August 3, 2020 BARRON’S 9
STREETWISE
What’s driving Bitcoin’s rebound? The leading
suspect is a slip in confidence in the dollar,down
7% against six key currencies since mid-May.
My Descent Down the
Bitcoin Rabbit Hole
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 Bit-
coin 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 contrar-
ian 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 sus-
pect 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, plusMcDonald’s(ticker:
MCD) andColgate-Palmolive(CL).
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 pre-
dicted. 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 infla-
tion, 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. dol-
lar 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 fi-
nance as in physics, motion is relative.
The exercise tracker on my watch says
Ihaven’tmovedmuchinaweek,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. Mea-
sured 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 non-
gold 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 treat-
ments and vaccines will soon pay off.
Although U.S. shares look expen-
sive 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 Bit-
coin forecast. I reached out to Meltem
Demirors, chief strategy officer at Coin-
Shares, 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 prof-
its, leading them to sell and park the
money in Bitcoin. The old me would
have said that makes Bitcoin the re-
serve 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 convinc-
ing case I’ve heard so far.
I figured out my prediction. Bit-
coin, 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.
A
merica’s tech giants received
a bipartisan videoconference
scolding from the House
Antitrust Subcommittee on
Wednesday. Yet shares ofAmazon-
.com(AMZN),Apple(AAPL),Face-
book(FB), andAlphabet(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 Twitter
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 shout-
ing match among House members?
“Put your mask on!” hollered one. “You
want to talk about masks,” said an-
other. “Why would the deputy secre-
tary of the Treasury unmask [former
National Security Advisor] Michael
Flynn’s name?” The leaders of compa-
nies valued at nearly a collective $
trillion quietly sat by, while the law-
makers who will run a near-$5 trillion
deficit this year brawled.
Thursday evening brought blow-
out quarterly results for the tech ti-
tans, and Friday, on the whole, more
stock gains.B
email: [email protected]
By Jack Hough
Barron’s Streetwise
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