Wednesday's Market Minute: Narrative Destruction In Bitcoin Will Exact A Heavy Toll

Stock prices move based on what a company earns and stories about what that company will earn in the future. The company only tells us four times a year how much they actually earn; the rest of the time, stories do the work. Narrative is an extremely powerful force in markets, and its relevance scales up in accordance with the murkiness of an asset’s “true” value.

Nothing is murkier than bitcoin. Narrative is more crucial to this asset than for any other product in existence, and it’s why this moment is the biggest in bitcoin’s history to-date.

Bitcoin’s story throughout its fantastic rise from sub-$1,000 has been that it will be a necessary hedge to a future in which central banks led by the Federal Reserve will abuse the monetary system and devalue currencies. “Have fun staying poor,” the coiners taunt online, implying those with U.S. dollar-denominated assets won’t be able to keep up with “digital gold” as central bank profligacy floods the world with useless paper dollars.

It’s been a compelling narrative the past ten years as it seemed that no matter what we tried, we just couldn’t get enough economic momentum for the Fed to extricate itself from the market. The economy has had a variety of nuances throughout bitcoin’s lifetime, but for the most part, it’s been characterized by moderate or weak growth and supportive – in some instances, arguably overly supportive – monetary policy. Without any disruptive or sticky inflation, there was never much need for an inflation hedge. What better story with which to sell something than a doomsday use-case that had no way to be disproven?

Until now. We are facing a vexing degree of inflation. And as some were surprised to learn last week, the Fed stands ready to act. For bitcoin, this is, at long last, its earnings report. An opportunity to discover the truth behind the story that’s been told for so long. The result: it’s in the midst of one of its worst crashes ever. It’s trading activity resembles nothing like gold. Instead, it looks like a worse-performing version of the riskiest parts of the stock market, which are also under duress.

Bitcoin does have an inherent value to those who need to transfer money without the consent of a third party. But that hasn’t been the core of the bitcoin narrative for a long, long time. It’s been “digital gold” and “inflation hedge” for years. As that narrative is permanently disproven, bitcoin will have an arduous road ahead.

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