Bitcoin’s Perfect Socio-Economic Storm
The Bitcoin Bull Market is Far from Over: Part 2
Welcome to Part Two of a two-part series dissecting the 2021 bitcoin bull market. Part One focused on the radical increase in the investability of Bitcoin as an asset over the past few years. We discussed the exponential growth in awareness, education, and infrastructure in and around the Bitcoin ecosystem. In other words, how more money will flow into Bitcoin. Part Two below will focus on why the money will flow into Bitcoin. It is not necessary to read Part One before reading Part Two but feel free to check it out here.
Taking a Proper Perspective
With Bitcoin’s price sitting at ~$36,000 at the time of writing, many people are wondering if Bitcoin’s magical 2021 rally has come to an end. While it is impossible to make that call one way or the other, it is possible to take an objective look at some fundamental dynamics in and around Bitcoin to see if we can gather some clues.
During moments of fear regarding the price of Bitcoin, it is important to remember what Bitcoin is and why it was created in the first place. In the words of Satoshi himself,
“[Bitcoin is] completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust… The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve”
- Satoshi Nakamoto
At its core, Bitcoin is about removing the need for trust in money. The day-to-day Bitcoin price fluctuates in accordance with the waves of human emotion. Meanwhile the fundamentals of Bitcoin remain steadfast, like a lighthouse unfazed by the crashing waves below. Nothing is fundamentally different with Bitcoin here at $36,000 than at $64,000 in March, or even at $3,800 in March of last year. Blocks of transactions are still being added to the chain about every ten minutes, the maximum supply is still 21 million, and no trust is required to make these things happen.
Therefore, attempting to project future inflows of capital into Bitcoin requires studying not Bitcoin itself, but the socio-economic environment surrounding Bitcoin. And in the 12 years since Bitcoin’s creation, the environment has never been more favorable.
The Race to Debase
“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust”
When it comes to breaches of trust from those in control of the currency, history is indeed littered with examples. From the Romans two thousand years ago, to the Germans one hundred years ago, to the Venezuelans of the past decade, the downfall of currencies always stems from those in charge of managing them. However, one does not need to look to history to find examples of monetary shenanigans, a quick look at the modern-day Federal Reserve is fully sufficient.
Money Zero Maturity (MZM) is a metric measuring the amount of liquid dollars in circulation, and includes the following:
Physical currency (coins and banknotes)
Checking and savings accounts
Money market funds
Below is a chart tracking MZM over the past 40 years taken from the Federal Reserve's website.
There are several things in the chart that stand out at first glance. First, you may notice the top of the chart is labeled ‘DISCONTINUED.’ Yes, that’s right. The Federal Reserve, the institution in charge of managing the nation’s money, will no longer provide this statistic to the citizens they claim to be working for.
Next, you may have noticed the giant spike in money supply in 2020. From January to December, MZM increased by five trillion dollars. To put that into perspective, spending $5 trillion dollars at a rate of $1/second would take 158,000 years. Put another way, the length of five trillion one-dollar bills stacked on top of each is 345,000 miles, high enough to reach the moon.
For a more practical perspective consider this: The money supply, as measured by MZM, increased by the same amount in 2020 as it did in the twenty years from 1980 to 2000. Twenty years of inflation has just been crammed into one. Like a drug addict, the economy is addicted to stimulus. A stream of constant injections is the only thing holding the withdrawal symptoms of market crashes and defaults at bay. But it is no secret that these injections are taking a toll on the health of the economy.
Inflation is Here
According to Federal Reserve and government officials, there is nothing to worry about when it comes to inflation. First, they told us that all this money printing wouldn’t lead to inflation. Now that they have no choice but to acknowledge it, they’re telling us that the inflation is ‘transitory.’ I, for one, am excited to see what sophisticated words they’ll use next to describe the ongoing increase in the cost of living across the country. But for now, let’s take a quick look at some of this transitory inflation:
(Year over year increases as of 6/1/21)
But commodities are not the only things increasing in price. While not typically included in inflation calculations, investments and hard assets are influenced by an increase in the money supply as well:
Zillow Home Value Index: +11.6%
CarGurus used Car Index: +29%
The S&P 500 Stock Index: +43%
Wealth inequality is one of the most hotly debated topics in modern economics and politics. I am of the opinion that a certain amount of wealth inequality is not only natural, but necessary in a free society. Someone who starts a successful business will inevitably make more money than someone who chooses to work at McDonald’s their whole life. However, I also believe that when the wealth divide gets so big it naturally leads to social instability that has the potential to tear down entire societies. Most people are quick to lay the blame at the feet of capitalism. The truth, however, is that despite their good (maybe?) intentions, governments and central banks are to blame for the growing divide between the rich and the poor.
Look back at the inflation rates listed above. Think about for a moment who benefits from prices increasing and who suffers. The obvious answer is that those who hold the assets are benefiting, and those who are trying to save up enough money to buy the assets are suffering. Who holds assets? The wealthy. Who wants to hold assets but can’t afford them? The poor. The American Dream is quickly becoming too expensive for the many young Americans.
One more question: Who is to blame for the increase in the cost of living? It sure isn’t capitalism. In fact, capitalism is the force working to keep prices down. Increases and improvements in technology, innovation, and competition i.e., capitalism, lead to lower prices. Government spending, and money printing are what lead to higher prices.
Bitcoin Fixes This
So what does all this have to do with Bitcoin? Everything.
Let’s take another look at the year over year inflation rates listed above, but this time instead of the USD being the denominator, we’ll use BTC as the denominator:
Zillow Home Value Index: -70%
CarGurus used Car Index: -65%
The S&P 500 Index: -62%
As you can see, not only has life not gotten more expensive for those on a bitcoin standard, but life has actually gotten considerably cheaper. Despite the massive housing boom, stock market frenzy, and lumber fiasco, bitcoin holders have seen their costs plummet over the past 12 months.
This is because, despite the recent ‘crash’ in price, demand for bitcoin over the past year has outstripped demand for nearly all other assets. Unlike the USD which has seen its inflation rate skyrocket (as seen in the MZM chart above) bitcoin saw its inflation rate decrease last May due to the pre-programmed halving event. This adjustment was not made by a group of politicians or bureaucrats, it was programmed into the code of Bitcoin from day one in 2009.
As the USD and other fiat currencies continue to get weaker so that governments can continue paying for their ever-expanding wish lists, Bitcoin will continue growing stronger and stronger. Nearly 90% of Bitcoin’s supply has already been mined, and the remaining 10% will not be fully mined for another 120 years. This is a fact that the majority of the world has not yet come to terms with.
A Game of Accumulation
While central banks and governments continue in their race to debase fiat currencies, individuals and corporations will continue to play their own game of accumulation of the hardest money ever created: Bitcoin. At the present moment, the market cap of Bitcoin stands at about $700 billion. To get an idea of how small this figure is, take a moment to compare it to other asset classes:
Global bonds: $128 trillion
- Negative nominal yielding bonds: $18 trillion
Global stocks: $95 trillion
Gold: $11 trillion
Bitcoin: $0.7 trillion
In a world where interest rates are not allowed to rise along with inflation, bonds are falling out of favor. The bond market is a $128 trillion dollar honeypot looking for a new home. In fact, $18 trillion of bonds have a negative interest rate, meaning investors are paying interest instead of receiving it. If none of this makes any sense to you, it’s because you’re thinking clearly. Our central planners have done what central planners always do, screw things up. But what they have done a good job at, is bamboozling the public into thinking they have everything under control.
By using fancy terms such as ‘quantitative easing’ and ‘transitory inflation’ the Fed disguises what is really happening: a whole lot of money is being printed. Most people are too busy going about their daily lives to take a closer look at what is happening behind the scenes. Unfortunately for those people, they will continue to walk through life as though they were on a treadmill, needing to continuously move faster just to stay put. The rest of us, however, will continue to see life get cheaper in the long run as we choose to denominate our expenses in terms of money that can't be messed with: bitcoin.
So is the 2021 Bitcoin bull market over? My money is on no, not even close. I believe that in the second half of 2021 we will continue to see currency debasement, and individuals and companies attempting to escape this debasement via bitcoin. But it’s important to remember that correct answer to this question is that it doesn’t matter. What the price of Bitcoin does over the next 6 months is inconsequential. In 2008 the prices of Apple and Amazon stock fell 58% and 64% respectively. Those drops meant nothing to stockholders with long term visions for both companies. It’s the same with Bitcoin. For those of us who understand where Bitcoin is headed, dips only mean one thing: more bitcoin.
Remember: when in doubt, zoom out.
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