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Why a $631B Asset Manager Just Changed Its Mind on Bitcoin

by Nathaniel Whittemore
December 2nd 2020

Today on the Brief:

  • Libra is now “Diem”... More
321 Welcome back to the Breakdown with me and L. W. It's a daily podcast on macro Bitcoin and the big picture power shifts remaking Our World. The Breakdown is sponsored by crypto dot com. Next Addario and All nodes and produced and distributed by Coindesk. What's Going On, guys? It is Tuesday, December 1st, and today we're discussing why a $631 billion asset manager just changed their mind on Bitcoin. First up, however, let's do the brief first on the brief today. Libera is now D M. The Journey of Libera has been a wild one from grand ambition and great partners. If you'll remember, this was going to change the World Bank. The unbanked create a global stable coin backed by a basket of currencies that could serve as a new reserve asset. It had people like PayPal and Visa and MasterCard and eBay involved

. And of course, it ran headfirst into regulatory reality. And very soon it had slightly smaller ambition and different partners, as many of those brand name partners dropped out. Now it's gotten even smaller in its ambition and has even changed its name. Meet D M. the D M Association has 27 members, largely from the world of crypto and tech, and they're looking at a 2021 launch of a single dollar pegged, stable coin. They've also announced a number of new team members. The big goal of this name change, it seems, is to distance themselves from Facebook. The current CEO of the D M Association, Stuart Levy, argues that regulators air warming up based in part on moving away from Facebook. Quote, I think regulatory stakeholders really are welcoming and Mawr Autonomous Association. They want to see an association strong enough to make its own decisions and have a leadership team that is capable of directing the project. It is in part for that reason we decided to change the name to move from Libera to Diem

, and that will be effective Tuesday. He reiterated this and reiterated that there was now a new mandate for this project and said the original name was tied to an earlier iteration of the project that saw a difficult reception from regulators around the world and we've changed the proposition dramatically. Summing up the shift in prerogative of the association, Frank Chaparro from the Block wrote. Funny how liberal went from world changing financial inclusion. Play to a third party fintech provider. Next up on the brief today. Christine Lagarde Stable coin comments Christine Lagarde, the president of the European Central Bank, has been talking about a digital euro Ah lot, and the T L D R on all of her comments is sort of It's likely, but it also won't replace cash. They're interested, clearly, four stimulus and government intervention reasons. However, she clearly has a difference and sees the difference between a government sanctioned stable coin and the private model that exists today. On Monday, she published a magazine article

in which she said stable coins could threaten financial security. Quote. Using stable coins as a store of value could trigger a large shift of bank deposits to stable coins, which may have an impact on banks operations and the transmission of monetary policy. This is interesting because she is reading correctly that I think in many ways stable coins air basically euro dollars offshore, non regulated versions of a Fiat currency, and they do in fact, impact monetary policy. This, of course, is Jeffrey Snyder's whole argument that all of our bluster about the Fed's money cannon is wrong headed because since the rise of the euro dollar system and the shadow banking system, we've had very little ability Thio even know how much money is out there, much less impact the money supply. Interestingly, Lagarde also came specifically at Libera, saying that stable coins quote, particularly those backed by global technology firms, could present risks to competitiveness and technology. Autonomy in Europe when stable coins air backed by big text

, she said, quote their dominant positions may harm competition and consumer choice and raised concerns over data, privacy and the misuse of personal information. Perhaps that Dems switch wasn't so strange after all. Last up on the brief Today the Dow closes its best month in 33 years. Obviously, a ton of our attention has rightly been on Bitcoin punching through all time highs on Lee to, of course, roller coaster right on over which happened again this morning. But the Dow also had a massive closed this month, up 12%. It's best since January 1987. The S and P 500 rose 11% which was the best since April, and NASDAQ was also up 12%. There are, of course, two big causal factors. The first is vaccines. The fact that we're not just seeing promising research and evidence, but we're now in the stage of these vaccine manufacturers actively asking for approval. In fact, right now, 800 expert panel is preparing its list

of recommendations for who gets the first vaccines, and it seems that it's going to be frontline healthcare workers and nursing home residents on the top of the list. The second causal factor is the increasing smoothness of the Biden transition. This thing is actually happening. There are fewer questions now, and there are a fair number of known quantities in key economic positions, particularly Janet Yellen is Treasury secretary, as we discussed last weekend. So while there was a slight dip on Monday, there was another rise today, and the S and P 500 is up 1.2% and on track for another record close. With that, however, let's shift over to our main conversation how a $631 billion asset manager just changed their mind on Bitcoin. So, as I've repeated now, a couple of times, Alliance Bernstein is a global investment manager with 631 billion in assets. The research arm of that firm just produced a new note for clients. And as you'll see, the firm had previously ruled out Bitcoin as an investment asset in January

2018. But this new note by co head of the portfolio strategy team at Bernstein Research, Inigo Fraser Jenkins, starts I have changed my mind about Bitcoins role in asset allocation today. I thought, Actually, I'm going to switch it up, and instead of just giving you the summary, I'm actually going to read a full or mostly full version of the piece. I think it's that interesting in that worth hearing. So with that, let's dive in portfolio strategy, crypto currencies and asset allocation. I have changed my mind. I have changed my mind about Bitcoins role in asset allocation. In January 2018, we declared that it had no such role, but actually maybe we have to admit it does. What has changed is the policy environment, debt levels and diversification options for investors post the pandemic writing about crypto currencies after Bitcoin has staged a large rally in recent weeks, followed by a correction may inevitably sound like playing catch up as a strategist. It is depressing Li, like upgrading a stock after it reaches a new high. Given the volatility of Kryptos than no doubt over

tactical horizons, they can yet give up more of their recent gains. But this note is aimed firmly at the long term, not tactical horizons. The pandemic possesses some profound questions for the role of crypto and potentially transforms its role. This note is about two related aspects of crypto. The role of crypto and asset allocation and the way its potential as a medium of exchange affects the ability to implement policy. This is bound up in the questions and power of governments, and they're likely larger role in economies. Post Cove it. This, in turn, has massive implications for asset allocation. It is relatively easy to create a narrative of why demand for Kryptos might increase, given the economic status quo. Post Co vid a counter acting forces. What is the limit on supply? Bitcoin has a limited supply, but a multitude of kryptos have been created in theory, total crypto supplies unlimited, however, in this respect there, like Fiat currencies in practice on Lee a small number are used for investment does that any time the supply of Kryptos could be limited for practical purposes, though the exact enumeration of which Kryptos air on that list

will vary over time. The role of Kryptos and asset allocation inevitably leads to a discussion of what is money. In this light, the pandemic acts as both new force for and against Kryptos. On the positive side, there will likely be increased demand as a result of fiscal expansion, the likelihood of inflation, the likelihood that taxes increase and the change in the debate whereby MMT related policies air increasingly discussed. In other words, the greater role that governments will likely play in economies makes Kryptos potentially. Maura. Peeling these very same forces also may hinder Kryptos. If they get in the way of policy implementation, then governments might seek to constrain them. Details. Do crypto currencies have a role in asset allocation? When we pose this question in 2018, we concluded that they did not have such a role. We would like to shift that position and say, Well, actually, yes, maybe they dio there are a few ways to view this question. Probably easiest is to see this through the narrow lens of an asset allocation problem. We start the note with this. That is the least controversial way to address the problem. In this light, it becomes a purely empirical question

and avoids the quasi philosophical questions of what is money. There has been a market change here since when we declare that Bitcoin had no role in asset allocation three years ago. These changes have occurred both to the empirical return data of Bitcoin itself and also to the policy framework in which investors operate with regard to the former. The volatility of Bitcoin has significantly reduced, making it more attractive in its potential twin roles, both as a store of value and as a medium of exchange, given increases in volatility of other asset classes. This means that the relative volatility of Bitcoin to both golden equities has declined to historically low levels. However, the pandemic has also seen the correlation of Bitcoin to other major assets rise. The basic issue is that it is a liquid assets, so in times like early March, it could be sold easily and hence does not escape from a rapid cross asset de leveraging the correlation of Bitcoin to other assets has remained high. What does this mean for its role in asset allocation? We will come on to the big picture question later in this note. From a narrow, empirical point of view, the downward shift in volatility of Bitcoin makes it more desirable. But it's increasing. Correlation points the other way. The

peace then goes on to share a number of different ways to think about optimal asset allocation, which I would suggest you go look at. It's kind of not good for reading, but then we come to the next section that I do want to read. This episode is brought to you by crypto dot com, the crypto super app that lets you buy, earn and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto dot com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the APP, you can apply for the crypto dot com metal card, which pays you up to 8% cash back instantly on all purchases. Reserve yours in the crypto com app today, many investors want to be a part of the next bull run. Others seek to build their dream home, finally launched that startup or fund their education. Try next US instant crypto credit lines and borrow against any major Cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks and flexible repayment, not to

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. This phrase is used somewhat too loosely. Technically, a hedge is something that should move in a way to exactly offset another position. There is no good reason to suspect that a given Cryptocurrency should exactly move in a way that would counter act inflation in a given Fiat currency. Indeed, apart from a fall in the value of Bitcoin in March alongside of fallen inflation expectations for the last five years, the correlation between Bitcoin and inflation expectations has been close to zero. So the issue is really Maura General one of quote. Can Kryptos be expected to do well if inflation rises? This is important, since we would claim that equities, real estate and gold are inflation hedges. Related to this is the question of whether it can act as a diversify as inflation hedges. We've made the case in recent notes that the policy response to the pandemic is on balance likely to be inflationary, but we also acknowledge that there are strong deflationary background forces and also the likelihood that unemployment remains very high for an extended period of time. We think that on balance there is an economic argument that the outcome will be inflationary, though it is really politics that tips the balance in favor of inflation rather than macroeconomics

. The likelihood that the velocity of money may decline means that monetary expansion might need to be even greater and puts more emphasis on fiscal policy. In this reading, the driver of Bitcoin is similar to that. As for gold, it is debt levels of major economies. Having attained the same level at the ends of World War Two. There has been declining productivity of debt for decades. This potentially put semi permanent upward pressure on debt levels. That has implies that a greater amount of debt is required to produce a given level of GDP. Granted, the affordability of that debt is greater now, and in the US at least, this debt has been termed out to greater maturity ease. But this implies it is hard to reduce the debt stock. In Exhibit 10, we show the index exchange rate of major currencies against gold since 18 80 The evidence seems to be that currencies issued by sovereign face long term terminal decline against gold, either through revolution, war or growing debt. We note in passing that this ignores the effect of income paying assets. So, for example, equities denominated in U. S. D would clearly have beaten gold by a huge degree over this time for crypto bulls, the claim would be that they could potentially fill a similar role as

gold in this regard. Central banks, digital currencies and could kryptos be banned? Central banks have increasingly discussed the possibility of launching their own digital currencies, so called central bank digital currencies, or CBD CS. There are a range of possible advantages here in terms of payments technologies that are not in the scope of this note. One major innovation, however, would be that it would allow the possibility in theory of imposing negative interest rates. This is hard to do with conventional currency, as at some level of negative interest rates. It would lead people to withdraw their money from banks and stored at home. That is not desirable for a number of social reasons, increased crime being one, but it also imposes an effective lower bound on rates that banks can charge retail customers. If central banks are increasingly exploring such options, what effect did they have on crypto currencies? It is not just the potential desire to explore deeply negative rates. That could be an issue here as tax burdens likely rise, including well, taxes that may create more demand for Kryptos. There have already been examples where changes in government policy have created a demand for crypto currencies

. One extreme example is in Cyprus, which in 2013 had to impose a drastic levy on bank deposits. We think that the launch of CBD CS could encourage and legitimized the use of digital currencies in general. However, it also points to a problem with Kryptos, a property that makes them potentially attractive for asset allocation. I e. Their resistance to being debased in an attempt to reflate the economy is actually a possible impediment for them, where kryptos to be very widely used, that they could then seriously hampered on ability for policy to counter act a recession. In a sense, that is part of the point of them. They're not subject to sovereign power. This is what may excite libertarians, but It also raises social questions about whether that's the best result for all. What would Jeremy Bentham think? N Kryptos defense there at least the most egalitarian of all assets and that they're genuinely open to all to buy whether or not they have a bank account. It is the core advantage of Kryptos that they're outside the bounds of sovereign power when it comes to the basement taxation and nationalization. That also raises the question of what happens if they get in the way of governments implementing policy. Could Kryptos be outlawed by governments, as gold

was in the 19 thirties? Discussion of this usually revolves around their role in illegal activities, leaving that to one side. If Kryptos caught on so much, they hampered a policy attempt to reflate an economy e g through the use of negative rates. Then one can imagine a case being made for them to be banned. It is often claim that they would be hard to outlaw, given that they're so decentralized. But we don't think that people should underestimate power of governments to rule out activities they don't like. Yes, Kryptos might have an advantage in taking out costs. I e. at least some of the cost of the banking sector charges the rest of the economy that can help drive their adoption, though in turn this raises the question of whether disintermediation of banks would imperil the credit creation process. As with the debate about the money supply, there are pros and cons. This would remove costs and could potentially mitigate credit bubbles. But credit creation by private banks is central to how capitalism works. The bottom line is that Kryptos get in the way of reflationary policies that could be damaging for the real economy. Of course, Kryptos have to be huge for this toe have in effect at the moment. They're tiny in this regard, so the prospect is a long way off. The next section is entitled

Bitcoins Big SG Problem, and I think it's worth reading if you're reading the whole piece. But you've listened to those arguments before. It basically says that the more the climate conversation increases, the more that Bitcoin could have a target on its back. It also discusses Bitcoins association with other illegal activities, but thes air longstanding arguments you've heard them before. I think it's important to just keep moving So with that, let's move to the last section of this pretty extraordinary note. What is money? What is money? All of this inevitably leads back to an almost philosophical question of what actually is money. Anyway, Montagne warned us on Lee two philosophies by accident. So this comes at the end of the note and as a result of the discussion of crypto currencies as an investment rather than as a precursor to it. Once we move beyond the narrow empirical questions of the volatility and diversification of a currency such as Bitcoin and what it does in a portfolio from an overall return risk point of view, then the topic quickly touches on a broad set of fundamental issues. Many of those come down to the role of the sovereign state after co vid debt levels will be higher, more people will be unemployed and demanding action to address that inequality will be greater

, which will create social pressures. Governments have become comfortable with allowing large increases in the money supply, and at the same time they find themselves in possession of new fiscal tools and their ability to hand out cash to individuals in a way that was not deemed acceptable behavior before the pandemic. All of this is to say that governments are likely to play a bigger role in economies and markets. Post Cove. It no wonder there is, um, or intense debate about the concept of modern monetary theory. In fact, one could argue that in a sense, that has already become the adopted paradigm, albeit without the institutional trappings of automatic fiscal stabilizers. But we do think that universal basic income is likely and at least one developed economy in the next 5 to 10 years. Thes issues provoked linked questions about the role of money and also the nature of long term investment. Saving our crypto currencies a form of money in the sense of being a medium of exchange. Or are they a store of value and hence an asset to be used in investment? Well, they could be both Justus cash denominated in a certain currency can be We don't think that people need to obsess too much about this question. Both the role of money in the nature of investing are undergoing

changes. The world had a relatively small number of currencies for hundreds of years, and now the number of potential currencies has exploded. Indeed, conceptual artist Claudia Sambo and Holly English, in a recent work suggested that potatoes could be used as money. After all, the objection that the supply of potatoes could increase massively no longer seems to carry much weight as a counter argument to vegetable money. In the wake of the Fed creating three trillion this year, they also proposed that the value might be tied to their nutritional value. And I swipe at the argument and economics at what gives value to tokens used his money in Book five of Nickel Maki and Ethics. Aristotle teaches us. Hence, all commodities exchange must be able to be compared in some way. It is to meet this requirement that men have introduced money. It is a measure of how maney shoes, or equivalent to a house or a given quantity of food money then serves as a measure which makes things commensurate Ble. This is the so called mentalist view of what gives money its value. It essentially is a commodity that is deemed to have inherent value that could replace a barter system. The other approach to the question of what is money derives more from a view of social interaction, the claim that money really derives

from credit and the need to account for it. This view was eloquently laid out in grabbers magisterial history of debt, with the central claim that debt has a long history in human society and the idea of economic exchange starting with bartering is in fact a myth. On this basis, the ultimate basis for the value of a unit of money in today's society is the demand that it is manufactured for it by a government demanding that its taxes be paid in it. The debate between these two views and how it applies to Kryptos was very well laid out by Vignal and Casey, 2015. They make the case that both schools of thought could be applied to crypto currencies. The Mentalist view is predicated on a limited supply of kryptos. The latter, or charter listsview, is that Bitcoin is a payment system with a new basis for what gives users trust in the system. On this view, it is simply a method for recording and settling debt obligations. What makes it interesting is that there is a new distributed basis of trust, not deriving from a central authority. A concern we've always had is that there is a potential supply problem for Kryptos. Yes, Bitcoin famously has a limited supply, but the number of Kryptos has no limit. New ones could be created with ease

. So the overall supply of Kryptos Congrats. Oh! However, perhaps this is not so different than the situation with established Fiat currencies. There are a large number of them, none of which have limited supply. Yet in practice, only a relatively small number of them are used for investment purposes. New Kryptos can always be created, but if there is no plausible case for their broad adoption, then they're extra Supply is a meaningless so which ones count is being broadly accepted. Bitcoin is clearly at the core of this and then there are a small group of other ones with reasonably broad acceptance that form an intermediate group. And outside that group, coins don't have a role in investment. This intermediate group will likely evolve over time, and there won't be full agreement as to what coins qualify. But then, that is the case for Fiat currencies to So is the supply of Kryptos Limited. While technically No, it's not. But for all practical purposes, at any given time, there may indeed be some limits. So much for supply. What about demand? A post pandemic wave of inflation could potentially create significant demand for alternative currencies, for all the reasons we have discussed here. But while there might be increased demand for Kryptos in general, that is no good. If one holds the wrong

crypto, as we showed earlier in this note, not all Cryptocurrencies move together, and indeed, their mutual correlation has fallen recently. The increased demand is only useful if it is for the specific Cryptocurrency that one holds here. There is a fundamental linkage between other currencies and sovereignty. Either money is said to be worth something because the token being used has its own inherent worth, or else demand for money in question has to be created. One popular way to think of that is governments and their sovereign ability to impose taxes and determine how these should be paid. That's governments can always create a demand for their currency by saying that taxes have to be paid in it. Such support is generally speaking absent for Bitcoin pay. Zug, which has announced that citizens will be able to pay taxes. They're in Bitcoin from 2021. In future, one could imagine tax havens or quasi failed states without well established currencies as possibly allowing payment in Bitcoin or another Cryptocurrency. But it is hard to imagine a major developing nation, allowing that it would undercut sovereignty too much. Thus, there is not likely to be a guaranteed backstop of demand. The future of Kryptos is bound up with nature of sovereignty, how this interacts with personal liberty and the major policy

decisions that sovereign governments make to steer the economy to the extent to which the pandemic has accelerated shifts that were already underway and also brought about changes in these domains than it has also changed the potential role of crypto currencies. In the wake of the pandemic, governments likely become more powerful relative to corporations and individuals. Governments probably feel they have earned this right, given the extent to which their intervention was necessary to offset the economic impact of lock down. Of course, those lockdowns were imposed by governments to we need to get used to a greater role of governments in the economy, E G. Through the decision to extend or not direct fiscal measures such as furlough schemes, decisions about whether or not there will be allowed to be a genuine bankruptcy cycle, the likelihood that the tax burden increases and also on the path of inflation. On the latter, governments have the desire to generate it to deal with the debt burden and also new fiscal tools with which to address that. All these sound like issues that true believers and kryptos would point to as a reason to hold them. But one does not need to be an arch libertarian to make the case that policy shifts in these directions. Make a case for holding Fiat currencies as long as one is comfortable with

the idea that the supply is limited for only practical purposes. Two products of the 17th century seem relevant here. The Treaty of Westphalia has traditionally taken as the starting point for the acceptance that sovereign states of the basic units for international law later that century also saw the foundation of the Bank of England as part of an attempt to finance the Royal Navy. But by so doing generated the idea of a central bank with monopoly on issuing money, which would then be acceptable for the payment of taxes. If Cryptocurrencies become much larger than they are today, they implicitly threatened both these types of 17th century creations. The attractions of crypto are also what make them potentially an annoyance for policymakers. Kryptos do have a place in asset allocation for as long as they are legal. Okay, so just a couple follow ups. One really interesting note, very outside the norm of your traditional investment or research note. I think Inigo really let themselves go a little bit in the back end, which I appreciate I think is really cool. Second, I think it's interesting to see how much this

note kind of dismisses Bitcoins solo nature and asks whether you can make an argument for limited supply. Even beyond that, I don't want to get right here into the merits of that or not. I'm or just want to flag it as interesting specifically because they come away as saying that there is a limited supply for all practical purposes. I think there's a lot of people who would rightly point to Bitcoin specifically as having the network effect that makes that less relevant. Question But the flip side is, if you see tons of institutional investors eventually diversify their way into everything else. Maybe this is, ah, useful heuristic as well. Third, I think it's really interesting that it is very clear that the sovereign threat is emerging as the biggest source of potential long term skepticism for this asset category. It keeps coming up on Twitter. We talked about it yesterday, and it's here again, and it's interesting that because these institutions aren't recommending that you don't get in because of that, although

some, like Dalio, are. But it's just fascinating to see how much that is, where the fuck is heading Clearly some interesting food for thought with that guy's. However, I hope you enjoy this peace and until tomorrow, be safe and take care of each other piece

Why a $631B Asset Manager Just Changed Its Mind on Bitcoin
Why a $631B Asset Manager Just Changed Its Mind on Bitcoin
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