Crypto Comedown: After The High

• Apr 29, 2024
Crypto Comedown: After The High

by Ryan Shea

As I alluded to with last month’s title, “Correlation breakdown”, crypto prices are no longer moving in tandem with other tradfi asset prices as they were during the “everything bubble” and its subsequent bursting. However, while there has been no discernible relationship between daily returns of the major asset classes over recent months - low to zero correlation – in level terms it is notable that stocks (proxied by the S&P500), crypto (proxied by Bitcoin in US dollar terms) and gold (in US dollar terms) all hit new record high prices recently – see image.

New All-Time Highs: Gold, Bitcoin, Stocks

Crypto Comedown: After The High

Source: Tradingview

One does not have to look very hard to see what has been contributed to pushing up the nominal price of these assets. Indeed, I outlined the rationale in a short tweet thread1 posted a few weeks back (replicated below):

- During the Great Recession (2007-9) I took a look at the US Congressional Budget Office projections for US government debt.

- It showed debt as a percentage of nominal GDP stabilizing just over 50% after the worst economic downturn since the Great Depression before it began its inexorable rise to 300% over the next seven decades.

- At the time it looked like an excel goal-seeked forecast by extrapolation. One of the most unreliable forecast methods out there.

Crypto Comedown: After The High

Source: CBO

- 15 years later I can confirm that the CBO’s forecast was indeed way off. The CBO were way too optimistic!

- US government debt is far higher than the CBO projected in 2009. It stands at 100% rather than the predicted 58%.

Crypto Comedown: After The High

Source: CBO

- Although the Covid pandemic accounts for some of the overshoot, it certainly does not account for all of it. In fact, the US debt ratio was already much higher than forecast by the time of the Covid outbreak.

- That the original and already scary CBO projection for US debt proved too optimistic should be cause for great concern.

- With the US government still running sizable budget deficits2 and the Fed struggling to ease given inflation is not playing ball is it really that surprising analogue and digital gold (Bitcoin) prices have recently surged to new all-time highs?

Fiscal Dominance

Implied within the conclusion is a new buzz phrase that has been doing the rounds in macro-themed commentary; a phrase that prior to the recent memetic outbreak was only known to eco-nerds, and of those only a very small subset – myself included - anticipated it would become an important driver of the future macroeconomic landscape (see image – check out the date3!).

So, what is fiscal dominance?

The best definition comes from a speech given by former Bundesbank President Weidmann in May 2013. He characterized fiscal dominance as:

a regime where monetary policy ensures the solvency of the government. The traditional roles are reversed: monetary policy stabilises real government debt while inflation is determined by the needs of fiscal policy.”

At the time Weidmann made his speech, and for several years after, pretty much every investor dismissed concerns about the possible subjugation of monetary policy and the prospect of a more inflationary future. After all, inflation rates were very modest in the post Great Recession period, private sector inflation expectations were well-anchored – to borrow the lexicon of central bankers - and government bond yields were similarly low by historical standards.

However, when the inflation genie was finally released from the economic bottle following the Covid pandemic these concerns quickly surfaced4.


Because governments did not utilize the relatively benign macroeconomic conditions in the decade following the Great Recession to make much progress on the fiscal consolidation front. This was a grave error on their part, and the bill for this error is now being paid in the form of diminished confidence in the ability of fiat money to maintain its purchasing power5.

To appreciate why, we need to understand the mechanics of fiscal dominance. As I outlined in a 2022 research note one historic precedent is the US in the 1940s6. To wit,

[T]he Fed had an explicit policy objective “to stabilize the securities market and allow the federal government to engage in cheaper debt financing of World War II.”

They did so by adopting a formal yield curve target [Ed. Note: Yield curve control (YCC) in modern parlance], pegging nominal short and long-term interest rates at low levels. This policy, which was introduced in 1942 did not end in 1945 when peace was declared but persisted until 1951 by which time the purchasing power of the US dollar had halved!

It only ended7 when the FOMC, faced with 20% inflation rates, collectively refused to maintain the existing situation. President Truman and Treasury Secretary Snyder, in contrast, were pushing for the bond yield peg to continue and little wonder given that it proved a very effective method for lowering the debt-to-GDP ratio (from a peak of 121% in 1946 it dropped almost 50 percentage points by 1951).”

This Time Isn’t Different

For anyone tempted to think such things could never occur in our modern8 financial age, bear in mind that Japan is currently in a very similar macro position to the US back then. Its government is heavily indebted (200%+ of GDP), the majority of which is owned by the central bank, an institution that has been struggling to extricate itself from its zero rate policy in recent years9. (Ed. Note: The Japanese yen has been slumping on the foreign exchange markets as a result of the sustained interest rate differential of other leading economies, most notably the US. The move has become so disorderly that the MoF were this month compelled to intervene).

Japan may be the vanguard of fiscal dominance but it is by no means alone as a simple scan around the wonderful world of government debt to GDP ratios confirms. This is something investors are increasingly paying attention to, and for good reason.

Investors who fail to think in advance and prepare for the possibility of a significant monetary policy / inflation regime change not only risk significant underperformance of their portfolios as and when the shift occurs – the exact timing of which is extremely hard to predict - but their ability to either hedge or close existing positions at this point could prove extremely costly as financial markets are likely to be one-sided and liquidity poor. Given this, the prudent approach is to position, to a greater or lesser degree, for such a shift ahead of time.

Under fiscal dominance, nominal bond returns are fine because nominal yields are capped but they perform poorly in inflation-adjusted terms as real yields are pushed firmly into negative territory to erode the real value of government debt. Hence, it makes sense to tilt the asset allocation where possible10 in favour of assets better able to keep pace with higher inflation.

Stocks constitute one such asset class because the future cash flows (earnings) their valuations are based on are also nominal and hence should rise in tandem with higher inflation. This is the theory at least, but this outcome is far from certain because stock prices are also determined by how much investors are prepared to pay for these future cash flows. One popular measure of their preparedness to pay is the Cyclically-Adjusted Price-to-Earnings (CAPE) ratio developed by Professor Robert Shiller. His analysis confirmed that higher CAPE ratios are associated with lower future stock returns and vice versa, making it a useful valuation tool for equity markets.

As can be seen in the chart below, the latest read (April) of the CAPE ratio is 34.4, which is extremely elevated by historic standards (and, more than double the level it was during the 1940s in the US). This suggests investors are already paying handsomely for future earnings and probably wary of paying even more in an inflationary regime, especially when there are other equally obvious candidates such as finite supply commodities like gold and cryptocurrencies.

US CAPE vs. Long-term Interest Rates

Crypto Comedown: After The High

Source: Robert Shiller via (

Rising Geopolitical Tension

Consistent with the fiscal dominance meme gaining traction gold prices have been on a bit of a tear recently, surging 16% over the past two months. That this move has coincided with a significant escalation in global geopolitical tension, centred on Israel and Iran but with Ukraine and Russia still rumbling in the background (not to mention China/Taiwan), is probably more than just coincidence. After all, gold has an established track record of acting as a safe haven asset.

The surprise then is Bitcoin, widely considered in crypto circles to be “digital gold”, because while gold rallied in the aftermath of the Iranian strike on Israel, its price fell sharply – a move all the more perplexing given it occurred just prior to Bitcoin’s fourth halving, where the block subsidy paid to miners is cut by 50%, an event that historically has proved to be a bullish price signal for the world’s seminal cryptocurrency.

What gives?

Untangling The Threads

For the crypto naysayers (see below for one of the most vocal Bitcoin critics), this divergence is simply validation that Bitcoin isn’t really digital gold but just a speculative asset with zero intrinsic value that thrives in good times but declines in bad times.

If At First You Don’t Succeed...

Crypto Comedown: After The High

Source: Twitter

In my view, this is fundamentally flawed thinking.

Bitcoin is debt-free money and there are only two known assets with such characteristics – the other being gold – as Ray Dalio, founder of Bridgewater and a man the tradfi world listens to, recently acknowledged in a recent LinkedIn post. This means Bitcoin is scarce not only in terms of its supply (21 million for 8 billion people) but also in terms of its characteristics. That is what gives it intrinsic value. Moreover, transaction data doesn’t back up the Bitcoin is just a speculative asset narrative.

Diamond Hands

Blockchain analytics firm Glassnode tracks the age of Bitcoin holdings (see chart below), something that is readily do-able because of the public visibility of blockchain transactions. According to their metrics, two-thirds of the circulating supply of Bitcoin had not moved during the past 12 months. Over this time frame, Bitcoin’s price has rallied 150%! Think about that for a sec.

Crypto Comedown: After The High

What this data shows is that the vast majority of Bitcoin owners are very price insensitive. Such behaviour is not what one would expect from speculators, rather it is behaviour associated with diamond hands, investors resolved to hold onto a financial asset and ride out price volatility because in their minds they are playing for much larger stakes. For instance, if (when11?) the general public finally understands that Bitcoin is one of only two non-debt monies that can offer protection against a government relying on rising inflation to maintain fiscal solvency (aka fiscal dominance), it is not unreasonable to expect these two monies to have equivalent market caps. At current gold prices, this implies a Bitcoin price in excess of $500,000 (more than 8X the current price).

That said, and somewhat ironically, as I have previously pointed out, such a preponderance of diamond hand Bitcoin investors means Bitcoin prices are predominantly influenced by the relatively smaller cohort of short-term speculators because diamond hand Bitcoin investors have no motivation to transact at prices anywhere near current levels; they are, in effect, out-of-the-market. I appreciate that this may be a subtle point, but it is important because it means that even though Bitcoin’s price action appears entirely consistent with the speculative asset narrative beloved by the crypto naysayers, the underlying reality is very different. In the long-term it will be the diamond hands that determine the trajectory of Bitcoin’s price.

One Crucial Difference

While Bitcoin is – rightly in my view - considered a digital version of gold, and hence logic would suggest its price should behave in a similar fashion to the gold price, there are circumstances where the “digital” part of the definition matters. I would argue that the probability (or the perceived probability) of such circumstances rose recently, and this could offer an explanation for the mid-month divergence between these two non-cash flow generating assets.

What do I mean?

The crucial difference between gold and Bitcoin is that the former is an analogue asset. Transferring ownership of gold simply requires two people to agree to swap it physically in exchange for some good or service (let’s take robbery off the table). Just like cash, it can facilitate economic transactions in a world where there is no functioning electrical grid or internet.

Bitcoin, by contrast, can’t – at least for the time being. The problem is not the SHA-256 hash function that miners are required to solve to a pre-defined degree of difficulty because, believe it or not, Bitcoin mining can be done by hand, albeit it at a paltry rate of 0.67 hashes per day, per person. The problem is transactions need to be broadcast to geographically dispersed nodes that form Bitcoin’s decentralized network to check transaction validity and achieve consensus in order to extend the blockchain.

Bitcoiners have been working hard to make the protocol more resilient. Transactions have been relayed using mesh networks, SMS, and even over radio waves. Meanwhile, Blockstream – the company behind the Lightning Network – has gone as far as to establish a satellite network that relays Bitcoin data back to earth12. As a result of these innovations, there are viable workarounds when the internet is down. However, having no electrical power remains a deal breaker because without power, communication between Bitcoin nodes becomes nigh impossible.

(To those who argue the fiat money system also fails without power, this is true but only for electronic commercial bank money. Physical cash already in existence can support transactions in just the same way as physical gold can).

Given how embedded the internet and ecommerce have become in our daily lives, no “juice coming out of the sockets on the wall” is problematic (a grave understatement). Governments and corporations are therefore strongly incentivized to keep this vital civil infrastructure up and functioning. Barring the odd black/brown-outs, they have tended to be fairly successful in achieving this outcome. However, there are some very obvious scenarios where ongoing success is questionable: nuclear strikes, EMP attacks or terrorism.

The probabilities of events such as these happening, resulting in a “grid-down” situation, is normally considered remote. However, given the recent surge in geopolitical tension involves nation-states that are either in possession of nuclear weapons and/or are known to support terrorist organizations, this probability has increased. It is – hopefully – still very small, but as the epitome of the high-impact, low-probability Black Swan event, buying something that could provide some protection could well make sense. (Of course, in the event of an all-out nuclear Third World War who cares about protection because there will be no one left alive to protect as highlighted by a just-published book by Annie Jacobsen on the subject13).

As things currently stand, gold provides better protection in a “grid-down” situation than Bitcoin or other cryptocurrencies, because it is able to support fully-offline transactions (sorry maxis, but putting Bitcoin in your bug-out-bag14 makes no sense).

Overcoming this problem is an active area of research, and not just for private crypto projects. Central bank digital currencies (CBDCs) also require offline functionality if they are to be close substitutes for fiat money. In many regards this is very much the holy grail of crypto because not only would it make crypto as apocalypse-resistant as gold or bank notes, it simultaneously solves the problem of scalability15 (talk about a win-win!).

Given the combined intellectual power being directed towards solving the fully-offline transaction problem for digital money, my bet is that a solution will eventually be found. Until then, though, gold is a better option for those looking to hedge against some form of “grid-down” event16 and hence it should outperform when the probability of a Mad Max type scenario unfolding is on the rise as was the case mid-month, but thankfully now seems to be easing.

1 I have removed some of the humorous graphics to save space, if you wish to see them please give me a follow @CryptoeconRyan – much appreciated.

2 Astoundingly, this is taking place with an unemployment rate that remains extremely low relative to the cycle-average.

3 Black Swan Economic Consultants is a global macro advisory company I founded in 2013.

4 As I have argued in a previous research note, QE was much more effective at generating inflation during the pandemic because the way the fiscal stimulus was injected into the economy was different than during the Great Recession. This effect was amplified due to the detrimental impact the pandemic response had on global supply chains – see:

5 Fiat money is backed by debt, so if the value of the debt is viewed as compromised the ability of fiat money to maintain its purchasing power is also compromised – see:

6 Actually yield curve control began in the mid-1930s to stop the US economy double-dipping into another Great Depression, but it was implicit in the early years.

7 The legislation bringing the interest rate peg to an end is known as the Treasury-Fed Accord – see:

8 People fail to appreciate that every age feels modern, at the time!

9 This struggle will cease once the call comes in from the Japanese Ministry of Finance.

10 Financial repression is often associated with fiscal dominance because the central bank doesn’t want to end up owning the entire government bond market so it forces certain financial players to continue to own bonds, ie commercial banks, insurance and pension funds etc. Capital controls are also often implemented for similar reasons.

11 Should that be “wen”?

12 Data connectivity is one-way meaning users cannot send date to the network. It is read only, not read and write – see:

13 See: For those who prefer a shorter podcast version, Annie recently appeared on the Lex Fridman podcast discussing her book – see:

14 If you don’t know what bug-out-bags are trying typing it into Youtube – boy are you in for a treat!

15 Supporting fully offline transactions means that transactions do not need to always be done on-chain, which is the source of the scalability issues for decentralized and secure cryptocurrencies.

16 Once solved, however, Bitcoin becomes better than gold for one simple reason. It is much more transportable than the yellow metal.

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