Article contributed by Tin Money.
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“Pigs can fly if shot out of a big enough cannon, until they come back down as bacon” — Harley Bassman
A Bitcoin Bubble?
Bitcoin isn’t in a bubble. Bitcoin is a bubble asset. Bitcoin was created in the aftermath of the 2007–08 financial crisis. It grew up during the largest expansionist monetary experiment in the history of mankind.
Bitcoin is/are like the children of summer from Game of Thrones. Bitcoin has never met a real winter. And mark my words, winter is coming.
Historically speaking, the safest things to hodl are: unleveraged (debt-free) real estate and gold. If you owned land and gold over the last 100-years, you would have made it through just about everything this wacky world could have thrown at you.
Trouble is, those things are expensive now. Gold and real estate haven’t really changed value. A house built 100-years ago (if maintained) would still keep the rain off your head today.
Gold has its own value. 6000-years of human history clearly shows us that gold has an intrinsic value to human beings. It’s not perfect — far from it. But you have been able to reliably trade it for things you might need for over 6000-years.
What has changed is the price. The only thing that drove up price over the last 100-years is currency debasement, aka, inflation.
Not to mention, both gold and real estate markets are manipulated by people with way more of that debased currency than you or I have.
Here’s a fun chart:
See any correlation? Stocks didn’t go up in value, they went up in price. Real estate didn’t go up in value, it went up in price. Gold didn’t go up in value, it went up in price.
Big question is, where’s Bitcoin headed? I did a video that breaks down the macro history, if you’re interested in learning more about where we might end up. There’s also an embedded link at the end of the article.
Buying the Dip
On a 40-year time horizon, “buying the dip” in equities, say after a market crash, would have worked great. In fact, buying after a crash over the last 40-years would net you around a 10% annual return.
But on a 100-year time horizon, you’d go bankrupt three times. And that’s the trouble with “short” time horizons, like 40-years. It’s only showing you what’s happened lately.
Speaking of lately, the image below shows you what them Wall Street Bois have been up to lately. Well, at least since around the mid-90s anyway.
To put this image in perspective, that huge wall on the right is the notional valueof the derivatives market, if you stacked it all up as $100 bills. The little yellow blip in the lower left is the total dollar denominated gold market — about $2.5 trillion.
The entire crypto market is about half that.
The image is a bit of an exaggeration though. The number is actually closer to $600 Trillion. Still not pocket change. That $600 Trillion is the notional value — the value of the underlying assets is included.
The market value of the derivatives is “only” $15.5 Trillion, which is roughly 10–12% of the total value of stocks and equities globally. Only trouble is, if interest rates hit 5–7% in the United States, that $15.5 Trillion unwinds.
It will all basically cascade to ZERO.
Likewise, if stocks and equities fall enough, those derivatives start unwinding then too. Once they start, it’s 2008 all over again. Except now we’d have to print 10x as much to get out of the mess.
If you thought the Terra Luna collapse was impressive, what do you think a derivatives collapse will look like? That’s why the Fed isn’t really fighting inflation.
And they never will.
Bitcoin to the rescue?
Maybe. We’ll know for sure in about 40–60 years. The thesis is: Bitcoin is like an emergency plan. Here’s an analogy:
Let’s say we’re trapped on the fifth floor of a burning building. The regular exits are blocked and smoke is starting to fill the room we’re all in. We don’t know if anyone is aware the building is on fire, and we don’t know if anyone knows we’re in the building. What do we do?
We could just sit there and hope someone puts out the fire (high-risk). We could try to fight the fire (high-risk). Or we could figure out an escape plan, like through a window (high-risk).
If we sit and wait, we might get rescued. And we might end up going out the window anyway, except without a plan.
If we try to fight the fire, but we don’t have the resources, we might end up going out the window anyway, again without a plan. Not to mention, we might make our situation worse.
If we try to find a safe way to go out the window, it might not work. We might try and end up going splat five floors down anyway.
The question for you is: what would you do?
My suggestion is: work on a plan to go out the window AND wait to see if a rescue is coming.
We didn’t start the fire
If you take anything from the words I’ve written, please take this: the global financial system collapsed in 2007–08. It wasn’t a recession. It was a total failure.
“So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.” — Ben Bernanke (pg.354)
The building was burning all around them and they way they “fixed” it was to surround everyone with a wall of paper money. In case you’re wondering, a wall of paper might slow down a fire, but the fire is going to burn through sooner or later.
Bitcoin might be a helicopter out of the mess. It also might just be a rope down and out of the building. Either way, it’s a better plan than waiting for the paper to burn through.
We’ve been behind that wall of paper for almost fifteen years. I don’t hear any sirens coming to save us. Jerome Powell seems to have just figured out how to work a fire extinguisher and is ready to go fight the fire now.
Good luck with that.
Every country in the world is getting burned by holding US Dollars. Just like Bitcoin might be a helicopter, or a rope for us, it might be one for those countries as well. Think anyone outside the Chinese sphere of influence wants a global Chinese currency?
Euros are even more absurd to hold than Dollars. So, what’s left? Bitcoin.
The central bankers of the world are not dumb people. They’ve been wiggling out of mess after mess for over a hundred years. They’ll probably figure out a way to wiggle out of this one too.
Trouble for them is, now they have a potential rival. As you saw in the image above, Bitcoin is just a tiny, tiny, tiny fraction of the world’s wealth. It’s not even close to being in a position to displace the global economy.
But that can change quick. Finance moves at the speed of light today. The general idea is: more and more institutions and nation-states adopt Bitcoin, the dollar hegemony declines and ultimately fails. Then everyone who bought Bitcoin early becomes a mega-brain rich person.
Bitcoin has to survive first. Remember, winter is coming.
How to build a rope out of Bitcoin
Step one: buy some. Step two: buy some more. Step three: rinse and repeat. Step four: wait and see.
Bitcoin can absolutely zero-out. Anyone that tells you otherwise is not looking hard enough. The Bitcoin rope might fail when you put weight on it. But the building is on fire right now.
How long are you going to wait to find a way out?
If you’re tying to save up dollars to buy real estate and gold, you’ve got a long road ahead of you. The Fed is 100% going to keep stacking more paper to keep the fire from burning through. Just remember, they’re stacking fuel at the same time.
That also means another price pump is coming soon. Remember this chart?
That is the only playbook they have. They started the fire and the only thing they can do is to try and smother it with fuel. That fuel is also the source of the next price pump.
The smart thing to do is to be holding the things that are most likely to pump when they do. Equities will pump. Bitcoin will probably pump. Real estate and gold will pump.
If Bitcoin pumps, it will probably pump the fastest. Ideally, that’s how you get to real estate and gold before the financial system melts down again.
There’s your rope.
The 125-year time horizon
I made my first YouTube video to support this article. It’s a brief jaunt through the last 125 years of finance.
It was fun, but I’m a writer at heart. It was just easier to explain the history with a video, rather than blathering on and on here.
If you’ve read this far, thank you! I really appreciate all the new readers, and I’m grateful for the time you spend here. I hope the video is helpful and gives you a greater perspective on where Bitcoin sits in US financial history.
Here’s a quick shill for a Medium subscription. It will make your hair softer and fuller. It also might buy me a cup of coffee.
And remember, these are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
Article contributed by Tin Money.
Follow him on Medium
Little deeper dive into the macros around today’s crypto markets. My first YT vid!