Transcription
In just 5 days the price of Bitcoin has fallen more than 15%. What is happening with this digital asset? Let's see.
Just two weeks ago, Bitcoin was located above $70,000 and today it is fighting to resist $60,000. That is to say, in just 15 days the price of Bitcoin has fallen with great force. And yes, it is true that at other times there have also been strong falls in Bitcoin, even greater than the current one. However, this fall in the price of Bitcoin has a different component from the previous ones, in essence that it has become uncorrelated with respect to the price of technology stocks.
For many years, the price of Bitcoin has gone hand in hand with the price of technology stocks. When technology stocks rose, Bitcoin also did, and when technology stocks fell, Bitcoin also did. But now, as I have known, technology stocks, especially those related to artificial intelligence, are rising and a lot, while Bitcoin is falling, even taking into account the notable fall last Friday.
And here, of course, is when fears begin to emerge. It could be that Bitcoin has ceased to be of interest or even that it has ceased to have economic logic.
Well, at this point I think it is important to distinguish between two types of economic logics, because they are also two types of economic logics that articulate two types of distinct investment strategies. On the one hand, we have the fundamental economic logic, that is, what is the essential distinctive core value of a given asset. And on the other, what is the speculative economic logic of that asset? That is, what are the prospects, the bets on what its price will do in the short and medium term.
This double vision, fundamental economic logic and speculative economic logic, is applicable to any type of investment, to any type of asset, also to Bitcoin. What was and is the economic logic of Bitcoin? Well, to be an unconfiscatable, uncensorable, and undilutable asset and therefore to act as a refuge against political and institutional arbitrariness. That fundamental economic proposal of Bitcoin, which is useful, which is valuable for many people, is still there. The asset has not ceased to be that at any moment.
Now then, upon that first layer of fundamental economic proposal, a speculative economic logic can certainly be built. An asset appears in the market that we understand many people consider useful to satisfy some of their needs. In this case, protection against political and institutional arbitrariness, it is reasonable to anticipate that its price will rise. And if speculators anticipate that the price of an asset will rise, then they will take long positions in that asset to take advantage of the momentum of its life, thus reinforcing that upward movement in the price of Bitcoin.
This is something we have seen on numerous occasions throughout the different price cycles of Bitcoin. As Bitcoin becomes more popular and more people, more investors incorporate it into their portfolio, then many speculators anticipating that movement rush to buy Bitcoin expecting the price increase and that causes a bullish cycle. When speculators, for whatever reason, become disenchanted, no longer see more short-term potential in its life, they exit, liquidate, and then part of the rise that had a strong short and medium-term speculative component, deflates.
But that does not necessarily mean that those who bought Bitcoin for fundamental reasons to protect themselves against political and institutional arbitrariness are also liquidating en masse. Put another way, the price of any asset, also of course Bitcoin, can fall not because the fundamental economic logic has been exhausted, but because the speculative economic logic of that price increase cycle has been exhausted.
And that is the situation in which we have been at many other times during the last 15 years and in which it would seem that we are also now with one caveat. And that is that now, as I have already mentioned before, the price of Bitcoin has become uncorrelated with that of technology company stocks. Therefore, it could be that something more serious is happening now than in previous cycles. Is there then any reasonable explanation for this decorrelation that does not go hand in hand with an exhaustion of Bitcoin's fundamental economic logic, which apparently is still there? An unconfiscatable, uncensorable, and undilutable asset.
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Well, then let's resolve the doubt. Why is the price of Bitcoin now falling while the price of technology stocks is rising? Why has the correlation broken? Well, the first thing to keep in mind is that in reality the correlation between Bitcoin and technology stocks had already been breaking for some time. Now it has done so to Bitcoin's detriment because technology stocks rise and Bitcoin falls, but months ago, as you can see in the chart, it did so in Bitcoin's favor. Bitcoin rose much more than technology stocks did. But well, this is not even the essential thing. The essential thing is something else.
Why have technology stocks and Bitcoin shown a strong correlation for so long? Well, because both assets are very sensitive to interest rates. Technology stocks are usually high-duration assets, that is, assets that generate the bulk of their economic value, of their earnings in the very long term. And in this sense, high-duration assets revalue disproportionately when interest rates fall and depreciate disproportionately when interest rates rise, because the interest rate is something like the price of time, the price of waiting. If waiting becomes very expensive due to rising interest rates, then the profits generated in the very long term are worth very little today. If waiting becomes cheaper, then the profits generated in the very long term become very valuable today. That is why, as I say, technology stocks tend to revalue when waiting is cheap and tend to depreciate when waiting is expensive.
And something similar happens with Bitcoin. If waiting is expensive, if interest rates are high, then the opportunity cost of being invested in Bitcoin increases. And therefore, not only do speculators not enter Bitcoin, but there may even be fundamental investors in Bitcoin who rebalance their portfolio, who sell Bitcoin or who sell gold. Note that gold has also been falling for a few months to buy other assets that provide a higher interest-bearing return. And vice versa, when interest rates are very low, the opportunity cost of being invested in money or in gold or in Bitcoin is very low. Hence, the fundamental demand for these monetary assets tends to expand and also as a reinforcement that speculators usually enter anticipating that greater fundamental demand.
Well then, recent months have been months in which investors have revised upwards their interest rate expectations, not only because of the war in Iran, but also because of the high public deficits in the United States or also because of the high debt issuances of companies that invest directly or indirectly in artificial intelligence or this past Friday due to the good employment data in the United States that have led to the belief that the economy is much stronger than thought and that therefore the prospect of interest rates falling at some point moves even further away. We are, therefore, in an environment of expectation of higher interest rates. Therefore, it is an environment in which it is perfectly expectable that the price of Bitcoin will fall, not only due to the withdrawal of speculative demand, which we have already seen has occurred for months, but also because fundamental demanders, as also happens with gold, are experiencing a higher opportunity cost for holding money, for holding gold, for holding Bitcoin and that is why they sell those assets and invest in other more profitable things.
Therefore, what is strange about the current period of upwardly revised interest rates is not that Bitcoin falls, it is not that gold falls in price, it is not that money tends to be hoarded less, what is strange is that high-duration stocks, such as technology stocks, are not also falling with this rise or with this expectation of rising interest rates, because that is what historically happened. Interest rates rise, Bitcoin falls, but technology stocks also fall and the correlation is maintained there. In fact, this past Friday with the strength of the employment data, it did happen. Bitcoin fell there, gold fell, and technology stocks also fell, but with the exception of this Friday, it has not happened during recent months.
And why has it generally not happened? Well, because the expectation of gains through artificial intelligence is much more powerful in this context to push up the price of technology stocks, than the expectation of interest rate hikes is to pull them down, although of course even in this there are exceptions, as we saw last Friday, expressed differently. In this context, the expectation of higher interest rates is not a strong enough argument to bring down the price of technology stocks, because the expected profits of these companies are being revised very significantly upwards. And the revision is largely due, as we have explained in other videos, to the direct or indirect influence of artificial intelligence.
If to this we also add a certain speculative momentum, speculators are not currently taking long positions in Bitcoin and are taking long positions in technology stocks, then the decorrelation is perfectly explained, without the need to appeal to any umpteenth death of Bitcoin. Bitcoin continues to be useful for those savers who seek an unconfiscatable, uncensorable, and undilutable asset. Its economic properties in this regard have not changed at all. What can change in each specific conjuncture is the quantity of demanders, the intensity of demand for that type of unconfiscatable, uncensorable, and undilutable assets.
In the current environment of rising interest rates, as a consequence, in part of the rise of artificial intelligence, the demand for defensive monetary assets, such as Bitcoin or gold, suffers. Investors sell those assets to buy assets that promise a higher return, but as long as the underlying utility is still there, its economic value will also be. And that means that when the demand for monetary assets increases again, and in particular for an unconfiscatable, uncensorable, and undilutable asset like Bitcoin, then its price will also turn around because with greater demand and a constant supply, the price will be higher.
The key lies in not confusing the conjunctural with the structural, the speculative with the fundamental. Of course, not everyone has to buy Bitcoin if they consider that the service it provides as a monetary asset, unconfiscatable, uncensorable, undilutable, is not a monetary service that that person values. Perhaps that saver is looking for another series of properties different from these in the assets in which they invest. But if one values this type of property in a monetary asset, then the fact that the price of Bitcoin falls is not a risk, but rather an opportunity to be able to buy cheaper that type of asset that you believe you need.