When repetition becomes financial reality

Central banks are buying gold in the 21st century for the same reason Romans bought it in the first: It has value because people perceive it to have value. 

That circular logic has proved so durable that the purchasing power of gold is virtually unchanged since antiquity.

In that sense, central banks are buying gold now because Romans were buying it then.

Perception has become reality through repetition.

The bet with crypto is that it can pull off the same trick, but faster — compressing millennia of belief into a few short decades. 

Lately, it’s started to look like it might.

Recent research offers empirical evidence that people are using crypto to protect against the risk of government default: “A 10% increase in sovereign CDS spreads is associated with a 2.9-4% increase in crypto app downloads.”

10%!!! 

It doesn’t take much to move a credit default swap 10%, so that correlation suggests people are quick to turn to crypto at any sign of a debt crisis.

Importantly, the correlation tests positive for causality: “Crypto adoption jumps in the months following news related to sovereign risk.”

The researchers established cause and effect by studying credit-risk events like inflation shocks in Argentina, Turkey and Venezuela and sovereign debt crises in Sri Lanka, Greece and Ecuador.

Advocates have been telling these stories for years as proof of crypto’s utility, but with limited effect likely because the evidence was only anecdotal.

But the data now supports the narrative.

In short, the study confirms that when bank depositors are reduced to stealing their own money, people really do turn to crypto.

Other studies also suggest that crypto’s narratives often line up with reality.

Bitcoin, for example, has long been framed as an escape hatch from irresponsible economic policymaking by corrupt governments — and that is, in fact, how people use it.

“We document a flight-to-bitcoin (FTB) phenomenon,” one study concludes, “whereby local demand for bitcoin increases with local economic policy uncertainties.” 

“FTB is driven by investors’ lack of confidence in government as FTB is stronger in countries where the confidence in government is low and corruption incidents surge,” the authors explain. 

It gets even better for the broader crypto narrative: “Bitcoin ownership shifts from centralized exchanges to decentralized wallets amid such turbulence.”

What could be more crypto-narrative-confirming than that? 

Another study even cites crypto as a reason for corrupt governments to change their ways, concluding that “the control of corruption appears to discourage cryptocurrency adoption.”

Crypto advocates sometimes celebrate government dysfunction as another confirmation of their narrative (and who doesn’t love having their narrative confirmed?). But if crypto could frighten governments into good-governance reforms, that would be an even better story, I think.

The same study finds that “higher emigrant ratios in…lower-income countries are associated with increased cryptocurrency usage” — with the implication that people find crypto useful for remittances. 

Remittances is one of crypto's original use cases, but it’s always been surprisingly hard to quantify. 

Western Union still hasn’t been fully undermined by crypto, but seeing the empirical evidence makes the remittances narrative more substantial.

Finally, another study backs one of crypto’s grandest storylines — that it puts money and finance beyond the reach of government control. 

Studying the relationship between international sanctions and crypto usage, the authors conclude that “sanctions can act as a significant motivator for countries to adopt cryptocurrencies.”

Satoshi set out to create non-sovereign money, and sanctions evasion is proof that it works as such.

If these academic studies feel, well, academic to you, you’re probably reading from a developed economy: All of the studies found their results primarily in emerging markets.

In the US, by contrast, bitcoin’s “digital gold” narrative took a hit in 2023 when it failed to hedge against 9% inflation.

But the study on sovereign default risk showed that people mostly use bitcoin to hedge inflation risks resulting from a sovereign debt crisis, and not, say, supply shocks.

Even with CPI at 9%, no one doubted the US’s ability to service its debts, so people didn’t feel compelled to swap their dollars for bitcoin.

But there are signs that crypto’s value proposition is starting to be recognized in developed countries, too.

“In just the last year,” the lead author of the paper on sovereign debt observed, “we’ve seen [the crypto] narrative migrate from being just an emerging markets’ story to one that folks in advanced economies are contemplating, too.”

The signs are mostly anecdotal so far, but also impossible to miss: Larry Fink referring to bitcoin as a “flight to safety” asset class; Jim Cramer recommending both bitcoin and ethereum as a hedge against deficit spending; even the US government itself starting a strategic bitcoin reserve to hedge against its own irresponsibility.

The risk of US default remains small — but not so small that Wall Street, CNBC and the US Treasury can resist hedging it with bitcoin.

The more that behavior is repeated, the more the perception of crypto will become its reality.

— Byron Gilliam

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It’s the summer of DATS and the party is going strong. 

But when October rolls around, everyone will be looking to DAS: London to hear from these meta-defining voices on where things stand and where they’re headed. 

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📆 October 13-15 | London