This post is part of CoinDesk’s 2019 Year in Review, a collection of 100 op-eds, interviews and takes on the state of blockchain and the world. Ari Paul is CIO and managing partner of BlockTower, an investment firm.
Cryptocurrency has many value propositions, including censorship resistance, seizure resistance, and global coordination without middlemen. Until recently, one value proposition seemed largely hypothetical – depreciation resistance (that is, a store of value immune to inflationary money printing at the whim of central bankers or politicians). While bitcoin fans have long noted how fiat is devalued over time, bitcoin often appeared like a solution in search of a problem in this regard. With minimal inflation in the developed world over the past decade, most people were quite content to hold USD or EUR or JPY. When Argentines sought to escape their severely inflationary peso, they were happy to store their wealth in relatively stable USD. In 2019, we saw the emergence of cryptocurrency as an alternative store of value.
The modern financial system depends on a few critical narratives. One is that prices on capital markets reflect the decisions of rational buyers and sellers. Another is that the central banks can be trusted to manage the supply of leading fiat currencies to achieve, at worst, moderate inflation.
The first narrative broke after the financial crisis. Central banks became the largest buyers of sovereign debt issuances and forced interest rates to artificially low levels. Today, there is $17 trillion worth of sovereign debt in circulation offering negative yields. Investors are literally paying debtors to take their money. Many prominent investors, like Howard Marks of Oaktree, are noting that this is unsustainable and irrational at face value, a symptom of a broken market. As owners of central bank-inflated assets over the past decade, these same investors profited from this dislocation, but now they are publicly shouting warnings.