have lost much of its initial impetus.   

 

His articles provided the main impetus for change.  

 

2. [U] (technical ) the force or energy with which sth moves

 

 

preponderant

preponderant / pripndrnt; NAmE -pn- / 

adj. [usually before noun]

(formal) larger in number or more important than other people or things in a group

preponderantly adv. 

 

intrinsic

intrinsic / intrinsik; -zik / 

adj. 

~ (to sth) belonging to or part of the real nature of sth / sb

the intrinsic value of education   

 

These tasks were repetitive, lengthy and lacking any intrinsic interest.   

,

 Small local shops are intrinsic to the town's character.   

-- compare extrinsic 

intrinsically / -kli / 

adv.

There is nothing intrinsically wrong with the idea (= it is good in itself but there may be outside circumstances which mean it is not suitable).  

 

gyrate

gyrate / daireit; NAmE daireit / 

verb 

to move around in circles; to make sth, especially a part of your body, move around

(),:

[V]  

They began gyrating to the music.   

 

The leaves gyrated slowly to the ground.   

[VN]  

As the lead singer gyrated his hips, the crowd screamed wildly.   

,

gyration / dairein / noun

 

 

bear market

'bear market

noun (finance ) a period during which people are selling shares, etc. rather than buying, because they expect the prices to fall

()

-- compare bull market 

 

erode

erode / irud; NAmE iroud /

verb [often passive]

~ (sth) (away) 1. to gradually destroy the surface of sth through the action of wind, rain, etc.; to be gradually destroyed in this way

SYN wear away :

[VN]  

The cliff face has been steadily eroded by the sea.  

 

[V]  

The rocks have eroded away over time.  

 

2. to gradually destroy sth or make it weaker over a period of time; to be destroyed or made weaker in this way

:

[VN]  

Her confidence has been slowly eroded by repeated failures.   

 

Mortgage payments have been eroded (= decreased in value) by inflation.  

[also V] 

erosion / irun; NAmE iroun / noun [U] : 

the erosion of the coastline by the sea   

 

soil erosion   

 

the erosion of her confidence   

 

loom

loom / lum / 

verb [V] 

1. [usually +adv. / prep.] to appear as a large shape that is not clear, especially in a frightening or threatening way

()

A dark shape loomed up ahead of us.  

 

2. to appear important or threatening and likely to happen soon

There was a crisis looming.   

IDIOMS

 loom 'large 

to be worrying or frightening and seem hard to avoid

,()

The prospect of war loomed large.   

,

 

 









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Economist | The anti-at punto

 


Buttonwood

The anti-at punto

The boundary between crypto and at money is more permeable than you think

 


 

May 27th 2021 | words 817

 

 

 

FINANCE HAS its squabbling tribes, much like the rest of society. A contest that attracts a lot of attention just now is the demographic-cum-digital divide between crypto kids and fiat dinosaurs. The crypto kids believe that blockchain-based finance is the future and a haven from the inevitable degradation of fiat money. In the opposite corner are the titanosaurs of the fiat world, the central bankers. Im sceptical about crypto assets, frankly, because they are dangerous, said Andrew Bailey, the Bank of Englands boss, this week.

 

This is a good moment for the dinosaurs. The dollar price of bitcoin, the mainstay of crypto assets, fell from $58,000 or so in mid-May to around $33,000 in the space of a couple of weeks. The steepest part of that decline came after Teslas chief executive, Elon Musk, said his firm would suspend its policy of accepting bitcoin for purchases of its cars. A pledge by Chinese regulators to crack down on the mining of bitcoin gave the sell-off additional impetus

 

The consequences have so far been few. Because there has been no visible collateral damage, crypto has been widely seen as a side-show in financial markets. This view is too dismissive, though. Crypto, like gold, is built on a collective belief about its value. But so to an extent are all asset prices. And crypto is moving past the point where it can be considered its own self-contained world.

 

To understand bitcoins ascent it helps to go back to the work of Thomas Schelling, a Nobel-prizewinning economist and game theorist. Schelling contended that people are often able to act tacitly in concert if they know that others are trying to do the same. Many situations throw up a clue, a focal point, around which people can co-ordinate without explicitly agreeing to do so. For instance, if asked to pick a positive number, people will offer a variety of responsesone, seven, 100 and so on; but if asked to choose a number that others will also select, there is a preponderant choice: the number one.

 

This insight applies to certain assets that lack intrinsic value. The investment case for gold, said Schelling, can best be explained as a solution to a co-ordination game. Gold bars have value because enough people tacitly agree that they do. Their value is bolstered by their scarcity, and their longevity. Willem Buiter, a prominent economist, once aptly called gold the six-thousand-year-old bubble. Bitcoin is newer, but similar. Yes, the technology behind it is ingenious (although Ethereum, the next-most-valuable crypto asset, arguably has the more compelling user case). And, yes, bitcoin is used in transactions, if no longer for Teslas cars. But its selling points are scarcity and fame. It is a natural focal point. As with gold, you can make a theoretical case that it is proof against paper-money inflation.

 

The latest gyrations seem to confirm that crypto is a walled garden unconnected with the rest of finance. But if you look more closely a different pattern is emerging. There is already a pathway linking crypto prices with gold. Flows into exchange-traded funds (ETFs) that invest in gold started to revive just as money was flowing out of bitcoin futures and ETFs, according to a recent analysis by Nikolaos Panigirtzoglou of JPMorgan Chase, a bank. That suggests that institutional investors are shifting back into gold after a flurry of interest in crypto, because bitcoin prices had risen too quickly. Viewed this way, the fall of bitcoin and the revival of gold are a relative-value trade within the broader set of inflation hedges.

 

Furthermore, it is hard to shake off the feeling that crypto-crashes now matter. This is the third bear market in four years, but a lot more money is now involved. The market capitalisation of cryptocurrencies tracked by a specialist website, coingecko.com, was more than $2.5trn in mid-May. A fortnight later it had fallen to $1.5trn. That is a big loss in anyones money. Crypto prices are creeping up again, so those losses are already being eroded. But at each new peak, the asset class looms ever larger. And a dollar lost in crypto investing is the same as a dollar that was once earned or borrowedeven if, at present, it is hard to know precisely who bears the loss.

 

There is something else to consider. Cryptocurrencies are highly speculative assets. It is thus hard not to think of their prices as a signal of shifts in risk appetite more broadly. Beliefs matter for all sorts of asset prices, whether in dollars or bitcoin. You might be able to dismiss this crypto-crash. But the next one will be harder to ignore.

 


 

VOCABULARY


squabble

squabble / skwbl; NAmE skwbl /

verb [V]

~ (with sb) (about / over sth) to argue noisily about sth that is not very important

(),

SYN bicker :

 My sisters were squabbling over what to watch on TV.   

squabble noun

family squabbles   

 

There were endless squabbles over who should sit where.  

 

 

cum

cum / km /

prep. 

(used for linking ten nouns ) and; as well as

a bedroom-cum-study   

 

fiat

fiat / fit; fait / 

noun [C, U]

(formal) an official order given by sb in authority

(),,

SYN decree 

 

degradation

degradation / degrdein / 

noun [U] 

1. a situation in which sb has lost all self-respect and the respect of other people

,()

the degradation of being sent to prison   

 

2. (technical ) the process of sth being damaged or made worse

,():

environmental degradation   

 

sell-off

'sell-off 

noun 

1. (BrE) the sale by the government of an industry or a service to individual people or private companies

()

2. (NAmE) (business ) the sale of a large number of stocks and shares , after which their value usually falls

() 

 

impetus

impetus / impits / 

noun 

1. [U, sing.] ~ (for sth) | ~ (to sth / to do sth) something that encourages a process or activity to develop more quickly 

SYN stimulus 

to give (a) new / fresh impetus to sth  

 

The debate seems to have lost much of its initial impetus.   

 

His articles provided the main impetus for change.  

 

2. [U] (technical ) the force or energy with which sth moves

 

 

preponderant

preponderant / pripndrnt; NAmE -pn- / 

adj. [usually before noun]

(formal) larger in number or more important than other people or things in a group

preponderantly adv. 

 

intrinsic

intrinsic / intrinsik; -zik / 

adj. 

~ (to sth) belonging to or part of the real nature of sth / sb

the intrinsic value of education   

 

These tasks were repetitive, lengthy and lacking any intrinsic interest.   

,

 Small local shops are intrinsic to the town's character.   

-- compare extrinsic 

intrinsically / -kli / 

adv.

There is nothing intrinsically wrong with the idea (= it is good in itself but there may be outside circumstances which mean it is not suitable).  

 

gyrate

gyrate / daireit; NAmE daireit / 

verb 

to move around in circles; to make sth, especially a part of your body, move around

(),:

[V]  

They began gyrating to the music.   

 

The leaves gyrated slowly to the ground.   

[VN]  

As the lead singer gyrated his hips, the crowd screamed wildly.   

,

gyration / dairein / noun

 

 

bear market

'bear market

noun (finance ) a period during which people are selling shares, etc. rather than buying, because they expect the prices to fall

()

-- compare bull market 

 

erode

erode / irud; NAmE iroud /

verb [often passive]

~ (sth) (away) 1. to gradually destroy the surface of sth through the action of wind, rain, etc.; to be gradually destroyed in this way

SYN wear away :

[VN]  

The cliff face has been steadily eroded by the sea.  

 

[V]  

The rocks have eroded away over time.  

 

2. to gradually destroy sth or make it weaker over a period of time; to be destroyed or made weaker in this way

:

[VN]  

Her confidence has been slowly eroded by repeated failures.   

 

Mortgage payments have been eroded (= decreased in value) by inflation.  

[also V] 

erosion / irun; NAmE iroun / noun [U] : 

the erosion of the coastline by the sea   

 

soil erosion   

 

the erosion of her confidence   

 

loom

loom / lum / 

verb [V] 

1. [usually +adv. / prep.] to appear as a large shape that is not clear, especially in a frightening or threatening way

()

A dark shape loomed up ahead of us.  

 

2. to appear important or threatening and likely to happen soon

There was a crisis looming.   

IDIOMS

 loom 'large 

to be worrying or frightening and seem hard to avoid

,()

The prospect of war loomed large.   

,

 

 









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