A crisis is brewing behind the scenes of the global economy, and it’s time to think about our coping strategies.
Bitcoin is part of them, and here’s why.
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Macroeconomic concerns are once again all over the headlines.
The chain reaction set in motion by our governments’ responses to Covid is far from being over, and it looks like most economic players prepare for the worst. Whether the recession is indeed already in the works, or people’s rising anxiety will make it a self-fulfilling prophecy, we are about to witness a tormented period.
In such times, everyone has their own idea of what assets have the most chances to withstand – and beat – the recession:
💎 luxury market stocks – because the richest 1% steadily increase their wealth no matter what ($LVMH stocks are now +16% from their all-time high),
🌾 commodities like wheat or oil – because everyone needs them,
💶 strong currencies like the Swiss franc – because the dollar is losing its international dominance (DXY has fallen 10% in the last 3 months) …
We believe that Bitcoin is one such safe-haven asset, and we have a number of reasons to do so.
Here’s our take on the current macro situation, and the logic behind our support of Bitcoin.
As IMF’s chief economist said in last week’s report, “the inflation is stickier than anticipated even a few months ago” and there’s a high probability of “hard landing” for global economy if it persists. Hard landing is a term for a sharp economic decline that follows a period of rapid growth – and it’s not pretty.
Inflation is fought by raising interest rates, and the Fed (and other central banks) have been doing so aggressively, going from 0.10% to 4.85% in one year.
So aggressively, in fact, that it put an entire debt-based banking system at peril: as the yield on newly issued government bonds increases together with the rates, previously issued bonds lose value. This is particularly painful for long-term (10 or more years) bonds – which banking institutions have been massively loading on their balance sheets with the freshly printed money.
According to Bloomberg, by the end of 2022 US banks were sitting on $620bn of unrealized losses (and this even without derivatives), which means that their leverage ratio won’t stand the test of more or less significant deposit withdrawals. It is not impossible then that Silvergate, Signature, SVB, and Crédit Suisse won’t be the only ones to fall this year.
The situation is acknowledged by the regulators: in the notes from a March meeting release last week, the Fed pointed out that the banking crisis was likely to push the US economy into a “mild recession” later in 2023.
As you might have guessed, “mild” could be an understatement, and the current market sentiment is fear. Fear that the banks fail, fear that rising rates crash the real estate market, fear that businesses can’t sustain the increasing cost of capital…
Even the recent economic data that otherwise would have been judged as “encouraging” did not change the fearful expectations: yes, US unemployment is low, yes, inflation shows signs of slowing down (US CPI 5%)… but the hardly measurable dangers lurking in the shadows are nonetheless scary.
In the end, such sentiments often become a force of their own and can stir the marker in their direction.
When the news about the banking crisis hit the newspapers a month ago, most key assets tanked and recovered, but their recovery was very different.
Since March 13, $BTC grew +54%, while Nasdaq and S&P500 +8%, and Gold +10%.
This demonstrates Bitcoin’s resilience not only to the banking FUD (fear, uncertainty, doubt), but also to the anti-crypto crusade that American regulators initiated at the same time.
In our opinion, its unique nature of independent money makes it particularly valuable in current circumstances. Whatever turn the economy would take, Bitcoin looks well within any narrative:
📌 The Fed raises rates and puts banks in even bigger jeopardy:
➡️ people grow wary of banks, and many switch to Bitcoin for its disintermediated ownership.
📌 The Fed does not raise rates and/or starts the easing policy (more likely):
➡️ the inflation makes even higher-yield bonds not profitable – investors search for other values, such as stocks, commodities… and Bitcoin,
➡️ cheaper money encourages risk-on investments, like Bitcoin,
➡️ when the short-term improvement in employment gives place to the ensuing economic downturn, Bitcoin can sink with the others, but it also can emerge as a risk-off asset thanks to the “diamond hands” strategy so many Bitcoiners adhere to,
➡️ if dollar continues losing value and global dominance – Bitcoin is a borderless money alternative.
📌 Inflation in developing economies is much harder to tame, as it starts to feed on itself (inflation in Argentina is now over 110%).
➡️ as a currency is spiraling out of control, Bitcoin can serve as a hedge.
There are also non-economic reasons that play in Bitcoin’s favor:
📌 Lindy effect, or a theorized phenomenon by which the future life expectancy of some non-perishable things, like a technology or an idea, is proportional to their current age. In other words, the more Bitcoin lives, the less likely it would fail.
📌 Halving cycles. Every 4 years, miners’ reward for adding Bitcoin blocks is reduced in half. As this event makes Bitcoin scarcer, it naturally drives the price up. At some point, BTC becomes over-bought, which sways the price in the opposite direction, until it is over-sold… and the new cycle begins. With the next halving schedule for April, 2024, we are now in the pre-halving (= bullish) period.
As Bitcoin returns to the top-10 valuations with a market cap of $587bn, it slowly crawls back into the media space (and Warren Buffet repeating how he hates Bitcoin for the hundred’s time is only doing the coin additional publicity).
People sense and fear the recession, and Bitcoin’s recent rally has certainly got some of these fears priced in. However, following the current narratives could also be deceitful, as the market mood can change fast.
Be wise 😉