Coming to light after the financial darkness of 2007-2009, Bitcoin was birthed—but it doesn’t have a parent or a home. As an asset precisely constructed to deal with the shortcomings of central planning, will it be successfully tested in the likely near future of run-off inflation?
Coalescing Hyperinflation Narrative
In a planned economy, it is important to note what the central committee is up to. Last week, on Tuesday, the Federal Reserve Chairman Jerome Powell addressed the Senate Banking Committee. Few were surprised to learn that economic hardship and instability will continue. Accordingly, the Fed’s current policies will proceed as planned.
Specifically, the Fed funds rate—an important interest rate set for commercial banks to lend and borrow—will have to be maintained within the range from 0% to 0.25%, continuing its historic low.
Powell noted that strong demand is pushing Treasury bill yields near zero. If you recall, Treasury yield represents an effective interest rate paid by the U.S. federal government to borrow money. Overall, Powell concluded that economic recovery is “far from complete”, which necessitates more Quantitative Easing (QE). In other words, further increase of the already record-breaking money supply surge.
Until the Fed’s set goals of economic stability and growth are achieved, it will continue to buy treasuries and mortgages on a monthly basis, worth about $80 billion and $40 billion respectively. All of this was to be expected. However, what was left out of the focus during the Senate Hearing is more telling—yield curve control.
This makes it clear that inflationary pressures are already built-in. In turn, the narrative for the dreaded 1970s-style commodity inflation becomes more likely with each passing day. Michael Burry picked Weimar Germany (1914-1923) to draw the startling parallels to the current state of the US economy, flatlined by “flattening the curve” that started the spree of economy-leveling lockdowns almost a year ago.
“The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket.”
— Cassandra@michaeljburry, February 20, 2021
Such a crash masquerades as growth, at first: strong currency exchange rate, rising stocks, speculative growth of businesses with lowered bankruptcy rate. Eventually, after eight years of this, the crash represented only a single one. However, no other period in history had governments instituting pandemic-driven lockdowns with such a negative effect on human capital.
The question is, if we are to face the greatest crash in monetary history, what asset will pull through the turbulent devaluation period?
Bitcoin As A Hedge Against Inflation
2020 has not only eroded the U.S. economy but it has also brought deep societal and cultural rifts to the fore. Rioting seems to have become a national pastime, culminating in the seemingly permanent militarization of the nation’s Capitol. In conjunction with America’s foreign policy, its standing in the world is seen by some as quickly eroding—as much as its economy.
Translated into economic terms, a severe market crash—comparable or worse to the one in 1929—will almost certainly exacerbate many social ills plaguing the country, cascading from one downturn into another. Global investors would flee the USD, which has already devalued significantly compared to Bitcoin—a cryptocurrency with an embedded deflationary mechanism and, more importantly, without a master.
Because of these properties, Bitcoin received the moniker “digital gold”, but without the cumbersome nature of gold and its associated costs of storage, transport, mining, and security. Inspiring other decentralized projects, Bitcoin was followed by another cryptocurrency—programmable Ethereum—birthing an entire ecosystem of Decentralized Finance. Not only has it ignited the hopes of the unbanked, but DeFi has attracted a wave of talent using open-source-driven tools and technology.
In today’s technology sector, open-source tools have become increasingly popular in all aspects of web development. The Ethereum blockchain leverages the popularity of open-source tools and integrates it with decentralized protocols—many of which replace the work done by traditional financial institutions.
At this point, it is safe to say that institutional investment in Bitcoin has firmly broken the prevailing sentiment of viewing Bitcoin as something that lacks legitimacy and is too risky. MicroStrategy, in particular, led by Michael Saylor, had already bought 90,531 Bitcoins. This translates to $3.9 billion as of February 28th. However, just a week before, on February 21st, that amount of Bitcoin was worth $5.1 billion. This makes it a highly volatile asset compared to stolid gold at ~$1,800 per ounce.
Nonetheless, Bitcoin’s price moves are reminiscent of a high-growth tech stock, oscillating between valley peeks on an overall upward trajectory. On the other hand, gold’s price is effectively a flatline.
After Taylor’s successful “Bitcoin for Corporations” event, other institutional investors, such as Tesla and Square, onboarded the Bitcoin train, each one spurring its price higher. All of them are betting on the Fed’s race to inflation, which Jerome Powell has all but confirmed at the last House Hearing.
Currently, it appears we are inside Bitcoin’s price correction period. However, even this is short-lived, according to a S/F (stock to flow) model that has proven its algorithmic accuracy before, based on Bitcoin’s key features—rarity and mining rate.
If anything, Bitcoin’s price correction periods present themselves as opportunities for HODLERS—a popular term for people who are looking at BTC’s price at $100k or beyond. In other words, pressures against Bitcoin are quite different from pressures against high-growth tech stocks.
While increased asset correlation in imploding bear markets has stood the test of time, Bitcoin has emerged after the last financial crisis of 2008. Unlike any other asset, its benefits can sometimes extend to even its tax status compared to how stocks are taxed. Combining many utilities and becoming the de-facto go-to asset for a growing number of institutional investors, it’s difficult to justify Bitcoin as anything other than a hedge against inflation.
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