Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for UnHerd. Opinions are his own.

It took only a relatively small correction in tech stocks to trigger a 40% slump in Bitcoin’s price.

Now, imagine for a moment what would have happened in case of a much broader market meltdown, the kind of which many investors now expect to happen at some point?

The crypto industry would do well to find an answer to this question.

Bitcoin’s big problem is that investors are treating it as a super procyclical tech stock. The crypto community should have pushed heavily against this because this is not in its long-term interest.

‘The single most damaging event for the crypto industry was the arrival of Bitcoin exchange-traded funds’

—  Wolfgang Münchau

When cash-strapped investors are forced to clean out their tech portfolios, they realise that there is a real income stream behind Nvidia, but not behind Bitcoin.

No asset class can choose its investors.

But these are the wrong investors. They push up the price in good times, and they are the first to get out when the going gets tough.

One of the astonishing parts of the DL News story about Ray Dalio, the founder of the investment firm Bridgewater, was not his statement that Bitcoin would never be gold, but his mistaken assertion that Bitcoin transactions are not private.

If one of the world’s most influential investors does not understand this fundamental aspect of Bitcoin, then we can say for sure that the cryptocurrency’s principal features are not widely understood in the non-crypto communities.

I have written about the ignorance of macroeconomists, but ignorant investors are much more consequential.

Based on what Dalio believes, it really would not make sense to invest in Bitcoin.

Two reasons to hold Bitcoin

The single most damaging event for the crypto industry was the launch of Bitcoin exchange-traded funds, which turned Bitcoin into the speculative asset it has become.

There are only two rational reasons why people would want to hold Bitcoin.

The first is that a cryptocurrency allows the owner to transact in the most adverse of circumstances, where their government, or someone else’s government, does not want them to transact.

The second reason is that they are algorithmically safe from debasement.

The ETF does not give you Bitcoins. It gives you a claim to the dollar price of Bitcoin. The full value of Bitcoin lies in the thing itself, not in the stuff that tracks the thing. An ETF is not a transaction currency.

As for debasement insurance, ETFs provide it nominally, but there is something odd about the fact that the unit of account of this insurance, the US dollar, is exactly the currency the debasement of which you want to protect against.

I understand that ETFs are more convenient for many investors, but they come at a cost. If the global financial system melted down, your ETF would be gone. Bitcoin would still be there.

Bitcoin is tech, but not a tech stock. Like gold, it should occupy only a small part of an investment portfolio.

Right now, it sits at the risky end.

I suspect that most investors would want to hold no more than 10% of their portfolio in Bitcoin or other cryptocurrencies. What happened is that more and more investors treated Bitcoin as a speculative asset in its own right.

It was not designed for that purpose.

Satoshi Nakamoto, Bitcoin’s secretive founder, would turn in his grave if that’s where he resides.

‘Haggling over the price’

People who look at Bitcoin in the way I do — as an alternative transaction currency and debasement insurance — can still disagree on the value.

If you are a macroeconomist, you would pay zero dollars for such insurance, since your economic model tells you that debasement is impossible.

Others, like me, see this differently. But in essence, we are just haggling over the price. That’s how markets work.

But if you think of Bitcoin as a glorified tech stock, and I think of it as an alternative money, then there is no market mechanism on earth capable of arbitraging our different perspectives.

This is why the actual Bitcoin price looks like the random walk of a cocaine addict.

‘ We are one war from financial Armageddon’

—  Wolfgang Münchau

Here is my answer to my question in the beginning: What would happen if there were a big financial crisis?

I think Bitcoin would be in existential danger.

One plausible crisis scenario would be an artificial intelligence-induced mass layoff of white collar jobs so severe that it would trigger a collapse in consumption and mortgage defaults.

This was the scenario outlined in a report by the research firm Citrini that spooked the markets.

My own crash scenario is a different one, but no less severe.

The US is running a fiscal deficit of 7% of GDP. The war against Iran could easily push this up to 10%. US debt is projected to reach 156% by 2055 under the IMF’s baseline assumptions.

But if the nominal growth is 1pp below the assumed rate, this level of debt would explode to 210%.

We are one war from financial Armageddon, or one economic forecasting error.

In Europe, the big problem is no longer Greece, but France. The European Commission had a truly alarming report out on French debt sustainability. Interest rates on its outstanding debt are expected to grow from currently 2.1% of GDP to 5% in 2035, while the debt-to-GDP ratio is expected to rise from 116% to 140%.

This is just governments.

According to Moody’s, the volume of private credit under management has gone up from approximately half a trillion US dollars in 2015 to approximately $1.7 trillion in 2024. BlackRock has just stopped redemptions for one of its private credit funds.

Every financial crisis is preceded by jitters such as these.

When our credit bubble bursts, the fiat universe will turn into a hyperinflationary mess. This is the world for which Bitcoin was designed and against which it should provide insurance.

But if it gets sucked into this world, it cannot provide this function.

Joyride

In a global financial crisis of the magnitude I just described, speculative cryptocurrencies would be at risk of being swept away.

There are, in principle, three ways to think about financial crises.

Not to think about them at all, which is the default mode; to try to anticipate them, which is difficult; or to be prepared whenever they may happen. That’s the smart way.

This is what the crypto industry should do at this point.

Get off the joyride. Find a new story.

Bitcoin is not going to be a unit of account for a long time, if ever.

But it has a chance to fulfil the other two functions of money – that of a means of transaction and a store of value. But a currency as volatile as Bitcoin cannot credibly claim to be a store of value.

These are the themes I would urge the crypto-community to think about, rather than to plot the next bull market ride. The risk of a global financial crisis is not a hypothetical scenario, but something very real.

Gold will remain a debasement insurance. So will copper. Maybe prime properties will make a comeback.

Bitcoin has the potential to be right up there on that list.