Bitcoin Is Rising Again. Asking Why Takes You Down the Financial Rabbit Hole.

A 50 subject one dollar note sheet before receiving a serial number

Andrew Harrer/Bloomberg

I think I’m ready to issue my next Bitcoin prediction. I’m consistently wrong, which makes this a valuable service.

In mid-February, after Bitcoin had shot from $4,000 to $10,000 in a year, I raised the question here of whether speculative excess might push it still higher. Then it fell by half in a month. I imagine that readers who recognize a good contrarian indicator when they see one, and who knew that Bitcoin options had begun trading in the U.S. in January, made out handsomely on the puts.

Bitcoin has now bounced back above $11,000, and readers seeking the mathematical inverse of wisdom on the matter will once again find it, as soon as I can make up my mind about some last-minute details, like up or down, and by how much.

First I have to figure out what’s driving the rebound. The leading suspect is a slip in confidence in the U.S. dollar. It’s down 7% versus a basket of six key currencies since mid-May.
Goldman Sachs
recently pointed out that the dollar’s change ranked among the most extreme 2% of two-month moves since 1973. Its strategists cite the U.S. coronavirus surge and the heavy Treasury issuance that will be needed to deal with it.

They predict continued—but more gradual—declines for the dollar over the coming year, and recommend that stock investors lean to sectors and companies with high international sales. Examples include technology and energy, plus
(ticker: MCD) and

Gold has been hitting new highs—another sign of dollar weakness. See page 25 for what to do about that.

What is strange is that there isn’t much sign of inflation, recent or predicted. The spread between the 10-year Treasury and its inflation-protected sibling has widened, but to only about 1.5 percentage points, suggesting that bond buyers expect weak price growth for years to come. Either gold buyers know something others don’t, or the metal is trading on anxiety over inflation, not the real thing. A 2013 study of the link between gold and inflation found that gold is a reliable hedge only over centuries. Over more practical time periods, it does its own thing.

There are other complicating factors. The euro is up 9% versus the U.S. dollar since mid-May, propelled by signs that the European Union will borrow gobs to fight the virus. Why would the same factor that has soured investors on the dollar cheer them on the euro? Because until now, euro states have mostly borrowed individually. The thinking is that if they go deeply into debt jointly, the monetary union is more likely to stay together. Why do love stories always make me well up?

The euro has by far the heaviest weight in that aforementioned basket of currencies used to track the U.S. dollar. So, is the dollar falling or the euro rising? It’s not easy to say. In finance as in physics, motion is relative. The exercise tracker on my watch says I haven’t moved much in a week, even though I’ve been vigorously orbiting the sun at 67,000 miles per hour.

Ed Yardeni of Yardeni Research doesn’t expect significant declines for the dollar from here. He says that part of the recent slide amounts to profit taking after an early-year rise. Measured over the past decade, the dollar remains up 10% versus the euro. Yardeni points out that the dollar still makes up well more than half of nongold reserves held by central banks, and that competitors to the dollar as reserve currencies, like the yen and euro, aren’t obviously better when judged by the fiscal or monetary health of their issuers. He says he’s hopeful that the virus is plateauing in the U.S., and that investments in treatments and vaccines will soon pay off.

Although U.S. shares look expensive relative to those in the rest of the world, Yardeni says that’s because the U.S. has more highly desired shares of fast-growing companies. Buy gold? Go ahead, up to a 10% allocation, he says. Bitcoin? Stick with gold, he says.

That’s helpful, but not with my Bitcoin forecast. I reached out to Meltem Demirors, chief strategy officer at CoinShares, whose products let investors buy Bitcoin exposure like they would stocks, but not yet in the U.S. She cited deficit anxiety as a reason for Bitcoin’s recent run, plus another factor. There has been a boom in newly created products in the cryptocurrency world, and many buyers have made fast profits, leading them to sell and park the money in Bitcoin. The old me would have said that makes Bitcoin the reserve currency of La La Land, but the new me is trying to keep an open mind.

I asked Demirors whether I should buy Bitcoin. My current allocation is 60% stock index funds, 40% bond funds and cash, and 100% pooh-poohing the other stuff Wall Street says I should buy if I don’t want to have my alpha stuck up my tail risk, or some such. Demirors says most investors should consider a 1% to 3% allocation. “I view Bitcoin as savings technology,” she says. A finite amount of the coins will be produced, she says, and the value is tied to a growing community of users. I haven’t bought, but Demirors made the most convincing case I’ve heard so far.

I figured out my prediction. Bitcoin, recently $11,300, will settle back below $10,000 by year’s end. That’s right: I’m gently blowing the wrong end of the rally horn—more good news for Bitcoin bulls.

America’s tech giants received a bipartisan videoconference scolding from the House Antitrust Subcommittee on Wednesday. Yet shares of
(FB), and
(GOOGL) climbed that day and the next. Why aren’t investors more worried about a sweeping crackdown by business-savvy legislators?

Was it the 21-term representative who confused Facebook with
while questioning Mark Zuckerberg, and who expressed deep concern about message censorship, or, as he put it, “having a Twitter or a Facebook taken down?” Or was it the 30-second shouting match among House members? “Put your mask on!” hollered one. “You want to talk about masks,” said another. “Why would the deputy secretary of the Treasury unmask [former National Security Advisor] Michael Flynn’s name?” The leaders of companies valued at nearly a collective $5 trillion quietly sat by, while the lawmakers who will run a near-$5 trillion deficit this year brawled.

Thursday evening brought blowout quarterly results for the tech titans, and Friday, on the whole, more stock gains.

Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’sStreetwise podcast.

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