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Related: the current rise of Bitcoin prices has been peculiar to me, and seems to be a bit of a canary in an inflationary coal mine. We've injected trillions o
by keithwhor 6y ago
Related: the current rise of Bitcoin prices has been peculiar to me, and seems to be a bit of a canary in an inflationary coal mine.
We've injected trillions of dollars of fiat into the economy this year. It feels like the sky-high valuations of technology companies and Bitcoin are "shock absorbers" of sorts, or early signals of inflation-yet-to-come. If we assume the market is efficiently pricing these assets (like AirBnB's IPO) then it could very well be that the actual value of a fiat dollar has dropped dramatically -- making sky-high valuations more reasonable -- and we'll only see that reflected in the price of consumer goods and commodities once industry leaders collectively feel comfortable the economy is on track again. After all, you can only charge what consumers can afford to pay.
I'm an armchair economist at best. I just can't make sense of the market right now, and wouldn't be surprised to see the price of things like groceries, beer and travel double or triple what they were in 2019. Is there anybody writing about this that I haven't been paying attention to? Am I missing something?
- ant6n 6y agoBut then what would one invest in? The stock market may just as easily crash.
- brokencode 6y agoBut a stock represents ownership of a real company that (hopefully) will make profits that can be distributed as a dividend or be used to grow the company and increase the value. A Bitcoin is totally speculative and has virtually no useful purpose in the real world yet. You can’t actually buy stuff with it from stores, due to its niche status, high fees, slow transactions, and wild price fluctuations. Looking at it that way, it’s clear that a stock is a much safer investment than a Bitcoin.
- smabie 6y agoIt doesn't matter how safe an investment is. Uncorrelated alternative assets (metals, crypto, art, etc), when added to your portfolio, lower the total volatility (risk) and boost the risk adjusted returns. You can take a really crappy asset with low returns and high volatility (like gold) and add it to your portfolio to boost your risk adjusted return. In short, from a quantitative perspective, it never makes sense to look at a security or asset in isolation. Instead one must consider the total portfolio as a whole. Source: work as a quant trader tldr: If the question is "does crypto have a place in everyone's portfolio?" The answer is emphatic an "yes". And indeed, we are quickly moving towards a world in which crypto is held by most institutional investors. Even at this early stage, the institutional flows into btc is staggering. And it will only increase with time. From my vantage point as an insider, btc is here to stay. full stop
- brokencode 6y agoSure, maybe put a few percent of your portfolio in it. But my point is that Bitcoin is highly speculative and risky compared to pretty much any other kind of investment. Even gold has industrial uses and isn’t simply a token of value like Bitcoin. I will concede though that there is a huge market of derivatives which often seem pretty unusual and risky to an amateur investor such as myself, so maybe Bitcoin isn’t that different from some of those investments. I don’t know a lot about that market, other than that it played a large role in the Great Recession, which is a dubious distinction.
- smabie 6y agoThen you probably won't be pleased to hear that crypto derivatives are far more popular than actual hard crypto :) Most people are unaware, the the derivative volume of btc is yuuuge compared to the spot volume.
- thekyle 6y agoOne of the most common critiques of modern portfolio theory is that it defines risk by volatility rather than downside risk. While a stock will never have price-to-book multiple less than 1 (unless fraud has occurred) a cryptocurrency has no such limit on how far it can fall.
- smabie 6y agoWell a crypto currency can only fall 100%, so it's not unlimited. Moreover, some stocks do actually have a P/B ratio below one, for example Deutsche Banks PB is currently around 0.3. You could instead look at downside deviation instead of volatility, but in my experience standard volatility and upside/downside deviation look very similar for most securities. This is somewhat paradoxical for me personally, but it is what it is.
- Blammar 6y agoI just wanted to point out that stocks have had price to book multiples less than one, per various comments by Buffett and Benjamin Graham. Also, for another example, there are funds that sell at a discount to the total value of shares held by the fund.
- hobby-coder-guy 6y agoWhy not Tulips and Beanie babies?
- lottin 6y agoAll investments have an inherent risk. Typically there is a direct relationship between risk and return. The more risky an investment is the higher the return investors demand. Thus, when considering an investment, a key question to ask is whether the expected return on the investment is commensurate with the risk that this particular investment entails. This is called a mean-variance analysis, and before investing in BTC, or in the stock market for that matter, you should probably do exactly that kind of analysis.
- loeg 6y agoBTC prices have approximately zero relation to inflation in the real economy (for whatever definition of that you want to use). Rising BTC prices are driven by pyramid scams, fraud, and speculation. There is no useful signal here related to anything else.
- doggosphere 6y agoBTC prices have been driven by institutional demand and federal monetary policy.
- vulpesx2 6y agoI've seen sources to corroborate institutional demand, but is there a source for your claim on the link to federal monetary policy? Ideally beyond correlation to show causation.
- doggosphere 6y agoI don’t, but it is one of the core reasons why Bitcoin is attractive to anyone. Asset prices are up across the board.
- aent 6y agoOr 21 billion fake tether dollars.
- opendomain 6y agoI have serious questions about tether. As far as I know, they have not proven they even have 1 billion on reserve. How can they claim 21 billion? Is this pyramid scheme the real reason bitcoin prices are so high?
- tanseydavid 6y agoDo you believe that speculative activity is not related in any way to inflation or expectations of inflation?
- 6y ago
- whatever1 6y agoWhy coca-cola would 3ple their prices in 2021? The loans are cheap, the wages are stagnant, energy and raw materials are cheap. I really don't see this scenario playing out unless the financial institutions collapse.
- hobby-coder-guy 6y ago3ple?
- arbuge 6y ago> If we assume the market is efficiently pricing these assets (like AirBnB's IPO) then it could very well be that the actual value of a fiat dollar has dropped dramatically Note that many other assets such as energy, financial, and real estate stocks, consumer goods, etc. are not experiencing sky-high valuations - indeed, some of those asset classes are down for the year. So it's not just fiat dollars that have dropped dramatically in value by your reasoning. It seems to me more likely the market is simply overpricing one class of assets (tech stocks) here. Occam's Razor comes to mind.
- keithwhor 6y agoOverpricing one class of assets is functionally equivalent to underpricing the other classes. Facing inflation, money will aggregate first in the assets most likely to maintain + outpace an increase in monetary supply. Once they start appearing too overpriced, the overflow will affect other industries. I'd invoke Occam's Razor to state that inflation due to increase in monetary supply is more likely to manifest as "overpricing" of one or two asset classes first. As opposed to a crash, where one asset class bottoms out and takes the other with it, stimulus and inflation, in theory, would cause the opposite -- would they not? I haven't studied hyperinflation. So consider me inquisitive on the subject. But it's certainly happened before, and the dynamics seem like they have the potential to create a positive feedback loop similar to a crash.
- sunshinerag 6y agowell said.!!
- jokethrowaway 6y agoI think you're right. The economic stimulus is mostly going in rich people's pockets which happen to like the idea of BTC and Tesla. They're likely worried about inflation, so they need to invest the money. And that's how you get BTC and Tesla's meteoric rise.
- smabie 6y agoIf by "rich people" you mean institutional investors, then yes. The flows into crypto from institutional investors is absolutely staggering. And it will only continue. This is just the beginning. Even if the returns of btc were poor, it would still be a very attractive investment as uncorrelated assets boost the risk adjusted returns of a portfolio.
- sunshinerag 6y agoYour armchair analysis is on the mark. in a fiat dominated world, any market distortions caused by monetary mismanagement (money printing through QE, asset inflation) is not visible as everything in the market is priced in the same underlying asset (USD globally). Since bitcoin is outside this system it is actually holding up a mirror to the increasing worthlessness of the USD and other mismanaged fiat currencies.
- SamBam 6y ago> as everything in the market is priced in the same underlying asset > the increasing worthlessness of the USD I think you must be using words different from what I take them to mean, which means you can draw radically different conclusions from how I read them. If everything in the economy is tied together, such that $10 is still an hour of work at a grocery store, and $10 still buys you a lunch or three gallons of milk, and $10 still buys you 4 gallons of gas, etc etc, then I don't see how you can say that there has been some kind of "secret" sky-high inflation over the past few years that is only detectable "from the outside." Inflation is defined by the purchasing power of money within the economy. If that's not changing, inflation isn't happening. Pointing to a single asset whose price is fluctuating wildly and insinuating that that is the only real source of truth, and that literally everything else is hiding the true cost of living seems to be just showing what you want to believe. (Note, I'm not saying that there's been no inflation. It's been about 2.5%/yr over the past 20 years. But simply that the notion that it isn't visible from "inside" the economy is contradictory.)
- keithwhor 6y agoTo my understanding, inflation -- and the causes of such -- is something that can only really be assessed ex post facto. What's being asked is, "is what we're seeing a warning sign of inflation-yet-to-come?" Rephrased, "are people bullish on technology stocks and Bitcoin because they're speculating that there's major fiat inflationary risk and these asset classes are most likely to hold value?"
- IfOnlyYouKnew 6y ago
- hertzrat 6y agoIf almost the entirety of the money ends up, in the medium run, in the hands of a few wealthy people who want to invest, it explains the lack of inflation for everything but investments
- imtringued 6y agoConsider that the money is mostly going to the owners of assets. Assets have the unfortunate property of only giving returns to their owners and most people simply do not own assets so it's an incredibly poor way of introducing money to consumers.
- hartator 6y ago> the price of things like groceries, beer and travel double or triple what they were in 2019. It's already the case. Not 2x or 3x but double digits inflation on groceries notably meat products won't be surprising when we do the math next year.
- djur 6y agoOverall inflation is at roughly the same nearly flat level it's been for a decade. Food has gone up and energy has gone down, and both of those are easily explained by coronavirus-related supply and demand shifts.
- imtringued 6y agoIf that were true then it would be time to rejoice and watch underemployment disappear. The central bank can then unload its balance sheets and reduce inflation to sustainable levels. If that does not help you can also increase taxation to take care of inflation. There are a lot of tools that can trivially deal with too much inflation but with deflation the only tool you have is the central bank pumping money into the market and so far it is failing to achieve its stated goals.
- Bombthecat 6y agoWhy do you think that money would ever reach normal people? Or stays in stock /bitcoin until sind and then gets reinvested to make more money...
- yourapostasy 6y ago> After all, you can only charge what consumers can afford to pay. In the US, it is more like "you can only charge what consumers can go into debt for". The self-correcting force of consumer inflation on price discovery has been time-delayed buffered and confusing price signals for a long time for select industries by acommodative consumer debt issuance. Without that effect upon price discovery, I suspect the number one reason bankruptcies occur to consumers to trade categories every few years as the inflation works its way through different key industries and their customers. Which is why US personal bankruptcy has been quite consistently caused by medical bills for decades [1]. When/If this inflation wave takes root in the consumer sector, it first has to overcome the deflationary secular bias that has plagued developed world economies for a few decades. I suspect this is because price discovery in wages has been quite robust, but in goods and services it is obfuscated by many means (consumer debt issuance is only one of many mechanisms), and the end effect is people are functionally broke. If it breaks that deflationary bias, then it will break a great many households who cannot bear inflation while their wages stay functionally unresponsive to the same inflation. If that happens, then I expect the deflationary bias to turn into a depression. [1] https://www.debt.org/bankruptcy/statistics/ https://www.debt.org/bankruptcy/statistics/
- keithwhor 6y agoThanks. This is super interesting. Can I rephrase to make sure I understand? What you're saying is that; due to debt issuance in the US, it's hard for commodities and consumer goods to be priced efficiently. I interpret "confusing price signals" to mean that e.g. Apple can charge $1k for an iPhone and sell out to families who wouldn't typically be able to afford it, but the price of bread remains the same. Your medical bill comment -- you're basically saying that when one of these families hits a statistically predictable snag, they're instantly bankrupt because they've always been functionally broke, propped up by the consumer debt industry? And so you're saying that most commodity goods face deflationary pressure as a means to stabilize the market? So if the price of commodity goods does increase significantly beyond the capacity of debt issuance, we're likely to see a depression?
- yourapostasy 6y ago
- shimonabi 6y agoArmchair economists have been predicting inflation since 2008.
- brianobush 6y agoAnd they were right; it has been with us all the time. Look at health care and food.
- imtringued 6y agoIf that were really true the trivial fix would be to train more medical personnel and invest into more food production. In reality it's just a temporary corona related increase.
- vbtemp 6y agoAnd housing. But since cheap crap remains just has cheap and crappy as ever, somehow some people take that to mean inflation isn't a thing?
- radiator 6y agoYou are not missing anything, QE means the value of the currency has dropped, there is no escaping this simple fact. Whether it can be hidden for a while and for how long, remains to be seen.
- Traster 6y ago> Bitcoin are "shock absorbers" of sorts, or early signals of inflation-yet-to-come. Bitcoin doesn't go up because inflation is coming. The current value of bitcoin is an early indication of people betting on inflation. There doesn't need to be inflation, there only needs to be an expectation of inflation for investors to pile into bitcoin, thus massively driving up the price. And investors piling in will drive the price massively because there's a fixed supply of bitcoin so the price is entirely driven by demand and the current present value of all the bitcoins in existence is still ~500Bn, the same amount as a company on the stock excahnge. The price of all the gold in the world for comparison is ~10Tn. Or to put it another way, if inflation now doesn't happen, the price of bitcoin looks ridiculous and there'd be a massive crash as everyone floods back out. In fact, further than that, if inflation doesn't sky rocket then the value of BTC looks silly.
- kart23 6y agoYes, many have speculated that as oil and gold prices in the past acted as hedges against inflation, btc may very well be that next place that investors go in times of heavy inflation. If liquidity is good, I think that this works. But the problem is that liquidity in bitcoin is so different from other classes of investments, and we don't fully know what is possible with this kind of market yet.
- mrfusion 6y agoHow do you explain gold though? It certainly hasn’t kept up with bitcoin.
- deleted 6y ago[deleted]
- jcranmer 6y ago> It feels like the sky-high valuations of technology companies and Bitcoin are "shock absorbers" of sorts, or early signals of inflation-yet-to-come. If we assume the market is efficiently pricing these assets (like AirBnB's IPO) then it could very well be that the actual value of a fiat dollar has dropped dramatically -- making sky-high valuations more reasonable To me, the most reasonable interpretation of these valuations is a savings glut. People are being given extra income, but instead of going out and spending it on more impulse purchases (such as fine dining or an exotic vacation), they're shoveling that into savings accounts. And assets that reflect a long-term saving mindset--real estate, stocks--are going up in price, while more immediate consumptive assets (e.g., food) are staying stable. > wouldn't be surprised to see the price of things like groceries, beer and travel double or triple what they were in 2019. That would be an effective inflation rate of 100-200%. If you're assuming that would happen within a year, the number of countries right now with that high of an inflation rate is 3: Venezuela, Zimbabwe, and Iran. Even the developing world doesn't regularly see inflation quite that high, you'd expect more like 10-30% annual inflation for those countries.
- wcoenen 6y ago> We've injected trillions of dollars of fiat into the economy this year When the government issues debt and then uses the money to send out cheques, that money had to come from investors in the first place. So the money was reallocated, not created. (New assets did get created: someone is going to hold those bonds and count them as part of their assets. But they can't use these bonds directly to buy groceries.)
- haolez 6y agoLet's inject quadrillions, then!
- acover 6y agoI think quantiative easing added trillions of dollars during covid. https://en.wikipedia.org/wiki/Quantitative_easing https://en.wikipedia.org/wiki/Quantitative_easing
- wcoenen 6y agoWhen the government issues bonds, they sell them for commercial bank money, the same type of money in your bank account. When the central bank later buys those bonds from banks (they never buy them directly), something different happens: the bonds are exchanged for "bank reserves", a different type of digital money that only exists as numbers in the central bank's database. This "money" cannot be used to buy groceries.
- 6y ago
- wtvanhest 6y agoI have been buying small amounts of bitcoin since around 2015. I have a very small portfolio, but growing? Recently I have had friends that are very far from the tech scene, but well versed in investment risk pick up BTC as institutions announced the onboarding of coins. I have no idea if $30k / btc is reasonable or insane, but I think we will know when bitcoin gets to the final price as the correlation to gold gets closer to 1. Housing price is up, but not rent (all over US), that is driven by lower rates rather than inflation. All that said, a ton of money was dumped on the market. We won't know until later in the year what the result of that is.