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All that glitters is not crypto

Chew Sutat
Chew Sutat • 9 min read
All that glitters is not crypto
Could Bitcoin function as a form of digital gold? / Photo: Kanchanara via Unsplash
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Mita of Mushki ruled over the Anatolian kingdom of Phrygia in the late 8th century. The rich and fertile lands in the western plateau of Asia Minor prospered as the intermediary between Greek and Persian states and its people were renowned metalworkers and potters. Oral records of the kingdom, which peaked in the 9th century BC, suggested immense gold resources which unexpectedly, attracted enemies.

The kingdom, barely remembered today, eventually became part of Persia and was conquered at different points in time by Alexander the Great and the Romans. When Rome itself split, Phrygia ended up as part of the Byzantine Empire. It sits north of Cappadocia in modern Turkey, which is a tourist attraction for its underground cities, fairy-like chimney rock formations and hot air ballooning for visitors.

However, Mita is better known by another name — Midas. Whether he was the actual mythical king famous for his extraordinary ability to transform anything he touched into gold is a historian’s guess. As the legend goes, the king was already very wealthy but he craved just that little bit more — the same kind of feeling stock traders centuries on — eager to hold out for that extra uptick before they “hit” what are already very profitable offers — will understand.

Having done a good deed, Dionysus, the Greek god of wine-making offered Midas a wish. Midas asked for the gift to change anything he touched to gold, even though he was cautioned against wanting it.

The old adage “beware what you wish for” followed. The king took delight in turning a few pots, stones and even bits of soil, flowers and fruits into nuggets of gold. However, too much of a good thing resulted as he could not eat or drink and also managed to turn his horse and daughter into golden statues. A sympathetic Dionysus gave Midas an escape from this cursed gift by washing his hands in the Pactolus River. The mythic Midas touch may have ceased but in real-world geography, the river is famous for its gold dust deposits.

Walls of worry around
Since the start of the year, pessimists will feel inundated with a string of non-stop negative news — from Japan’s Nodo peninsular to Ukraine to Gaza to Taiwan and the South China Sea to the all-but-certain coronation of Donald Trump as the Republican candidate for November’s election. Most recently, with President Joe Biden’s “Compete with China” rallying cry at the State of the Union, the harrowing geopolitical backdrop does portend plenty that can go wrong with the markets.

See also: Bitcoin’s Trump-inspired rally is bad news for Korean small-caps

There is little solace in the US economy too. The much hoped-for rate cuts by central bankers have yet to materialise. Inflation seems to have slowed from last year’s higher base but US employment remains red hot, making it hard for the Federal Reserve Board to deliver its promised dot plot decrease. Indeed, former Treasury Secretary Lawrence Summers declared last week that the Fed is well off on its estimate of a neutral setting for interest rates and there is an increasing chance policymakers won’t end up lowering the benchmark this year. All this while, US commercial real estate is in the doldrums with Moody’s estimating 20% vacancies and growing.

Amid the AI-fuelled Wall Street rally, the rescue of New York Community Bancorp (NYCB) by a consortium including former treasury secretary Steve Mnuchin has gone largely unnoticed. Ironically, NYCB, whose share price collapsed from US$10 ($13.30) to US$2 within days, was itself a consolidator of troubled Signature Bank a year ago, after which its market cap leapfrogged to become the 33rd largest US bank. Its Achilles heel was loan losses on commercial real estate — a wildfire that could spread as loans are being refinanced this year with borrowers facing the prospect of negative equity, which means passing the asset back to banks. Other than this being an election year, the Fed needs to find other reasons to cut rates — one of which is to help regional banks stay liquid as the “special programme”, introduced in the wake of last year’s Silicon Valley Bank implosion, comes to an end.

Records are made of these
Yet, all we are hearing are new market highs attained from Wall Street to India to Japan, which finally surpassed its 1989 high. Japan, this column’s dark horse last year, continues to run on a combination of global under-allocation and locals finding confidence. As postulated earlier this year, Japan may still have legs. India continues to “Modi-fy” in the lead-up to elections over the next two months. Its number of registered retail stock traders has quadrupled to 120 million from 30 million before the pandemic. According to a friend there, everyone from the tiffin wallah to the local hairdresser is now stock experts — bringing back memories of the shoeshine boys giving stock tips to brokers in 1929.

See also: That's what friends are for

Nvidia, the leader of the AI-driven pack, came within striking distance of US$1,000. It had hit US$974 on March 8 before promptly reversing to US$851 over the March 10 weekend. This brought the S&P and Nasdaq down on an intra-day 13% reversal. However, as Nvidia bros will enthuse, the stock is still up 82% year to date. But is this the beginning of the levelling?
Even two supposedly non-correlated alternatives, Gold and Bitcoin, have bubbled up to records again despite their function being to signal disasters on the horizon or the debasement of traditional financial assets. Gold, another one of our calls in January, ran up to a high of US$2,000 per ounce in 2020 at the start of the pandemic before losing its sheen a year later to meme stocks and cryptos.

As a non-yielding asset that sticks out in a high interest-rate environment, gold held out at US$1,600, gaining steadily to US$2,000 for most of 2023 and up almost 10% to US$2,180 in early March even while US equities continued to run. In theory, even if the price ultimately crashes, one could still caress gold as a shiny physical asset — much like Dionysus, the god of wine, who inspires wine investors to claim that if all else fails, they can still drink their investment.

What then can one make of Bitcoin, which exists somewhere in the metaverse if only one can remember the password to the keys? As of March 10, one can actually declare that everyone who ever owned Bitcoin made money as the cryptocurrency surpassed its October 2021 top of US$69,000 before the Crypto Winter shrank it back to US$15,000. The Economist rightly points out that Bitcoin is “hardly rallying in isolation” but thanks to “a combination of hype about AI, joy at the state of the global economy and expectations of looser monetary policy to come”.

China’s incredibly scripted and boring “Two Sessions” were completed without the traditional premier-fronted press conference. Even so, Chinese indices managed a 14% rebound from the pre-Lunar New Year lows as newly-appointed CSRC chairman Wu Qing (aka Broker Butcher) — whom I had met when he was president and party secretary of the Shanghai Stock Exchange — went after malicious quant traders and illegal short-selling and as state-run financial groups pumped an estimated RMB170 billion ($31.5 billion) by Goldman Sach’s Kinger Lau into China domestic markets. Lau further postulates that this puts a near-term floor on the market. Like many who have been long and wrong, I hope he is right but my outlook on China is already resigned to the long haul.

Fomo rekindled
Having now made a new high, is this the time for sceptics of crypto to pile in? It is worth understanding the structural dynamic behind 2024’s revival. The Securities and Exchange Commission’s (SEC) long-awaited approval of 11 ETFs (exchange-traded funds), including those managed by BlackRock and Fidelity, finally happened in January. The 10 largest ETFs now have US$50 billion in assets, enabling investors to “invest” through their broker or bank without having to set up a crypto wallet at an “exchange” where words like “brand” and “trust” are alien to it. Or simply having to remember the password to your crypto keys!

It has been estimated that institutions which have not been investing in this 14-year-old “asset” only own some mid-single-digit percentage of the total market capitalisation of Bitcoin. So, with a finite supply of bitcoin and the financialisation of this “asset”, could Bitcoin function as a form of digital gold? As far as we know, there is no present King Midas, hence the physical metal is limited by what is already available on (or under) earth. In 2021 and 2022, as inflation rose and Bitcoin collapsed, this theory did not seem to work but with the speculation of SEC’s approval and regulatory recognition coming, since last year Bitcoin has moved in tandem with gold, albeit back on steroids coming back from a far lower base.

Others point out that just like how some physical gold has been lost squirrelled into bank vaults or forgotten under mattresses, approximately 14% of the finite source of Bitcoin is lost due to lost keys. If institutions continue to add it into portfolios, the whales who control between 30%–50% of Bitcoin will certainly make a windfall in the near term but the long-term returns will probably mirror that of gold — in other words, there is a fixed supply and prices rise in line with the stock of money — implying steady but single-digit returns, contends The Economist which says: “The current frenzy may be eye-popping but future returns may be slower and steadier”.

Sink your teeth into in-depth insights from our contributors, and dive into financial and economic trends

Crypto bros are already betting on Ethereum to be the next ETF approval windfall. Ethereum technically has more technological use than Bitcoin per se with more people using it to build applications on blockchains as Bitcoin is simply too slow. Solana is another crypto that is even quicker. The rest of the long coin tail, however, is filled with scams. As the hype from Bitcoin’s new high spreads confidence and smugness for believers, I am hearing of altcoins, new issues and punting in coins priced with decimals places of 7–10 places. The ultra penny coin market has come to some life alongside talk of ICOs (again) sprinkled with gold dust.

For these parts of the market, the ending this time should not be any different and as the excitement builds, it may pay to remember our Phrygian King.

Chew Sutat retired from Singapore Exchange S68

after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore

 

 

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