Bitcoin & World Reserve Currencies Amidst COVID-19
Hey there crypto-sphere! First of all, I sure hope this article finds you all in good spirits. To say the last few weeks have been a wild ride would be the understatement of the bull mark-… oh wait. I wanted to put something on paper that encapsulated my thoughts on what I feel has been going on with the global markets as of late. Mainly to help myself digest and metabolize all of this madness… But if anyone reading can find it the least bit helpful or find some sort of solace in it, then that’s even better.
I literally sold the top of the stock market. Sounds badass right? Not quite. While I predicted that COVID-19 would act as the catalyst to the inevitable bear market, I falsely predicted the timing in which Bitcoin would assert itself as a safe haven asset. So what did I do? I sold all my stocks at the top of the market and immediately put it all into Bitcoin thinking I was making a gangster move. I did not think Bitcoin would move in parallel with Wall Street or act as the sort of futures that it has over the last few weeks.
I’m sure I wasn’t the only one who thought that Bitcoin would act as a safe haven asset sooner rather than later. Looking back on things its evident why Bitcoin experienced the price action that it did during the initial onset of the COVID-19 pandemic. So let’s take a look at some of the reasons for Bitcoin’s erratic price action so that we can be better prepared the next time something like this happens.
- Even safe haven assets drop dramatically during liquidity crises. Liquidity crises occur when assets become overbought, panic selling ensues, and investors are forced to liquidate other assets in order to meet margin calls after losing on their long positions. Basically people are willing to sell any asset for prices they would not have sold for prior to the downturn. For example, gold, a proven safe haven asset, dumped 30% in a 6 month period during the last financial crisis. In a liquidity crisis, cash is king. Anything that can be sold for cash will be. That doesn’t necessarily mean it’s not a safe haven asset though. Between 2007 and 2011 gold went from roughly $600 to $1800 while stocks fell and then went sideways… Point being, no asset is immune to a short term liquidity crisis. I believe Bitcoin will see a similar run to what gold experienced prior to the end of the last bear market on Wall Street.
- Bitcoin doesn’t have a circuit-breaker. There have been multiple instances so far in 2020 where the Dow Jones has dropped by more than 7% shortly after opening. This triggers what is called a “circuit-breaker.” A circuit breaker temporarily halts trading which gives investors and traders a chance to catch their breath in an attempt to allow clearer heads to prevail and curb panic selling. Bitcoin does not have this. In a truly free market its survival of the fittest. When Bitcoin starts falling, there’s no slowing it down. This has been on full display a few times since the dawn of the “coronaconomy.”
- Bitcoin does not have trading hours. US stock market floors are closed more than they’re open. Similar to the circuit breaker, when the market is closed, it allows investors to individually and collectively gather their thoughts. A truly free market’s trading hours are 24 hours a day, 7 days a week. Much like circuit breakers, non stop trading results in higher volatility.
- Whales want the best price possible before the “Halvening” set to occur in May. If I was a whale and I knew that the production cost of a single Bitcoin was about to dramatically increase, I would want to get as much Bitcoin for as cheap as possible as soon as possible. Thus I would be frothing over the idea of working in tandem with a global pandemic to drop the price freakishly low.
- Miners wanted to sell the BTC that they had while it was still higher than what it cost them to produce it. Many whales are miners and many miners are whales. So this point and the last are symbiotic with each other. If I’m a miner and I’m anticipating a major price reduction, I’m going to want to sell the Bitcoin that I mined while the price is still higher than the production cost. According to an article on Coindesk, the price to mine a single Bitcoin post “Halvening” could jump to $12,525. You better believe no miner will be willing to sell for anything less than that. Which means, more Bitcoin being HODL’d.
- People were getting straight up liquidated! One reason I believe we saw Bitcoin hit the upper $3k range was because past a certain point investors were getting liquidated on their long positions. Most people did not see Bitcoin ever going sub $4–5K again so tons of people were long on Bitcoin in those ranges. I have a hard time imagining anyone choosing to sell below 5k. If so, those were some weak hands and I’m glad they got shaken out.
- Bitcoin was transferring from weak hands to strong hands. I hope nobody reading this panic sold when we experienced that huge red candlestick! And if you did, I hope you reentered at a better price. For the folks that didn’t reenter, well, you got shaken out and somebody with a bit more faith and/or brains now has your Bitcoin. While this might suck for you, it’s bullish for the market as a whole. For example; let’s say you accumulated Bitcoin at $3.5k between Dec 2018 and March 2019 and sold recently at $10.5k. Then you bought back in at 5k. To get the same 3x return Bitcoin would have to go to $15k. This encourages new support levels and increases the overall market cap, which ultimately decreases the volatility of the asset while strengthening its place in history. Bullish AF.
If you’re like me and failed to see all of these signs until after the incredible opportunity to sell and reenter, don’t beat yourself up. Hindsight is 20/20. Its easy to predict the future. Its hard to predict when the future will happen. While I was off on the timing of its value being realized, I definitely want to be holding a big bag of Bitcoin right about now. Lets explore why!
Hard Times Ahead…
I believe that we’re about to enter into a 2+ year recession. If that happens, I would think Bitcoin’s value would have to be realized before the stock market starts its slow but inevitable move upwards. Especially considering the imminent and highly anticipated “Halvening” event set to occur in May of 2020. It’s the opportunity of a lifetime for whales and those of us gutsy enough to buy the dip and potentially risk catching knives all the way down.
The Federal Reserve and central banks worldwide are essentially just kicking the can further down the road by printing off more ‘monopoly money’ (money that isn’t backed by anything other than the government deeming it legal tender). Simultaneously the Bitcoin reward for mining a block on the blockchain will be cut in half. As fiat currencies holds true to their inflationary nature, Bitcoin remains deflationary in nature. You can’t write this shit!
“Psychology keeps trying to vindicate human nature. History keeps undermining the effort.” Mason Cooley
For contextual purposes, lets look back into the history books to the last financial crisis. According to its chart, In October of 2007 the Dow Jones was at roughly 14,000 points. In March of 2009 it bottomed out at roughly 6,500 points. I see a similar type of recession on the horizon.
This is not a prediction but it would not be surprising to see the Dow bottom out between 15k-18k points. Once the bottom is in the market will likely continue to move horizontally for a while as faith is slowly restored. Statistically, this happens every 10–12 years. There’s always the chance that things get really scary and we enter something similar to the Great Depression, where we lose 90% of the market value and it lasts some 3–4 years. Trying to apply meta-rationality it’ll likely fall somewhere in between. Although, if it’s anywhere remotely close to the Great Depression side of things, it will serve as a Hollywood script for Bitcoin because faith in fiat currencies globally will be shook.
However, this will all be delayed if the recently signed stimulus package does what it’s designed to do. Sounds like a good thing right? Not really. Let’s talk about that.
The Road to Hyperinflation
The way I see it, stimulus packages are just like they say sound. They’re stimulants for an economy when an economy is depressed.
Stimulants are addicting! And they sure as hell don’t cure the root cause of depression by any interpretation of the word. Take a meth addict for example. That person likely never woke up one day and said “Hey today, I’m gonna become a meth addict.” One day though, they tried a little meth. It felt good so they did it again. They still weren’t dependent on the drug but after enough recreational use they became so. This dependency becomes their new normal and eventually the drug stops affecting them the way it once did. In order to chase that high they have to increase the dosage and eventually they overdose and either die or are forced to make drastic changes to their lives in order to survive.
This is eerily analogous to what the American government is currently doing to try to ease the minds of investors. But again, the problem is these stimuli do not cure the root problem. In fact they only make it worse. The root problem is not COVID-19. This pandemic is merely proving to be lighter fluid for the incineration of the US dollar’s buying power. Injecting massive amounts of “new” capital into the market does not alleviate investor’s concerns over a deadly virus.
Furthermore, whats to say that this lockdown doesn’t last longer? To put it in perspective, according to Statista.com, the projected GDP (Gross Domestic Product) of the US in 2020 is roughly $22 trillion. The stimulus package that was recently signed into action is nearly $2.2 trillion which is equal to only 10% of the United States’ annual GDP. Using the same ratio; 10% of the year is roughly 36 days. This means that $2.2 trillion only buys us about 36 days before we either get small businesses and non-essential workers back to work or are forced to print off more monopoly money further diluting the monetary supply and causing inflation.
Keep in mind, much like the meth addict that had to increase their dosage, the latest stimulus package is nearly TRIPLE that of the American Recovery and Reinvestment Act deployed under the Obama administration. Every time we employ a stimulus package, the purchasing power of the dollar diminishes.
By the way, I think the positive effects brought on by the economic stimulus package indicate that we are currently in the “denial phase”. I believe Wall Street has yet to endure more downward price action. See the picture below for a better understanding behind the psychology of a market.
Where does China fit in to all this?
Lets take a moment to combine the aforementioned stimulus package with the fact that China has digitized its currency; the yuan. This is something that the US has not done with the dollar. When a nation digitizes its currency it makes it much easier for investors worldwide to invest in that specific currency.
This in conjunction with the pharmaceutical, manufacturing, and supply chain advantages that China currently has, puts China in a position to be a viable threat to the US retaining its position as the World Reserve Currency. Take a guess at who currently possesses the most foreign reserve currency… If you guessed China, according to an article by thebalance.com, you’re right.
So what happens if people start choosing other currencies like the Chinese yuan over the US dollar? They send their devalued dollars back to the US. What does that do to the buying power of the dollar for those of us that have no other choice but to use it? It causes hyperinflation. For very different reasons, the US could potentially end up in a similar situation as Zimbabwe and Venezuela have been experiencing in recent years. All fiat roads lead to hyperinflation.
How can we avoid this as individuals?
So what have we learned so far? The dollar is being threatened, China holds the keys, and our government is artificially and temporarily propping up the US stock market. Whether this is intentional or not, its manipulating the psychology of the market. This is not organic and not healthy.
Fortunately, for our economy and meth heads worldwide, nobody needs to die. We as individuals just need to make radical and fundamental changes. Wishing that our lethargic and cumbersome Federal Government will somehow get with the times is a long shot. The good news is that there is a way to ensure that the dollars you currently have do not go to waste when shit inevitably hits the fan. In order to ensure this we need to drastically improve our criteria for sound money. This might just be the wakeup call we so desperately needed.
Sound Money vs Fiat Currency
It’s important to understand the difference between sound money and fiat currency. Fiat currency is a medium of exchange, a unit of account, its portable, durable, divisible, and fungible. Sound money is all of these things as well but has one more extremely important quality. Its a store of value.
The dollar, amongst other fiat currencies, can be printed off by governments. This dilutes the supply and consistently transfers wealth from your pocket to the government and banking systems. The same can not be said about sound money and stores of value. Examples of sound money are gold, silver, and Bitcoin.
In Conclusion
So if you’re sitting here wondering what the hell you just read, let’s go over the takeaways.
- We’re clearly entering a recession and the government is trying to claw our way out of it with a massive stimulus package. But as the Fed and other central banks worldwide print more money and prop up the stock market, Bitcoin becomes more scarce. This is bullish for Bitcoin.
- China is in a position to take over as the global reserve currency. This could cause the US dollar to experience hyperinflation and dramatically impact the wealth of US citizens.
- Fiat currency is not sound money. To preserve wealth, I for one, will be trading in my currency (dollars) for money/stores of value such as gold, silver and Bitcoin.
I hope you could find some value in this. I know I feel better. Shoot me a tweet regarding how you feel about all the insanity! https://twitter.com/Nick_Odio
Looking forward,
Nick Odio
By the way, I’m on the lookout for paid gigs so if you’re picking up what I’m putting down or know someone that might, feel free to email me at youalreadyknodio@gmail.com. I love to learn and will dive deep into all things esoteric. Some of my areas of expertise include but are not limited to cryptocurrencies/digital assets/distributed ledgers, health & wellness, biohacking, global affairs, music, sports, business, science, and travel!
Follow me on Twitter: https://twitter.com/Nick_Odio
Follow me on Instagram: @youalreadyknodio
Sources:
