LightningCon Vietnam 2023, Keynote addressed by Jack Lee
On March 24th, 2023, HCM Capital Managing Partner Jack Lee gave a keynote speech on why bitcoin becomes a hedge against inflation in emerging markets at Lightningcon Vietnam 2023. This blogpost features the slides and builds upon the ideas shared during this address.
In emerging markets, remittances make up a large share of GDP in many countries. Here we list the top ones by total amount and by the percentage of GDP relatively. However, in terms of the current transaction, there are many limitations, for example, the high fee, the slow speed, the safety issue, and the unbanked population in emerging markets. This situation requires an updated system, the lightning network can be a solution.
The figure above shows that most of the world's highest unbanked population is in emerging markets. Globally, the region with the highest population percentage is the Middle East and Africa, which is around 50%.
Therefore, just as Cathie Wood said in an interview with Yahoo Finance “People living in emerging markets with hyperinflation need a fallback option and an insurance policy. They need Bitcoin. ”
When it comes to the emerging market, we cannot only focus on the emerging market itself. Let’s talk about the USA. On March 10, Silicon Valley Bank was announced to be closed by the California Department of Financial Protection and Innovation due to “insufficient liquidity and insolvency”.
Only two days later, on the 12th, US regulators announced the closure of Signature Bank in New York on the grounds of “systemic risk”. The European financial institutions were also affected. On 19th March, the Swiss government approved UBS's purchase of Credit Suisse.
The USG acted swiftly this time. It guaranteed all the deposits of Silicon Valley Bank and Signature Bank using something called the Deposit Insurance Fund. This is a government-mandated insurance fund paid for by other banks. It also created a program called the Bank Term Funding Program, which lent a bunch of money to other shaky banks in case they need to get cash quickly to pay their depositors.
However, interestingly, while saying “fighting inflation”, Fed printed trillions of dollars in a week. The curve here is already verticle. This is Fed’s panacea: Print more money to solve everything!
Fed is not the only one who is lying. Biden’s government is also advocating their achievements, while Elon Musk replied with a sarcastic tone: “Umm…the banks are melting.”
But why did this happen? For 40 years, interest rates were basically a one-way bet. They just went down and down and down. The reason was that there was no inflation. But then in 2021, inflation reappeared.
Banks borrow short to lend long, when depositors ask for their money back, banks have to sell their long-maturity assets to raise cash to pay off the depositors. Therefore, the deposit side needs to keep rolling and renewing deposits in order to maintain the balance of funds in the bank. If some reason causes a large loss of deposits, the bank will need to borrow cash from other banks or sell assets in exchange for cash to meet the needs of depositors to withdraw deposits. In general, bank depositors do not withdraw large amounts of deposits in a short period of time. However, there are many high-tech companies as depositors of Silicon Valley Bank, some of which are also crypto companies. They have suffered heavy losses in the past year and financing difficulties have caused them to withdraw deposits in large quantities, causing liquidity difficulties for Silicon Valley Bank.
The rising rates have caused the rising costs on the liability side and the decrease on the asset side, which caused the SVB’s bank run.
This story tells us: There are no TBTF (Too Big To Fall) banks, and this is a systematic crisis.
The rate hikes strengthened USD. The influence is not limited to the US but also in other parts of the world.
The cost of imports from the EU and the UK has risen sharply, and the purchasing power of the people has dropped significantly.
Developing countries are particularly affected compared to developed countries. Many emerging economies that have performed well in the past have suffered huge damage from dollar rate hikes in 2022. On the one hand, many developing countries rely on imports of energy and food. Since energy and food are mainly denominated in US dollars, the exchange rate of the US dollar has risen, which has greatly increased the cost of imports in these countries, triggering imported inflation. On the other hand, the rise in US dollar interest rates have triggered large-scale capital outflows and financial market turmoil in these countries. In addition, high prices may trigger social unrest in developing countries. The rise in the exchange rate of the U.S. dollar has led to a sharp increase in the debt repayment pressure of developing countries and even faced the risk of forced bankruptcy, and the international reputation may be greatly reduced.
2022 was a year of high inflation in ASEAN due to the supply shortages stemming from the Russia-Ukraine war. Regional inflation averaged 4.8% YOY in 2022, with Thailand, Singapore, and the Philippines seeing the highest inflation levels.
The emerging markets have been obviously affected by the US interest rate hikes, mainly manifested in the increase of capital outflow and the sharp depreciation of the currency.
Same as USG, the ASEANG chose to hike the interest rate.
And this is not the first time. Just as Mark Twain said, “History never repeats itself, but it does often rhyme.”
In the 1990s, the Fed raised interest rates 7 times over a 13-month period to curb inflation. In July 1997, the Thai baht depreciated sharply, and then the shock wave quickly spread in Southeast Asia. Many large enterprises in Asia closed down, workers lost their jobs, and a large-scale socio-economic depression appeared.
Since March 2022, there have been 8 times of rate hikes. Sri Lanka recently declared national bankruptcy due to its inability to repay foreign debts.
Emerging markets need a larger, more liquid, and more secure alternative monetary system.
Let’s think about Bitcoin. Bitcoin was created in 2008, after the financial crisis. We generally believe that Bitcoin must have some connection with the economic environment at that time.
Bitcoin was created just to help to get rid of the drawbacks of the traditional currency system. First, the government monopolizes and overissues currency. Second, the currency is unstable, especially in countries with unstable political situations. These two points are the inherent drawbacks of the traditional legal currency systems in various countries around the world, and the recent financial incidents are just proof of these drawbacks.
Digital Scarcity: Bitcoin is valuable, not because of a particular feature, but instead because it achieved finite, digital scarcity. The total supply of Bitcoin is fixed, which is 21 million. This attribute determines that Bitcoin is deflationary by nature.
How about other cryptos? Bitcoin is backed by energy, while other cryptos are backed by certain venture capital. They have an unlimited supply. The value of those projects is subjected to the market’s trust and positive response to the founders behind them. We all know the collapse of these two famous projects: Luna and Solana, which seemed promising.
Also, when it comes to crypto, we cannot forget the FTX’s collapse in 2022. SBF has devoted a lot of time and money to maintaining relationships with regulators in Washington. The whole family has a relatively deep connection with the political organization of the Democratic Party. The collapse of FTX has set off the largest crypto-related bankruptcy ever.
Bitcoin is different, it’s not backed by any VC or political group, but by energy. This is the best alternative monetary solution for emerging markets.
A centralized system is a risky outtake by trusting your asset in a third party, today we have a new system that is decentralized and allow us to take back our own power with money.
Bitcoinization is happening, while 40 years ago, Hayek said so trying to introduce an alternative monetary system to the current one, nowadays, this assumption has been realized. Bitcoinization is happening.
In the right chart, the author presents a growth and adoption model for Bitcoin based on a mineral crystallization scheme. According to it, we are still in the ‘nucleation’ phase, characterized by a fervent activity around wallets, exchanges, nodes, mining pools, and micro-bubbles, supported by a strong inflow of engineering talent. The blue curve is the nucleation rate which describes the formation of aggregates that ultimately combine to form a crystal lattice.
The red line is the crystal growth rate with saturation/crystallization achieved at the top right and flat part of the S-curve. The estimates of how valuable Bitcoin would become after global hyperbitcoinization vary based on what weighting is included for different stores of value (gold, government money, real estate, stocks, bonds, art, oil, and other commodities are all used for this purpose today)
Considering Bitcoin represents an existential threat to government fiat money and central banks, we must also consider their decisions from a game theoretic perspective.
When Bitcoin becomes the world’s preferred currency, BTC will no longer be priced in any fiat equivalent (1 BTC will be worth 1 BTC) and BTC won’t regularly be exchanged (or sold) for any other currency. All goods and services will be available for BTC and, critically, this economy will be deflationary, as opposed to inflationary.
Last but not the least, we want to invite all the attendees to look at this interesting comparison: In 2022, before FTX’s final collapse, SBF said “FTX is fine. Assets are fine”. And now we all know the end of the story. And this year, after a series of ban runs, Powell is still saying that the bank system is safe and sound. But, who knows the end of this new story? Let’s just wait and see.