Bitcoin’s Immunity in the Covid-19 Crisis and Beyond
While the entire planet is in crisis mode, we’ve seen an increased interest in Bitcoin, gold and the central banks’ progressively dominant policies. Meanwhile, usage of Bitcoin’s resilient financial network is steadily rising among some of the people who need it the most and becoming increasingly understood by institutional investors.
Amidst the Covid-19 crisis, we’ve seen a worldwide increase in interest in both Bitcoin and central banking policy.
Whether you’re just trying to understand what’s going on, a strict believer in Bitcoin and gold or believe in the government’s ability to navigate this difficult and complex situation successfully, this is an important time to take notice of what is going on not only in Bitcoin but in the world of money and monetary policy.
So how is Bitcoin doing in these dramatic and unprecedented times, and where is it standing in the bigger picture?
Bitcoin’s healthy growth and cyclical stability
First of all, here’s some metrics for the Bitcoin asset and network:
Discussion group members:
The biggest online community dedicated to Bitcoin news and discussion, r/Bitcoin on Reddit.com gained 300,000 members in 2020 and has not slowed down since February. It now has more than 2.3 million members
Hash rate
Nigeria: A sign of real adoption?
In Nigeria, savings lose more than 10% of their buying power every year according to the official statistics and Nigerians who want to make a living online are not allowed to use PayPal.
Bitcoin cycle hypothesis
Bitcoin experiences waves of interest and adoption, which correlate with speculative bubbles. During the bubble the interest in Bitcoin grows in an order of magnitude. After each painful crash the interest in this new technology plateau at a higher level than it started. Every new cycle, new users and investors learn about Bitcoin network’s value and some invest their capital into it.
For whatever reason, Bitcoin is prone to this kind of instability, which can be seen (in addition to price charts) on Google Trends, tracking the relative amount of Google searches for keywords.
Perhaps these waves of speculation and adoption will keep repeating until Bitcoin finds its stable value.
The growing digital gold narrative
While the younger generation is open to the idea of Bitcoin as an asset, in 2017 most established professional investors still saw Bitcoin as a fad. However, by 2020 its staying power seemed to have penetrated the thinking of more than a few traditional finance investors.
”This new generation loves Bitcoin, and they’re the ones that will be running the world in not too long.” Kiril Sokolov said in a recent interview to RealVision. Sokolov founded 13D Research, a successful research and institutional investment advisory over 35 years ago, and said that in 2019 he took time to learn about Bitcoin and took the plunge to buy a small sum.
Sokolov isn’t the only one. Alex Gurevich, the CIO of HonTe Investments and the former head of Macro trading for JP Morgan references Bitcoin in interviews. Luke Groman from FFTT who’s also a proponent of holding gold as an investment, tends to accompany his analysis with a caveat that his case for gold might apply to Bitcoin as well. While this might sound like a reach, investors from traditional markets casually mentioning Bitcoin suggests that Bitcoin has quietly passed its watershed moment. It is no longer a bizarre or dubious craze but rather an alternative asset class that sophisticated investors might be interested in (even if they were born before 1980).
The state of state-issued money
The world today is in a lot of debt. World governments owe over 77 Trillion dollars to the owners of their bonds, and the total global debt including individuals and companies in 2019 was 250 trillion (according to the IMF and IIF). In comparison the global GDP in 2019 was 86.6 Trillion.
As an example, imagine you make $86,000 a year, owe the bank $77,000, and keep spending more than you make each month. What do you do? You take out a new loan from another bank to pay for the old loans. And you just keep going on like this for as long as possible, wishing for a miracle. Then, suddenly, your too small income goes to almost nothing. Now you’re really in trouble. This is the situation most governments and many businesses (not to mention people) are faced with right now, with revenues plummeting during this Covid-19 shutdown.
But governments have an advantage because they can get loans by selling new government bonds, and central banks can create money at will and buy with this money government bonds and other assets, providing liquidity (this is called QE). Over the last month the Federal Reserve (or The Fed for short), has not only lowered the interest rates on loans, but lowered the reserve requirements for American commercial banks to 0 — meaning they can loan out to businesses and citizens as much money as needed. The Fed also bought in March 2020 many assets including corporate debt, bank debt and government bonds, probably to prevent disastrous defaults on debt and liquidity problems. The government has passed a bill giving 2 trillion dollars to struggling corporations, businesses and citizens, and plans to pay for it with new bonds.
And this is just for the United States of America, the world’s biggest economy which controls the world’s reserve currency. Many other governments have followed suit, as we wrote about last week.
In Bitcoin-land internet memers parodied this phenomena of fiat monetary expansionary policy with the meme, “money printer goes brrrrr”. The fear of savings debasement (though perhaps also fears of doomsday type situations) could be a logical reason for increased interest in Bitcoin and gold as of late, even with the backdrop of Bitcoin’s 50% price crash on May 12th 2020.
Meanwhile, physical gold coins markets have seen a massive shock due to the panic over Coronavirus, with the price of smaller gold and silver coins being sold at a premium to retail buyers due to the amount of panic.
Despite the taunting of central banks by Bitcoiners and gold bugs, asset buying by central banks (a.k.a. QE) which started in the 2008 crisis, has not created a rise in the official inflation or cost of living metrics, though these metrics do not include the cost of health care, education and housing which have risen significantly in the last decade. According to alternative metrics for inflation such as ShadowStats, the American consumer inflation rate is closer to 10% a year, which is still far from hyperinflation.
Another hypothesis is that QE (and low interest rates) helped boost the stock market and asset prices, making asset owners richer, causing the extreme rise in the prices of luxury goods and luxury lifestyles, instead of general inflation. Velocity of money statistics support this idea. Velocity of money is the amount of times each dollar changes hands in a year. It is a metric that correlates with an active and vibrant economy. The velocity of the dollar is the lowest in recorded history and likely will keep dropping as long as the coronavirus pandemic continues, which means money created in multitudes by the Federal Reserve might be “stuck”, not reaching the larger economy.
But this strange equilibrium of sorts might change due to two new factors: helicopter money and MMT.
Helicopter money is a controversial method of stimulating the economy, by giving out money to all citizens of a state. This is naturally expected to create price inflation if done on a regular basis. The taboo against this method has broken down during these difficult days. At the end of February, $1,200 was approved to be given to each Hong Kong citizen, and on March 17th, $1,000 was approved for every American citizen.
MMT is another controversial idea which is gaining popularity and perhaps will become more acceptable due to the Covid-19 financial crisis. Supporters of MMT believe that the government can use “printed” money to increase its budget in a magnitude much larger than previously thought. If MMT is accepted by policy makers and the public, they may create massive amounts of new money, believing it will not have bad consequences, if managed correctly.
“People want a hard currency, and the country to do it first will be the most successful” Kiril Sokolv added in his RealVision interview. “QE is just buying assets, but MMT is literally financing the government and can be inflationary or hyper inflationary. All roads lead to gold. It’s very under-owned and misunderstood.”
Luke Gromen gave his take on rising government debt: “Either debt defaults globally, or they inflate it all away. In the paper… [going over historical data] its inflation, financial repression and a few hyper inflation. Each time. Global sovereign debt is about to be defaulted on or restructured or about to be inflated away on a real basis. Which are both good for gold. If they don’t print enough, sovereign debt globally is at risk of nominally defaulting.”
With Bitcoin’s hard limit of 21 million coins, and it’s own QH coming up, Bitcoin is a hard currency that should be well-positioned if such hypotheses come to be true. During this unprecedented global economic shutdown followed by unprecedented monetary policies it just might be that Bitcon, the new decentralized internet currency will start serving a growing purpose.
