From Bitcoin Fundamentals Report #188 newsletter 22 April 2022
The extent of most people and pundits' bitcoin framework is that it is 'a hedge against inflation and is a risk asset.' That is difficult to square with massive risk events happening from Europe to China to US real estate, yet the bitcoin price is generally sideways for many weeks, or when CPI is taking off and the price is stable.
Since the Ukraine invasion on Feb 24 and the subsequent embargos on Russia, which should be a risk off event and a huge threat of recession, bitcoin is up 8%. Yes, consumer prices have increased in the last year too, but that alone does not distinguish between monetary inflation vs supply shocks.
It is dangerous to have a bitcoin investment thesis that relies only on inflation and risk appetite, because recessions happen. There is little reason to hold bitcoin if recession and deflation are looming if that's the extent of your thesis.
My analysis goes much deeper and often rubs people with the above view the wrong way. We need to understand, why after 12 years of QE (what we are supposed to believe is money printing), was CPI so restrained until April of 2021? For the whole life of bitcoin, CPI was sub-3%, except a brief period in 2011. It still did alright!
In the above chart, I tried to match up the YoY CPI with the bitcoin price. The black arrows are where they did not agree, and the green arrows are where they did agree.
There is no apparent evidence that bitcoin is a CPI hedge. Just look at the last ~2 years. CPI has screamed higher, hitting 8.55% in March 2022, yet the bitcoin price has been consolidating or down since at least November 2021 and one could argue the last rally ended April 2021, right as CPI started to accelerate upward. Can you honestly look at the chart below and say that higher CPI is a positive indicator of the bitcoin price???
I'll grant, the inflationist investment thesis for bitcoin is partially true. I don't mean to say that bitcoin wouldn't act as a hedge against inflation. However, if CPI starts falling and we go back into recession this year, where does that leave your investment thesis? What about all the pros and bros on Wall Street holding bitcoin as an inflation hedge because that's what they learned from the bitcoin media/educational community? They'll sell.
The recent CPI spike since April 2021 is temporary (I don't use transitory because high time-preference people have thoroughly perverted its intended meaning). The long term trend of lower rates and lower growth is still intact. Where does that leave bitcoin?
The inflationist thesis won't cripple bitcoin in the coming recession, but it can cripple people who believe it so much they sell. So, what is a better investment thesis for bitcoin that will lead to sustainable holding?
In a credit crisis you want to hold things without counterparty risk. The two options are gold and bitcoin that are monetary assets not beholden to someone else's debt. Bitcoin fits that bill better than gold, because it can be settled around the world in ten minutes for a few cents. Imagine settling in $1 billion in gold, shipping, securing, assaying and storing that payment. Therefore, bitcoin should go up as CPI goes down.
Second, Bitcoin's ecosystem continues to grow: mining, wallets, trading, stablecoins, media, savings, lending, collateralized loans, etc. As the rest of the system is stagnating or crashing, demand for bitcoin in financial products is growing.
MBS (mortgage backed securities) are effectively manufactured collateral-grade instruments. They proliferated prior to the Great Financial Crisis (GFC) because there was a dearth of quality collateral to sustain an expanding global credit system (collateral shortage).
Just spit-balling here, but what if, in this coming crisis, when people flee to the safety of collateral and dollars once again, there was a Bitcoin Backed Security (BBS)? Idk how it might look, perhaps just straight bitcoin or bonds sold by bitcoin miners. It's something to think more about.
The third part of a better bitcoin investment thesis, other than bitcoin being counterparty free in a credit crisis and having a thriving ecosystem insulated from boomer credit stagnation, is its network effects. It is a young technology and has a long way to go. The risk is very asymmetric, not much to lose but a whole lot to gain. Price will fluctuate around a mean growth rate as we've seen in bitcoin's past. And it's about time for the next rally.
An investment thesis for bitcoin based on inflation and being a risk asset, is thinking about it exactly backwards. You can't put off the collapse of credit bubble forever; it will eventually burst. Most people say they will just print money and inflate away the debt. My answer to that is, "They print debt. They cannot solve a debt problem by paying it off with more debt."
The coming pop of the largest credit bubble the world has ever seen, will not be inflationary. The inflation already happened over the last 75 years.
Recession is coming and we need a recession investment narrative. Bitcoin is a deflation/recession hedge, because there is no counterparty risk, the ecosystem is thriving and its growth is insulated from dollar risk, and it's a new technology at the start of its adoption curve.
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