Bitcoin narrative woes: How Trump Fed pick Kevin Warsh will finally give price stability

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.

When the price of Bitcoin hit a low of $61,000 last week, the crypto-hating economists came out in force once again.

Nouriel Roubini talked about “The Coming Crypto Apocalypse.” Olivier Blanchard ruminated that even a valueless asset like Bitcoin can have a strategic advantage if it constitutes a hedge against adverse shocks, but crypto is not even good at that.

In other words, it has no value, and it is totally useless even as an opportunistic bet.

Comments like these have been around since Bitcoin’s inception nearly 18 years ago, and they accumulate whenever the Bitcoin price falls.

Macroeconomists are completely data-resistant. So is financial journalism.

The Financial Times’ backbiting headline after last week’s rebound rally was: “Bitcoin is still about $70,000 too high”.

The crypto community is right to ignore this, but it would be wrong to ignore the causes of the cryptocurrency’s undiminished volatility. This has to do with the fact that there are too many slippery crypto narratives around.

The signal is strong

For starters, Bitcoin is not a tech asset. It is not a hedge against short-term inflation fluctuations. It does not correlate with anything. Blanchard is right on that narrow point.

It is also not an asset that should benefit from a crypto-friendly US administration. Or from spot exchange-traded funds. If it is easier for people to get in, then it is also easier for them to get out. None of this affects the price in the long run.

The result of narrative confusion has been that noise overpowers the signal. The signal is actually very strong.

If you put a 365-day moving average on the Bitcoin price, you get a nice, steady progression in the price of Bitcoin.

The trend is not as good as people thought, but still very good.

At the beginning of this decade, the price of Bitcoin stood at $7,000.

Now it’s up 10 times — that’s after the crash. Bitcoin has massively outperformed gold over that period. But it is a lot more volatile.

To reduce the volatility, the industry would do well to adopt more focused narratives. Maybe it is my lack of imagination, but I can only think of two reasons, and two reasons alone, why an investor would rationally attach a positive value to Bitcoin.

The first, Satoshi’s original idea of Bitcoin as a transaction currency that is not controlled by governments. This idea has a positive, desert-island style insurance value.

The second, and more important reason is currency debasement. If the dollar debases, so will the rest of the global fiat money system. Bitcoin is the only hard transaction currency that could take its place.

If, however, you believe that fiat money will remain strong, that the dollar will continue to rule the world, then I struggle to see how you can attach any rational value to Bitcoin at all.

Without the idea of debasement, we should get used to the idea of the Bitcoin price as a crazy random walk.

The financial markets cannot make up their mind on this. They wobble between different narratives.

First, they believe in the debasement story. Then something happens, and they believe in something else.

Enter Kevin Warsh

When Donald Trump nominated Kevin Warsh as chairman of the Federal Reserve, markets expected Warsh to be a hawk.

I think this view underestimates the intelligence of Trump and overestimates the integrity of Warsh.

Warsh was a monetary hawk during his stint on the Fed’s board 15 years ago, when Barack Obama was president. He opposed quantitative easing. But now that Trump is president, he is in favour of big cuts in interest rates.

There is no real consistency to his narrative, except that he wants the Fed to divest the remaining assets from the days of QE.

But it is naive to think that there is a direct trade-off between assets held on the balance sheet and short-term interest rates.

The two affect the economy in different ways. The assets affect the long end of the bond market, the interest rates affect the Fed Funds rate at the short end. Mortgages and consumer loans sit in between the two.

I see Warsh not so much as a monetary purist, than as an associate member of Team Trump. He is married to Jane Lauder, a member of the Lauder empire that owns the Estée Lauder brand of cosmetics.

The head of the family, the multi-billionaire Ronald Lauder, was the first to give Trump the idea of acquiring Greenland.

Trump chose Warsh over other candidates. They all promised him that they would cut interest rates. Trump is wily enough to know that these promises are worth nothing.

How Trump fuels debasement

But the promises of business partners are different. If they fob you off with a lazy lie, they are no longer your partners.

Trump has essentially appointed the person over whose family he has the greatest control. That’s what the Godfather would have done. He did so in a way that the markets believed that Warsh would be a hawk.

This is very clever.

But it has not changed any facts on the ground — especially the overriding issue at stake here: that Trump’s policies are contributing to the debasement of the dollar over time.

The debt stats are awful. Monthly interest payments to foreign bondholders were around the $100 billion mark, per quarter, in the last decade. This shot up to $300 billion in the third quarter of last year.

And we have not even seen the fiscal effects of Trump’s One Big Beautiful Bill, the most irresponsible fiscal programme in US history.

I expect Warsh to do what Trump wants him to do — keep short-term interest rates low and be slow to act if inflation were to rise. Bitcoin could over time become part of the Fed’s official reserves and those of other central banks.

The lack of reserve asset status is what distinguishes Bitcoin from gold at this point —and it is the reason why the political uncertainty recently has been benefiting gold relatively more than Bitcoin.

Gold is not a transaction currency, but a stable reserve asset. Bitcoin’s role as a transaction currency is marginal, and its role as a reserve asset is close to zero.

Its price is premised entirely on a hope that this might change. What the crypto community should do is push Bitcoin into at least into some of the central banks.

Without Bitcoin as a semi-official reserve asset, the economists may well turn out to be right in the very long-run.