The following post is authored by Opposing Points’ columnist, Mr. Monopoly.
I recently bought a cryptocurrency called MANA, which is intended to serve as a token that can be spent in a virtual world called Decentraland. There are plots of virtual land in Decentraland, along with virtual art and gambling, your typical run of the mill vices. All of these things run on the MANA token, and go up and down in value alongside the $USD price of the token. Thus, although nothing has happened within Decentraland to make the intrinsic value of 1 MANA go up, the token has risen in USD value by 318% in the last month. Which is quite good! But somehow it’s just a pretty standard return for an altcoin in that time frame.
As fun as I find the concept, Decentraland represents the final phases of a monetary policy so far ahead of its skis that it fell flat on its face, rolled down the mountain, got buried in snow, and is awaiting discovery from the snow patrol. And, by the way, an avalanche is coming, so good luck digging it out. Perhaps not surprisingly, people aren’t making the connection between the price of cryptocurrencies and the fiscal policies pursued by our government and the masters of coin at the Fed. So I’d like to explain the situation through a macroeconomic lens, and put some of the seemingly unconnected puzzle pieces together.
Generally, we at the ground level of society don’t have access to assets which can appreciate 1000 fold in 2 years. The feeling of making a lot of money in a short amount of time isn’t one we get to experience very often in a world with 8-6:30 jobs for the masses. We’re too busy and too poor to have the time to wonder about the potential negatives of this situation, plus who wants to bite the hand that feeds them? A meme coin called Shiba Inu is up big today? Better put some of my Venmo money into that - what else am I doing with it! As the great Kendrick Lamar says, “the dollar might turn to a million and we all rich.” Contributing to that problem, is the artificially low interest rates that force people to throw money into the stock market, speculate with real estate, or toss money into various cryptocurrencies. The fed says you can’t make money on interest by being responsible and saving because we need you to spend to artificially prop up asset prices. Want to be responsible? The fed basically says kiss my ass coin (a real crypto coin).
Let’s briefly examine what a bubble is before going any further. Asset bubbles have occurred throughout history, as has currency debasement, dating to ancient Rome. Strange symptoms tend to show up at the end of the effectiveness of such a policy, made most famous in 17th century Holland when the prices that different varieties of tulip would command in the marketplace varied based on very minute differences in the genetics of the flower. Holland had the same problem we have right now - “excess money” with nowhere in the productive economy to go.
Let’s also examine what Intrinsic Value (IV) is. IV represents the value that a product has based on real-world and measurable characteristics. For example, if you can break down the value of a barrel of oil into the different places in the economy the oil will go to, you could then calculate the IV of a barrel of oil.
Tell me, what’s the IV of a tulip? Or a Bitcoin? Or one share of Tesla?
Any product value on top of the IV (or below it) is determined by the marketplace. So if you say the barrel of oil costs 10% more than its IV and charge me that price, I’d want to know why I should be paying more than the sum of the parts. I’d probably look for another vendor who will let me pay for the oil at the IV price. That process will happen with millions of buyers and millions of sellers over time, and a market will form. Buyers with dollars chase sellers of goods.
So what happens to the price of assets when the amount of dollars in the market system exponentially increases all at once? They rise, regardless of the IV. Because more dollars are chasing the same amount of goods. That’s how you get this just weeks after the COVID crash accelerated.
When COVID struck and the economy grinded to a halt, the stock and bond markets sold off at ludicrous speed. Multiple “stops” occurred throughout the crash, meaning the market sold off so quickly that they legally had to pause trading for 15 minutes before re-opening it. While saying the reason for this was “COVID” and nothing else, the government intervened to protect financial markets via a support program that essentially backstopped the crash. The markets quickly reversed and had their best single month in a very long time while the pandemic kept all of us inside and afraid. And now, not even two years later, the S&P has doubled while we the people remain hamstrung by the virus. And now we are facing a new problem, which is often referred to in the mainstream media as “inflation,” perhaps as a way of covering up the purposeful nature of the inflated bubble.
The program the government and Federal Reserve implemented is called Quantitative Easing (QE). I would like to explain my understanding of QE, show how it has manifested itself in our every day lives, and then finish with crypto. I also recommend watching this PBS documentary, once you’re done with this article of course!
QE is a process in which the Federal Reserve, the central bank of the United States, acts as a buyer in markets and purchases things from private or public sellers. I must also remind you that the Federal Reserve is as federal as federal express. It’s a private bank. Because the Federal Reserve has the power to issue digital currency, without needing approval from Congress or any other form of government, they can buy or sell as much as they’d like with no true upwards limit. This policy was implemented by the Fed during the Financial Crisis of 2008, mainly since there were no buyers in pretty much any marketplace in the world economy. And to an extent, that’s what happened with COVID as well, although the problem in this instance had nothing to do with loans gone bad.
Under the greatly boosted 2020 QE program, the Fed began buying Treasury Bonds and Mortgage Backed Securities, mutual funds, and exchange traded funds at the rate of $120 billion (BILLION) per month (MONTH!). Officially, this was done because those markets were at risk of having no buyers and therefore needed emergency support. What they didn’t say is the reason a crash was occurring is a lack of buyers. Because while COVID was a shock to the financial system, a prepared global economy would not have sold off in such a way. The reason there were no buyers is simple - there already barely were any. The stock market had been grinding along for years based on our 401k deposits, stock buybacks, and the legacy QE program from all the way back in 2008.
And now it was being handed an unlimited avalanche of free money, in a time when the economy was locked down.
This free Fed money (not to mention the stimulus money provided by both Trump and Biden’s governments) is still making its way through global markets. But global markets have not seen the amount of available goods increase very much. Because, as you may have heard, we’ve been locked down in some form or another for about 2 years. And many people were paid to stay home and liked it. And there’s an “anti-work” movement growing (which fascinates me and is definitely a subject for another time. Because how do you run a service-based economy if nobody wants to work?).
What QE has done is disconnect the stock market, and frankly most other markets, from reality. The events of the actual economy no longer have much to do with the price that a buyer will pay for a financial asset, because there’s little risk you’ll lose your money. The market cannot go down, you cannot lose money on your investment. Because the Fed will be buying regardless of what the price is. The efficient market can never be truly efficient in these conditions.
This policy has led to a truly absurd transfer of wealth from us to the owners of capital in the USA. Those who already owned the stocks and financial assets have seen their wealth expand enormously (see Musk, Elon). But we’ve seen the effects here on the ground too. Take GameStop and the SPAC which Donald Trump has associated himself with - without any need to prove a plan to return capital to shareholders, these entities were able to get millions of retail investors to spend their hard earned money on their stock. Why? TO THE MOOOONNNNNNN. That’s understandably how charts like this look to people.
And now crypto. For starters, this is the most redistributive manifestation of the Fed’s policy in many ways. An unintended and slightly positive consequence. Because at least a lot of people who never otherwise would have sniffed wealth now have a lot of it.
But there is a fatal flaw with crypto. It has to pretend to have Intrinsic Value. Otherwise people will catch on that the $USD value of a cryptocurrency is a pure speculative bubble. At least stocks are somewhat connected to the companies they represent in the marketplace.
Proponents of crypto will say that the different features of one crypto vs. another are the reason why one costs more than another or has a higher market cap. They’ll compare the speed of an Ethereum transaction with that of a Bitcoin one, or will point to an upgrade which a crypto just went through as evidence that it now justifies a higher price per token. In the case of MANA’s price spike, the justification was the name change of Facebook to Meta, Inc. Metaverse in news = MANA goes up in value.
But the intrinsic value never changed. It’s still 0. We must not forget this, but I’m afraid we already have. We are presented with seemingly legitimate reasons why BTC goes up in value or Dogecoin skyrockets, and we accept them. It’s easier for money to grow on trees and not question how the seeds were planted in the first place.
People are now willing to spend their money, which they work all their lives for, on financial products that have not a shred of true value. While that’s always been a thing in our world, think sports memorabilia or expensive shoes, the difference here is the technology involved - this bubble is with us 24/7 through mobile apps.
The institutional participation is new too - many companies have made a habit of buying Bitcoin with a portion of their free cash flow. Mayors are getting paid in it now too. Everyone’s buying in, with the hope of their investment being worth more than it is now in US Dollars. Whatever the dream of crypto was, I don’t think it was to be a store of value for publicly traded companies. Or to be the sponsor of the building formerly known as the Staples Center.
The COVID era has changed us in so many ways. The crisis forced us to turn to our masters of coin for support, and they responded with QE. The money printer fumes as it ferocious prints, or creates digitally, out of thin air and we try to grab some like one of those carnival games. Many of us have become creatures who solely seek to have more money than we currently do. Perhaps we were already like that, but our greed has been hopelessly magnified in the last two years. Why not buy some bitcoin, why not put your life savings into ETH2? Everyone’s getting rich doing it, and you gotta keep up. You gotta get that return. I do it too.
If the public turns on crypto for any reason and the bubble deflates, the roots of the money tree will rot. Better just hope the dollar doesn’t fall too far from the money tree before you climb up too high on it.