Investment

Zen and the Art of Bitcoin Price Maintenance

Back in 2008, someone, or something, called Satoshi Nakamoto published a discussion paper called: “Bitcoin: A Peer-to-Peer Electronic Cash System.”

It decried the way financial institutions controlled the electronic transmission of money, saying it produced friction, costs and disputes between market participants.

The Nakamoto paper wanted to introduce Zen-like calm: “What is needed is an electronic payment system based on cryptographic proof instead of trust.” 

Some talk of an inflationary post-contagion Apocalypse which destroys fiat currencies, but leaves bitcoin untouched. Nearly all say bitcoin is a better store of value than gold

Many family offices, eternally suspicious of the motives of financial intermediaries, became converts. Several have come to see bitcoin as a safe haven, unexposed to government malfeasance. 

Sadly, you can never avoid exposure to the emotions which drive the markets. Stunning returns from bitcoin over the last year means greed has corrupted Nakamoto’s dream of a fair financial system. Fear of the regulators has driven a collapse in its value of a third during May. 

Nassim Nicholas Taleb has argued that bitcoin is now seen as an investment, a store of value or a religious cult, rather than a way to improve electronic money transmission.

According to JP Morgan research, institutions are starting to switch back to gold, not least because it is hard to see such a volatile investment as a store of value. 

Prior to May, some traders developed sufficient faith in bitcoin to use it as collateral against leveraged crypto bets. When bitcoin cratered, the bets folded. The traders won’t be doing that again.

We should never underestimate the power of emotions. As well as making us ecstatic or angry, psychologists, led by Joseph Ledoux and Robert Zajonc, say they play an important role in reinforcing decisions.  Paul Bloom says emotions are part and parcel of our perceptions.

We could easily put a price on a fob watch, for example. But if we learned it once belonged to a grandfather, its worth in our eyes would be far higher.  

Buddhist priests know quite a lot about this. They argue that we are deluded in how we see reality, by viewing it through the lens of stories we repeat about ourselves, and others. 

Nakamoto’s plan would have brought certainty to the financial system, for sure. But the rise and fall of the bitcoin share prices has created an emotional override. 

Buddhist priests would not have a view on bitcoin. But they say you cannot approach enlightenment until you can rise above all this.

In his book, Adaptive Markets, financial economist Andrew says decisions rely on achieving a balance between parts of the brain: “We are more efficient learners with emotions, than without.” 

But you need fundamental analysis relating to facts on the ground, to provide balance to your emotional drive. And the lack of certainty over bitcoin’s future role in finance strengthens the power of emotions. 

Bitcoin supporters have done their best to develop narratives, often delivered with remorseless certainty, to support their point of view. 

Some talk of an inflationary post-contagion Apocalypse which destroys fiat currencies, but leaves bitcoin untouched. Nearly all say bitcoin is a better store of value than gold. 

Hedge fund manager Paul Tudor Jones sees the strength in this. He views bitcoin as the “fastest horse” among the world’s safe-havens. Bridgewater Associates Ray Dalio declares: “I’d rather have bitcoin than a bond.” 

Others, most recently CNBC pundit Jim Cramer, say setbacks in the price of bitcoin have always fuelled a rally. They believe bitcoin will be defended by an army of believers, known as Hodlers, who will never, ever, sell. 

During May, however, Hodlers saw the value of their bitcoin holdings tumble from $60,000 to $38,000. A survey of crypto hedge funds published by PwC was previously banking on $100,000 this year. This is not great news for any self-respecting Hodler, who cannot draw on the consolation of a dividend income when going gets tough.  

It has also become clear that governments are emotionally unprepared to hand control of their currency markets to the bitcoin bunch, particularly given they may want to create their own cryptocurrencies. 

The Chinese government insists its financial institutions cannot accept bitcoin as currency. It wants to crack down on bitcoin miners, who use powerful computers to verify transactions.

The US Treasury has expressed concern over bitcoin being used to avoid tax. The US Federal Reserve has warned that cryptocurrencies could destabilise the markets. 

The European Central Bank has warned bitcoin is “risky and speculative.” The Bank of England calls cryptocurrencies “dangerous”. 

By coincidence or not, Elon Musk has reversed his plan to let Tesla customers use bitcoin to pay for its cars, although he says his corporate treasury will not sell its holdings.

He said he had taken against the way its miners verify transactions by using powerful computers which consume as much energy as a country. 

Ecological lobby group Greenpeace has decided against accepting donations in bitcoin for the same reason. For many, the emotions behind saving the planet will always trump bitcoin. The miners appear desperate to go green. 

But Nassim Taleb adds he doesn’t see much future in claims that miners could use renewable energy, because there will always be better uses for electricity than a punt on bitcoin.

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