Wen All-Time Highs?

Insights
• Mar 01, 2024
Wen All-Time Highs?

by Ryan Shea

February proved to be a good month for crypto prices. The rally that began in earnest in late 2022 extended by another 37% as measured by the Trakx Top 10 Crypto CTI. Given all of the focus on ETFs over recent weeks, unsurprisingly, most crypto players were keeping a close eye on the performance of the seminal cryptocurrency. After finally breaking away from the psychologically significant $50k mark, Bitcoin blasted through $60k in a matter of days. As a result, it now sits within spitting distance of the all-time high achieved in November 2021 (more on this in a bit). With the next halving – a bullish price catalyst if this year’s event goes the same way as the first three1 – less than 50 days away, many crypto players see a new record high for Bitcoin as imminent, a sentiment boosting development that would benefit the entire crypto universe.

AI Frenzy Redux

One of the key drivers of crypto markets last month was renewed excitement surrounding AI. Nvidia, the tradfi market darling, announced that revenue in the current period would be $24bn, considerably above the consensus forecasts of Wall Street analysts. Moreover, in his accompanying statement CEO Jensen Huang said “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations.”

This unambiguously bullish assessment not only provided a significant boost to Nvidia’s stock price (its market cap rose $270bn in a single day – a record), and hi-tech stocks more generally, it also prompted a surge in demand for the tokens of AI-related crypto projects. This move was captured by our recently introduced Trakx AI CTI, which gained more than 100% last month – 4X the price appreciation of Nvidia’s stock price!

Unlike the current centralized AI leaders, such as OpenAI, Google and Microsoft, these crypto-based AI projects offer users a decentralized alternative that leverages the power of open source code. As outlined in our latest research note, we judge there to be considerable potential for disruption from such players especially if, as widely assumed, AI becomes a larger, possibly integral, part of our everyday lives.

Owners of the LLMs (large language models) that drive AI have a great deal of power because they have the ability to control user access and can directly influence, or even censor, model outputs. Under a centralized model, this power is concentrated in the hands of the few. Not only is this operationally risky (this month Open AI’s Chat GPT started outputting nonsensical responses after a bodged UX upgrade – see image below) but it also means the technology is open to abuse because it is far from assured that the interests of those in charge of these private companies align with the broader public. Such concerns are no longer in the realm of theory. Google’s newly released AI image generator Gemini came under heavy user criticism a week or so ago after it produced politically-biased (read: woke) outputs and the company was forced to pull access to it temporarily - see images.

Wen All-Time Highs?

Source: twitter

The more integrated AI becomes in our daily lives, the greater the perceived risks arising from centralized AI, and hence the greater the value users will ascribe to less power-concentrating alternatives. Ultimately, of course, this value accrues to investors in these decentralized projects, which helps to explain the sizeable price gains in their native tokens witnessed over the past month.

Residual Rate Risk

Amid all of the positive sentiment, one factor that took some wind out of the sails of the crypto bulls was the macro outlook, specifically, US monetary policy.

As I outlined in the previous monthly, US interest rate futures were discounting a fairly swift and aggressive easing cycle from the Fed this year – an outlook that was at odds with US macro data showing the economy continuing to hum along.

After last month’s stellar non-farm payrolls report (the 353k print was more than double even the most bullish sell-side forecast), slightly hotter than expected CPI inflation, and the minutes from the January FOMC meeting which showed US central bankers focused on the risks of cutting “too early”, investors have tempered their expectations for near-term Fed easing. According to the CME FedWatch tool, the timing of the first rate cut has been pushed from March to June – see image.

Wen All-Time Highs?

Source: CME FedWatch Tool

With 75-100bp of Fed cuts still priced for 2024, the failure of upcoming macro data to support a more dovish Fed stance remains a threat to crypto prices, but on the positive side with less easing now priced in (a projection compatible with the FOMC’s own projections), the downside is more limited than was previously the case2.

A Crypto Litmus Test

As noted above, after the recent rally many crypto investors are (im)patiently waiting for new all-time highs to print, especially in Bitcoin. However, it is worth noting that while Bitcoin’s price has yet to hit a new all-time high in USD terms, versus other currencies the November 2021 peak has already been exceeded. This was a point made by Balaji Srinivasan, a well-known entrepreneur in the crypto/tech world, in a recent tweet – see image below.

Wen All-Time Highs?

Source: twitter

Looking across his list of fourteen countries it is clear that they do not have a great deal in common when it comes to geographic location, population size or economic size (nominal GDP). One tempting conclusion is to think that Bitcoin denominated in these currencies is already at record highs because these countries are associated with high political/governance risk and/or social instability. This may be true in some cases, but it does not fit Japan, a country renowned for its strong social consensus/cohesion and widely considered to be low on the political risk scale.

Nevertheless, there is one common thread between all these countries, something that is very pertinent to cryptocurrencies.

What is it?

Well, below is my response to Balaji’s tweet.

Wen All-Time Highs?

Source: twitter

Odd as it may seem at first glance, the commonality is all these countries have high inflation, either current (Nigeria, Turkey, Argentina3, Lebanon and Sudan) and/or prospective due to unsustainable fiscal policies as evidenced by high budget deficits and net government debt (Japan, Egypt, Pakistan, Ghana and Nigeria) - something Balaji clearly appreciated given he hit the like button to my tweet.

The link between high contemporaneous inflation and demand for cryptocurrencies is (hopefully) obvious. Inflation4 is a measure5 of the rate of increase in the aggregate price level meaning less goods and services can be purchased for a given amount of fiat money; the higher the inflation rate, the greater the decline in fiat money’s purchasing power.

During periods of high inflation – particularly if sustained - the typical response of consumers is to switch either to harder fiat currencies (the US dollar being a popular choice for much of the post-WWII period) or to other items able to maintain their purchasing power that satisfy as many money-like traits as possible. Historically, gold has played such a role, but in our digital age Bitcoin and other finite supply cryptocurrencies provide the same protection but with added functionality (gold cannot support digital transactions for instance).

The link between unsustainable fiscal policies and demand for cryptocurrencies may be somewhat less obvious. To understand why it exists one needs to recognize that fiat money is “backed” by the fiscal solvency of the nation-state issuer.

More formally, if the net present value of future budget surpluses exceeds the current level of debt the government has sufficient economic resources to draw upon to be able to repay the debt. In such circumstances, fiat money is able to maintain its purchasing power. But, if the current level of debt exceeds the net present value of future budget surpluses, and people view it as being politically impossible to correct via fiscal consolidation6, money’s purchasing power will, inevitably, fall. This is because at some point in the future the central bank will be coerced into funding the budget short-fall via the printing press. There are numerous examples of such behaviour in the past as Satoshi pointed out in the Bitcoin white paper. Importantly though, this is not a phenomenon that can be consigned to the scrap heap of history. Just last year the IMF published a report entitled “Elements of Effective Policies for Crypto Assets” which contained the following observation:

A lack of credible domestic institutions and policies is the most common root cause of substitution pressures into foreign fiat currencies, and the same is the case for the pressures to substitute into crypto assets [emphasis added]. A weak monetary policy framework (MPF), combined with large fiscal deficits and government pressures for central bank financing [emphasis added], are likely to undermine monetary credibility and instigate currency substitution (Adrian et al. 2021; IMF 2020). Therefore, the most effective way to limit substitution into crypto assets is to develop effective monetary frameworks and fiscal and monetary policies that maintain monetary credibility”.

In their three decade-long battle against deflation, Japanese policymakers have accumulated huge government debts, half of which is owned by a central bank whose balance sheet is larger than a year’s worth of the national output of Japan’s entire economy. Yes, contemporaneous inflation may still be moderate, but if those fiscal metrics don’t scream unsustainable I don’t know what does. Little wonder then Bitcoin has risen 16% above its November 2021 all-time high versus the Japanese yen and is showing scant signs of price deceleration.

Finally, by way of a small addendum I included the US in the above table. Inflation is lowish – albeit above the Fed’s 2% target – but the level of net government debt is high both by international and historic standards. Most concerning of all, the budget deficit exceeds that of all the other fourteen countries included in the table. Given this, the anticipation of Bitcoin imminently hitting a new all-time high against the US dollar is not at all fanciful, rather it is entirely consistent with economic logic.

Roll on the halving.

PS. Less than nine days after his original tweet Balaji posted a follow-up tweet showing Bitcoin was above previous all-time highs in local currency terms in more than 30 countries. This larger group represents 60% of the world’s population and 30% of global GDP. Unlike the original group, not all of these additional countries have high inflation - either contemporaneous or prospective. This does not, however, invalidate the above analysis; there is a reason why Bitcoin hit new all-time highs in those countries first – they were just the low hanging fruit. Instead, it is simply a testament to the strength of Bitcoin’s price momentum at present.


1Halvings are when the block reward earned by miners every time a block of transactions is successfully created is cut by 50%. A design that ensures the maximum supply of Bitcoin is capped at 21 million. Halvings occur every 210,000 blocks making it a quadrennial event given an average block time of 10 minutes.

2Assuming, of course, upcoming data are not so strong that investors start to price-in a Fed rate hike!

3The recent election of Bitcoin favouring political maverick Javier Milei as President may represent a sea-change. Only time will tell.

4Inflation is always positive. A fall in the aggregate price level is called deflation. The latter should not be (but often is) confused with disinflation, which is when the rate of increase in the aggregate price level is falling, ie becoming less positive. Economics 101 lesson concluded.

5Albeit imperfect - I admit.

6Cutting government spending and/or r

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