Can bitcoin insure inflation, and other questions to which the answer is no

“Trust must be earned” is the current advertising slogan of Amundi, Europe’s largest asset manager. Keep that in mind as you read the latest thematic article on what may follow the crypto winter.

Paris-based Amundi can seem a bit bipolar when it comes to crypto. Last February, it was reportedly looking into how to sell NFTs to customers while warning them about the “potentially destabilizing systemic risk” of stablecoins. Former investment manager Pascal Blanqué called bitcoin a “farce”; his successor Vincent Mortier is more receptive:

“If inflation remains above central banks’ targets, bitcoin’s limited supply may start to attract more attention,” write Mortier and strategist Tristan Perrier:

While bitcoin spectacularly failed to protect investors from galloping inflation in 2021-22, this was a period of dramatic increases in policy and market interest rates that pressured all asset classes. If inflation is high, but not increasing, nominal interest rates will also probably stop climbing and even fall a little. This is a much more favorable environment for an asset whose supply is limited and which has essentially a long duration, as the main attraction is its future potential rather than its current status.

And sure, maybe? The evidence we have suggests that bitcoin as an inflation hedge is useless (Smales, 2021), mostly useless (Conlon et al, 2021), randomly worse than useless (Matkovskyy and Jalan, 2020), or consistently worse than useless (Pinchuk, 2021 ) ). The inflation discussion also invites broader questions around whether limited supply is a prerequisite for all forms of existence (Aristotle, 350 BC), and whether “future potential” can have meaning when applied to something that has unquantifiable exogenous risks and no intrinsic value (Amundi, 2021) ). But then a company does not collect more than almost €2tn in assets at seeding R&D.

Amundi’s “Five Reasons Recent Backlash May Not Mean the End of Cryptocurrencies” will be familiar to anyone who has been in Davos or Reddit. It’s the shakeout, where a dotcom crash leaves a slimmer group of winners. There is proof-of-stake mining as a route out of the energy boondoggle. It is regulation, which “is more likely than not to be a positive in the end”. And there are signs that the financial mainstream has not abandoned all hope for crypto, says Amundi, somewhat self-referentially.

What is important, Mortier and Perrier suggest, is to separate practice from theory. The perceived reality of crypto (fraud, hubris, incompetence, or a combination of all three yet to be determined) may look unappealing, but it’s pretty much just TradFi doing TradFi things, so the theory (code-is-law decentralization) has come “mostly unscathed”.

And sure? Mayyyyy be?

A person could argue that the dotcom bust was not primarily defined by bankruptcies and fraud – or had more promoter fraud and less alleged theft – which meant a period of industry consolidation and cutbacks that is unlikely to happen with crypto. They may argue that in its current form, proof-of-stake mining invites concentration of control, so it is in direct opposition to Amundi’s core argument. They may see recent crypto press releases from mainstream companies less as a sign of a healthy ecosystem than as the light just reaching us from a long-dead star.

As for the positive tailwind of legitimacy through regulation, programmer Stephen Diehl posed the key question on those pixels earlier this month: what’s the point?

Amundi says that for investors to remain interested in crypto, someone needs to find something productive to do with a blockchain. Tokenization of financial assets is interesting in theory, but using the concept comes with major hurdles around legality, delivery and adoption.

These are fair points, but again may not be in line with recent developments, such as China’s use of blockchain for some ABS contracts. Although the experiment could reduce costs by a few basis points, the research so far has not been entirely convincing.

Mortier and Perrier conclude:

Blockchains, cryptocurrencies and tokenization have a lot of potential, be it in powering new types of decentralized organizations that can offer serious economic and social benefits, or in enabling new ways of trading and managing assets. The most likely outcome is that they simply need more time to mature before becoming mainstream, as was the case for other technologies in the past. However, they could still turn out to be a dead end (which could give time for another cryptocurrency bull market to last a few years, but not much more). At this stage nothing has been proven and the jury is still very much out.

Is it not normal to give evidence to a jury before expecting its verdict?