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El Salvador’s bitcoin-as-legal-tender experiment didn’t exactly get off to the best start yesterday. There were reported technical issues with the government’s crypto wallet; of more consequence was the 18% price reversal in bitcoin that began in the wee hours of Tuesday morning.
It shouldn’t be much of a surprise. Bitcoin is building a track record of failing at key moments of adoption that its acolytes spend months hyping up: the launch of bitcoin futures, the Coinbase IPO, and now the first nationwide adoption. I believe this will also extend to an ETF acceptance, if it happens.
One good explanation for why is that bitcoin is extremely susceptible to the old trading principle of “buy the rumor, sell the news” — asset prices rise in expectation of positive events, then drop as investors take profits as the prediction becomes reality and the future becomes the now. It follows then that the magnitude of such a sell-the-news event will depend on the hype surrounding the story being told: the bigger the hype, the bigger the run-up, the bigger the drop when that story comes to fruition and investors must wait for the next tale to tell.
No asset in the world has been hyped more than bitcoin. No grander stories have been told than the ones about how crypto will save the world. That’s a lot of news to sell — one country at a time.
Framed this way, today’s drop in bitcoin could be described as a short-term event. But I think the sell-the-news explanation only gets us halfway there. There is a more deeply, fundamentally bearish explanation: if bitcoin’s value is purely what the next person will pay for it — a grand multi-level marketing gimmick — its value will be a direct function of the number of individuals it can be sold to. If this is the case, it will naturally drop following big one-time adoption events that remove incremental buyers from the future. If a bitcoin ETF does get approved, my thesis here implies a big rally would be followed by an epic selloff.
Bitcoin is still mostly about selling it to the next guy — the fewer guys there are left, the less valuable it becomes. Just look at returns for bitcoin as a function of entry point and you can see clearly how expected returns get smaller the later you get in.
Most bitcoiners will tell you that adoption is the bull case. Adoption only matters if bitcoin has utility. I can give everyone I see a custom deck of cards with my face on it, but their value does not change unless they provide some benefit over regular cards. But that’s an old, tired debate about scarcity.
Yesterday’s crash is a clear sign bitcoin’s price is one again tremendously out of sync with its value. It’s also an early warning that the narrative of bitcoin as the savior of the impoverished is a far-fetched notion that has a lot of proving to do. Until it offers some observable functionality beyond traditional currencies or gold, there’s nothing more important to bitcoin than how many people are left to buy. It doesn’t matter who they are, where they are, or how badly they need real help — they’re just future bagholders in the eyes of earlier buyers looking to get out.
