Bitcoin's Coming Crash and Resurrection
Bitcoin's sell offs will continue until the world sees the use-case for Bitcoin.
Never forget the fundamentals. Animal Spirits shake up markets and confuse investors but fundamentals - the underlying value of a company, product or asset - ultimately calms fears and clarifies real value.
As Bitcoin (BTC) has become a globally recognized asset it has created a feeding frenzy for speculators. Venture Capitalists (VCs), retail investors, hedge funds and even governments are riding a wave of speculation sending Bitcoin’s price beyond what anyone (including the CIA) could have imagined. Unfortunately, lost in the market mania is Bitcoin’s use-case as a revolutionary monetary system the world desperately needs right now.
Bitcoin’s Confused Narratives
Bitcoin has been absorbed into market fever in recent cycles. Arguably since 2020 when Michael Saylor began to evangelize BTC to corporate entities, its potential as a separate, self-contained monetary system has given way to Bitcoin as a “store of value”, an inflation hedge, or as digital real-estate. Fidelity for instance published a paper in July 2020 called “Bitcoin Investment Thesis: An Aspirational Store of Value.” These characteristics may prove true overtime but they diverge from Bitcoin’s utility.
Bitcoiners have become uber fixated on institutional and political adoption as result. Bitcoin’s long overhyped spot-market ETF approval earlier this year was treated as a game changer and it decidedly was not. Then came the Bitcoin Conference in Nashville where presidential candidates virtue signaled to the Bitcoin community by claiming they would add BTC to the US Strategic Reserve, another booster shot for market hopium that utterly failed to materialize. These events have disappointed investors because they have little to do with Bitcoin’s fundamental use-case.
When stocks fall Bitcoin will fall more, probably a lot more.
Perhaps more concerning is that Bitcoin’s price fluctuations have become a fractal of the NASDAQ (see below), an index of tech companies and a proxy for traditional financial markets. Correlation with traditional markets presents serious concerns for Bitcoin’s price in the short-term. When stocks fall Bitcoin will fall more, probably a lot more.
Let’s go back to basics before Bitcoin was Saylorized for lack of a better term. The Bitcoin White Paper published anonymously under the pseudonym Satoshi Nakamoto was released in October of 2008. Satoshi, whoever he was, among others perceived the Global Financial Crisis (GFC) as the beginning of the end of fiat. The central problem outlined in the paper is the reliance on a third party financial institution, AKA the banking system. Satoshi’s word’s bear repeating:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending.”
Bitcoin was the culmination of a cryptographic revolution that began in the 90’s. The so-called cypherpunks were focused like a laser on the growing threat of surveillance posed by centralized banking and fiat currency, a fear substantiated decades on by censorship through demonetization. The emergence of Central Bank Digital Currencies (CBDC’s), which arrogates total control of banking to the State has only strengthened the urgency for cryptographic money.
The threat of financial collapse was far less apparent to the cypherpunks but it was the GFC that prompted the launch of Bitcoin.
The threat of financial collapse was far less apparent to the cypherpunks but it was the GFC that prompted the launch of Bitcoin. There is an old adage on Wall Street that “Bull markets don’t die of old age; they are murdered.” Such is the nature of financial systems more broadly and systems in general. However, people focus on the murder and ignore the crime. In this case, murder is the collapse of the fiat system, which most savvy observers sense is academic at this point.
Forensics of a Monetary Crime
The forensics of the monetary crime are far more important. It was the sudden surge of inflation triggered by fiscal stimulus and supply shocks that forced Central Banks (CBs) to raise interest rates in record time by record amounts (see below), something they have been loathe to do throughout history. What followed this brusque change in policy was the UK Gilt Crisis in ‘22, the banking crisis in March of ‘23, Treasury sell offs in October ‘23, and now the unwind of the Yen Carry trade in recent weeks. These are not temporary blips or isolated events, they are forest fires burning down a global financial system overloaded with debt and derivatives.
These warning signs belie even more pressing issues. The global financial system has been so anaesthetized by the alphabet soup of CB scotch tape: QE, ZIRP, Operation Twist, Reverse Repo, TARP bailouts, BTFP and helicopter money that the patient - the global economy - is beginning to reject monetary novocaine. Production-based economies led by China, Germany and Japan are cooling fast, and consumption-based economies led by the US are severely stressed.
The global economy is beginning to reject monetary novocaine.
Investors have ignored signs of global slow down in recent years but that is beginning to change. Stocks have soared to all time highs based on exaggerated claims of “productivity miracles” of various stripes: electric vehicles (EVs), the Metaverse, generative artificial intelligence, and most recently “miraculous” fat loss drugs called GLP-1s. At the same time, markets have ignored China’s anemic post-Covid recovery, spiraling US fiscal indebtedness, economic scarring beneath the top income brackets, and geo-political wars worsening by the month. In a flash, it seems, investor sentiment has refocused on the economy, especially on a teetering labor market, distressed consumer credit, and renewed fears of recession.
That means there will be a major stock market pull back of some kind and I think it has already begun. The structural breakout of gold, yield curve re-inversion, and poor bank lending all suggest recession or worse, and soon. Once markets begin to fully price this in there will be more volatility and much bigger sell offs ahead, which will spill over into Bitcoin as investors pile into cash (or Gold). Bitcoin’s recent sell offs have been substantial but I think more is to come until a decisive decoupling with financial markets occurs.
Some kind of epic financial denouement, what I refer to as an end of cycle event, is near. It could be triggered by the collapse of a big bank, the unwind of a derivatives trade, a war that skyrockets oil prices, or more likely something no one foresees. However it happens, forensics suggest the credit system will be destroyed and the need for a new monetary system will return with a vengeance when it does. That is Bitcoin’s mission.
The credit system will be destroyed and the need for Bitcoin will come back with a vengeance.
While gold’s move is already building on this theme Bitcoin needs a wash out. There is too much gambling, too much VC pump and dump (Solana), too many shitcoins, memecoins and stablecoins in the cryptospace. The coming stock market pull back will affect a much needed purge of the space. It will also enable Bitcoin to finally decouple from Wall Street so it can provide the fundamental monetary benefit the world needs.
No way say the Monetarists
No way say the monetarists. The monetarists believe financial markets are simply a derivative of liquidity and that means more inflation. As soon as the Fed lowers rates and restarts QE inflation will send assets including Bitcoin to the moon. That was how it played out in 2008, sort of, but this is not 2008 it is 2024. Fighting the last war is almost always a recipe for disaster because it ignores change.
Today’s global economic landscape is inflationary (shaky supply chains, backdoor liquidity facilities, front door fiscal spend) and deflationary (unsustainable debt loads, overheated asset prices, consumer credit crisis). However, the real story is the structural slowdown of global growth.
The world’s two biggest economies illustrate the difference. US fiscal debt is multiples of what it was in 2008 and interest rates are likely moving higher secularly, which hamstrings the US Government’s (USG) ability to borrow and spend. Likewise, the Fed’s operational flexibility is severely constrained by inflationary pressures, anchoring fiscal dominance, and fending off recession at the same time. The US economy as measured in Total Factor Production for instance stopped growing over 10 years ago and putative tech innovation has failed to deliver material productivity gains.
China’s economy also appears to be at a precarious inflection point. Certainly, China is not the productivity booster it was 15 years ago nor is it primed to massively print money to stimulate global growth like it did then. China’s central bank the PBOC is trying to deflate its massive property bubble and the CCP is shifting its export led economy towards more domestic initiatives as it decouples from the West.
Economic performance drives markets not liquidity.
In the final analysis, however, economic performance drives markets not liquidity. This stark reality is beginning to unsettle the stock market, which has been sentiment driven since at least 2020. As Benjamin Graham said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." Voting has finished, now it is time to weigh.
As I write this essay from Argentina it is clear that the world needs a new monetary system. The waiters who serve me coffee own Bitcoin and dollars while transacting largely in Pesos. That monetary parallax is not long for this world because of the imminent collapse of the fiat credit system. In other words, we have reached the end of cycle, a time when the normal CB tricks not only fail but exacerbate pre-existing problems while creating new ones. That means substantial turmoil ahead once markets fully accept the gravity of the monetary disaster we face.
The good news is we have a solution this time - Bitcoin. BTC was built for a fiat collapse and that is what is happening. However, Bitcoin must first decouple from Wall Street speculation and abandon futile efforts to integrate into a failed fiat system. Vladimir Lenin said that “a party must first purge itself to strengthen itself.” I believe the coming crash in Bitcoin will do just that.
Stay liquid, stay alert.
