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What Bitcoin's Latest Price Move Says About the Social Mood of Money


It's possible that mood is starting to turn positive.


A while back, I wrote a piece about Bitcoin and where I thought it fit in the digital landscape of money. It's a leap forward in how we think about what shape/form money can take, for sure. Is it ready for widespread adoption? No. Will it ever be? Possibly, but I doubt it.

Regardless of what I or anyone else has said, it has been virtually impossible to escape the chatter of the digital currency since then. And the currency itself has been on a tear:

A lot has been made about the price increase in Bitcoin over the past several months. It truly has been staggering. So, of course, the rise in volatility of the crypto-currency has increased.

But what's shocking is just how much it has increased. I was really curious about this, because I wanted to quantify it somehow. So I calculated moving standard deviations of 10 and 20 days, just to get a feel for it. But, given the parabolic nature of the price increase, I didn't think that was good enough. So I took those standard deviations and expressed them as a percentage of the 10- and 20-day moving average prices:

On some days, a one-standard-deviation move translated into a 41% price move. Think about that. A standard deviation is supposed to cover two-thirds of the possible outcomes for any given population. So to cover two standard deviations, you could wake up to find out you either doubled your money or you were completely wiped out.

But okay, sure -- Bitcoins are volatile to trade, we all know that. But they can't be that much more volatile than anything else, can they? Well, yes.

I took the same number of trading days in gold between April 2010 and September 2011 -- which is about the same time gold saw its historic peak -- to benchmark Bitcoin with. This chart, which also looks at gold's standard deviation expressed as a percentage of 10- and 20-day moving average prices, gives some perspective on just how volatile Bitcoin is relative to something else, which is typically thought of as being rather volatile in its own right. I don't think much else needs to be said if we're comparing volatility between asset classes:

Another discussion point about Bitcoin has to do with its impact on the economy should it become a strong force: Some say that given that it's a deflationary currency, it wouldn't be conducive to economic growth. The counterargument has always been that the US grew quite well on its own after the Civil War and into the early 20th century, while it was on the gold standard. That is true.

But how much does a currency, or a currency standard, have to do with economic growth? Aside from taking away the frictions that come with using physical commodities as the currency to settle transactions, it may not matter as much as you think. Because to look at our use of a gold-backed currency as a reason for economic growth in the mid-19th to early 20th century is to miss the forest for the trees. What am I talking about? Consider this chart from Federal Reserve Bank of Richmond economist John Walter's paper examining bank failures leading up to and through the Great Depression. It's a chart of the number of banks that were in the United States between the mid-1800s through the 1960s:

If you read the rest of Walter's paper, he makes the assertion (rightly so, in my opinion) that the bank failures of the Great Depression era were the result of a banking bust following several decades of relentless growth and massive technological upheaval in late Victorian-era America. The fact that we could see a rise in bank failures before the Depression and the Crash of 1929 only add credence to one of Todd Harrison's oft-repeated sayings that the stock market crash didn't usher in the Great Depression, but rather the Great Depression caused the market to crash. Mood was already negative and growing. The fact is that bank failures started rising in 1921. See below:

My point is this: The type of currency is of little consequence so long as positive social mood drives behavior that fosters the expansion of credit within the economy. Meaning, the real driver of the economic expansion back then was the expansion of credit and overall willingness to take on risk, not the kind of currency used. If people are feeling good about their world today, and they see that positive feeling carrying through to tomorrow, next week, or next year, their risk appetites will expand.
Given that the ethos behind Bitcoin is a perpetual state of distrust of everyone and everything, it is the ultimate vehicle to express falling social mood (i.e. "me, here, now" behaviors). But what I didn't know about was the proliferation of copycat crypto-currencies. And what's really interesting is that they all seem to be following the same price trend as Bitcoin. So while Bitcoin is the crypto-currency poster child, the world according to crypto-currencies is highly fragmented and very illiquid.

But here's the real Achilles' heel of a Bitcoin and its ilk: As they are designed, crypto-currencies don't really foster the use of credit within their economy. No one borrows Bitcoins or any other digital currency to buy something. It's a "me, here, now" kind of purchase, or nothing. Trans-Atlantic cables for telegrams and telephones didn't get laid because someone had all of the money up front, they got laid because someone took a chance and lent the money out, expecting to get repaid over time by some future date. That takes trust.

And as people trust other people and institutions again, fears subside. The latest congressional budget deal is an example. Sure, it's a measly deal, and there were no grand bargains struck. But given where Congress was two months ago, it's an improvement. Maybe, just maybe, social mood is starting to turn more positive. I'll admit it's something I've been waiting to see for the past couple years. So while it may not have turned yet, every day brings us closer to that eventuality.

Have we seen the end of societal acrimony or political dysfunction? No. But I will say that Bitcoin and the other crypto-currencies can act as a pretty good barometer of what our social mood is like now.

Related: The Basics on Bitcoin: 11 Things to Know About This Suddenly 'Hot' Digital Currency

Twitter: @japhychron
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