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

“Confidence must be earned” is the current ad slogan of Amundi, Europe’s biggest asset manager. Keep it in mind while reading its latest thematic paper on what might follow crypto winter.

Paris-based Amundi can appear a bit bipolar about crypto. Last February it was reportedly investigating how to sell NFTs to clients while warning them about the “potentially destabilising systemic risk” of stablecoins. Former chief investment officer Pascal Blanqué called bitcoin a “farce”; his successor Vincent Mortier is more amenable:

“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 against galloping inflation in 2021-22, this was a period of dramatic rises in policy and market interest rates that pressured all asset classes. If inflation is high, but not rising, nominal interest rates will also likely stop climbing and may even fall a little. This is a much more favourable environment for an asset whose supply is finite and that has a long duration in essence, as its main attraction is its future potential rather than its current status.

And sure, maybe? The evidence we have suggests that as an inflation hedge bitcoin 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 finite supply is a precondition of all forms of existence (Aristotle, 350BC), and whether “future potential” can matter when applied to something that has unquantifiable exogenous risks and no intrinsic value (Amundi, 2021). But then, a firm doesn’t collect more than almost €2tn in assets by seeding FUD.

Amundi’s “five reasons why recent setbacks may not mean the end of cryptocurrencies” will be familiar to anyone who’s been to Davos or Reddit. There’s the shakeout, where a dotcom-style crash leaves behind a leaner group of eventual winners. There’s proof-of-stake mining as a route out of the energy boondoggle. There’s regulation, which “is more likely than not to be a positive in the end”. And there are signs that the financial mainstream hasn’t abandoned all hope in crypto, Amundi says, somewhat self-referentially.

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

And sure? Mayyyyy-be?

A person could argue that the dotcom bust wasn’t defined primarily by bankruptcies and fraud — or had more promoter fraud and less alleged theft — which meant a period of industry consolidation and retrenchment that’s unlikely to apply to crypto. They might argue that in its current form, proof-of-stake mining invites concentration of control so is in direct opposition to Amundi’s core argument. They might see recent crypto press releases from mainstream companies less as a promising sign for the ecosystem than as the light only 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 these pixels earlier this month: what’s the point?

Amundi says that for investors to remain interested in crypto, someone’s going to have to find something productive to do with a blockchain. Financial asset tokenisation is interesting in theory, but applying the concept comes with big hurdles around legality, delivery and adoption.

These are fair points but again are perhaps not up with recent developments, such as China’s use of blockchain for some ABS contracts. While the experiment might be lowering costs by a few basis points, research so far hasn’t been entirely convincing.

Mortier and Perrier conclude:

Blockchains, cryptocurrencies and tokenisation do have a lot of potential, be it in powering new types of decentralised organisations that can offer serious economic and social advantages, or in enabling new ways of trading and managing assets. The most likely outcome is that they will 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 allow time for another cryptocurrencies bull market to last a few years but not much more). At this stage, nothing is proven either way and the jury is still very much out.

Isn’t it normal to give evidence to a jury before expecting its verdict?