Bitcoin soars again, Wall Street crypto narrative rises again?

Written by Michael J. Casey, Chief Content Officer at CoinDesk Compiled by Mary Liu, Twitter BitpushNews

New U.S. economic data and other indicators, including greater optimism in financial markets, suggest that the Fed has the potential to break earlier expectations and successfully achieve a "soft landing" for the world's largest economy.

If so, this could once again force Bitcoin bullish investment advisors to take a fresh look at how to structure this hard-to-classify asset as one that newbies can understand and hold in their portfolios? My advice to them is: don't worry at all, not because I think Bitcoin is worthless, but because all efforts to explain the value of BTC within the framework of the language and logic of traditional financial markets will continue to fail, and the real explanation of its value exists elsewhere – like on the streets of Lagos, Nigeria.

Think of the various narratives of buying Bitcoin that have sprung up on Wall Street.

Some mainstream people once widely described it as an inflation hedge. Bitcoin's market crash ended that narrative last year when consumer prices soared — the opposite of what you want to hedge up doing. Then there's the related but more subtle digital gold narrative, where Bitcoin is considered a scarce digital asset that can provide a long-term store of value in the face of political and economic uncertainty, but it also doesn't play as well. Most institutional and individual newcomers after 2021 have suffered wealth destruction.

Finally, there is the long-term idea that you should hold Bitcoin as a warrant or option for the future collapse of the dollar-centric international monetary system, a bet that confidence in the system's central bankers could eventually fade, and recent economic data from the United States has challenged this, at least for now.

The "legend" of the collapse of the dollar

Let's break down the third narrative.

Some see the economic situation in late 2022 as the perfect storm to end the era of economic and monetary hegemony in the United States, and therefore a test of the theory of Bitcoin as an option for monetary collapse.

Russia, which possesses nuclear weapons, is at war with Ukraine, supply chains are choking due to COVID-19 and war disruptions, and inflation is at its highest level in 40 years. The concern is that the Fed, which has already begun to aggressively raise interest rates, will not only be unable to break entrenched inflation, but its actions will cause such difficulties that it will be forced to back down under overwhelming political pressure. Some believe that this failure will eventually lead to a loss of confidence in the world's most powerful central bank and, by extension, in the dollar. In contrast, Bitcoin will shine as a solid mathematically driven alternative, immune to such human error.

By 2023, that most pessimistic prediction didn't really happen. Despite hundreds of thousands of job cuts in the tech and financial sectors, unemployment remains surprisingly low — the lowest in 53 years at 3.4 percent in January, released on Friday — and the latest 513,000 job growth in the same month only exceeded expectations by 187,000.

At the same time, inflation, while still high, is slowing. The US consumer price index rose 6.5% annualized in January, down from 7.1% in February. While the Institute for Supply Management's January survey of purchasing managers showed that the contraction in U.S. manufacturing was worse than in December, indicating an imminent recession, forward-looking forecasts are starting to become more optimistic.

This week, the IMF raised its forecast for the world economy in 2023 to 2.9%, up 0.2% from its October forecast. Moreover, the fast-rally stock and bond markets seem increasingly convinced that the best of both worlds is happening, with inflation cooling and the economy simply slowing to manageable growth rates without a serious economic collapse. Fed Chairman Jerome Powell's relatively optimistic outlook for inflation and interest rates at a press conference following the Fed's decision to raise interest rates reinforced this view.

If these predictions prove correct, Powell and the rest of the FOMC will regain some of the respect they lost in 2021, when they were criticized for being unresponsive and belatedly realizing that rising consumer prices are not just a "transitory" COVID-related issue. Of course, there will still be many critics of the Fed, but it would be far-fetched to say that confidence in the central bank or the money it manages has been fundamentally lost.

In other words, it seems increasingly unlikely that someone would exercise their Bitcoin options when the dollar crashes, at least this time. Therefore, this particular reason for buying seems untenable.

Bitcoin's larger value proposition

So, Bitcoin briefly topped $24,000 this week and hit its best month in a year, why?

Well, the simple answer is that investors everywhere are resuming their risk appetite, and as financial conditions ease, money is flowing into risky assets everywhere, and Bitcoin is considered one of them.

But this is a rather unsatisfactory answer. We have just explained how various so-called arguments for investing in Bitcoin have failed. Why does Bitcoin have any value? Just because people have money to spend doesn't mean they'll spend it on worthless things. So, what is the fundamental value proposition that continues to push people to buy Bitcoin?

I think it's "far, far away" from Wall Street.

Currently, Bitcoin is proving its value in developing economies where financial freedom is threatened, such as:

The Nigerian government has taken drastic measures to ban cash to force the adoption of its digital currency, and people have reportedly flocked to Bitcoin to protect their wealth. One indicator of this demand: The price of bitcoin in Nigeria is twice as high as the price of the US dollar – almost twice as high as the US dollar. Lebanon, whose banking system has almost collapsed. I was told that wholesale wine prices there are usually quoted in Bitcoin. In addition, mainstream media such as CNBC have reported that locals have figured out how to make a living from makeshift mining farms spread across the country. Vietnam once again topped Chainalysis' cryptocurrency adoption rankings last year. One reason: Just over 30% of Vietnamese adults have a bank account, making the country one of the countries with the lowest financial inclusion rates in the world. All other countries in Chainalysis' top 10 crypto adoption index. With the exception of the fifth-ranked United States, the list consists entirely of emerging market countries: the Philippines, Ukraine, India, Pakistan, Brazil, Thailand, Russia and China.

So, if you now feel that financial conditions are rekindling your investment interest and want to justify adding Bitcoin to your portfolio, don't try to compare it to the standard risks and opportunities in Wall Street financial markets. Instead, look at many parts of the world where local financial systems are flawed due to political, insecurity, or widespread failures of institutional infrastructure.

In those places, Bitcoin is proving its utility. If it's useful there, it has to be valuable.