One of the key themes of the Bitcoin 2019 in San Francisco this week was the potential perfect storm of events that could create extremely bullish pressure on the Bitcoin price over the next six to twelve months. This theory is hardly limited to this conference: The price of Bitcoin has already more than tripled this year.
Earlier this year, both Adamant Capital and Delphi Digital released Bullish bitcoin reports that mostly concentrated on the accumulation of large amounts of bitcoin by long term holders in late 2018. More recently, many have speculated that the recent runup in the Bitcoin price is due to Facebook’s Libra cryptocurrency announcement, despite the fact that project doesn’t really have anything to do with Bitcoin.
The market doesn’t seem to know what to do for now. The price went from $11,385.77 on Tuesday to $13,881.12 on Wednesday and back down to $11,832.59 as of this writing, according to OpenMarketCap.
Multiple individuals on stage during the Bitcoin 2019 conference described how a combination of the current state of the global economy and the upcoming halving event could be rocket fuel for the Bitcoin price in the near future.
The Theory Behind Bitcoin 2020
The perfect combination of economic instability and Bitcoin’s halving was perhaps best summarized during a panel discussion by well-known Bitcoin pumper Anthony Pompliano, who is a co-founder and partner at Morgan Creek Digital. Pompliano brought up global turmoil and the halving in response to a question from Keiser Report’s Max Keiser regarding the possibility of central banks adding Bitcoin to their reserves.
In his response, Pompliano first pointed out that central bankers in developed countries have been pretty good at keeping their local currencies stable. He added, however, that this is not the case in every country around the world.
“In the U.S., we try to hit 2% inflation, [and] we do a pretty good job of hitting right around that because we’re disciplined,” said Pompliano. “What we see in the developing world is countries get in a lot of trouble and they become undisciplined.”
The Morgan Creek Digital co-founder also pointed out that, while developed countries like the United States have been able to respond to recessions and maintain relative currency stability in the recent past, they may not have the necessary tools at their disposal next time around. Interest rates are already rather low, and the economy is already addicted to unconventional measures like quantitative easing.
“I think what we’re about to see happen — I think it’s the perfect storm for Bitcoin,” said Pompliano. “We’re going to cut interest rates, we’re going to print money, and we’re going to take the scarcest asset in the world and cut the daily supply in half. This is [expletive] rocket fuel for Bitcoin.”
Pompliano was referring to the Bitcoin halving when he mentioned cutting the daily supply in half. The creation of new Bitcoin every ten minutes is halved roughly every four years as part of Bitcoin’s hard-coded, predictable monetary policy.
Getting back to Keiser’s original question, Pompliano stated that a prisoner’s dilemma of sorts will occur as regulators and lawmakers realize they cannot shut down the Bitcoin network. In Pompliano’s view, the game theory is such that central bankers may be incentivized to act first by adding Bitcoin to their reserves. In other words, the central bank that acts first stands to gain most if other central banks also decide to add Bitcoin to their reserves because that would lead to an increase in the Bitcoin price (and thus the value of the first mover’s reserves).
The Macroeconomic Case for Bitcoin
Later on day one of the Bitcoin 2019 conference, Tetras Capital’s Brendan Bernstein went more in-depth on the macroeconomic aspects of bitcoin’s potential perfect storm in 2020.
According to Bernstein, Bitcoin’s price is a function of geopolitical instability and the world’s money supply. During his presentation, Bernstein made the case that both of these variables are destined to increase in the future.
“If you locked me in a room, I don’t think I could design a more perfect macro environment for Bitcoin than what we have right now,” said Bernstein.
In his presentation, Bernstein covered a variety of trends; such as the increased popularity of democratic socialism, the rise of modern monetary theory, the seemingly never ending nature of quantitative easing, and the fact that 10,000 baby boomers will be retiring per day in 2020; to back up his theory.
“All of this coinciding with the halving in 2020 is really a thing of beauty,” added Bernstein.
Bernstein went on to explain his theory as to why the supply of U.S. dollars will increase massively over the next ten to twenty years. Specifically, Bernstein discussed how government deficits are the largest they’ve ever been during times of peace, and there’s no sign that the size of these deficits will ever decline.
According to Bernstein, interest payments alone will surpass all government tax receipts by 2022 (when off-balance entitlement spending liabilities are included in the calculation). Over the short term, the expectation is that these extreme spending habits will be covered through further borrowing, but Bernstein argues that the printing presses will eventually be pulled out to paper over these debts. Buyers of U.S. government debt understand this point, which is why they’ve been buying that debt at lower rates since 2014.
“This is a big reason why the trade war is happening in my opinion,” said Bernstein during his presentation. “I think everything else is a facade, and a lot of it comes down to China stopping to buy our treasuries and finance our quasi-bankrupt entity.”
Bernstein goes on to argue that the supply of debt is increasing as the demand to purchase that debt by foreign entities is on the decline. Bernstein pointed to the estimated cost of the Green New Deal and the general, bipartisan support for modern monetary theory as supporting evidence for his belief that the U.S. government will only continue to add to its already ridiculously oversized debt obligations.
Much like Pompliano argued earlier in the day, Bernstein made the case that the only way for the United States to get out of its debt crisis will be to massively increase the money supply.
“We’re going to have to resort to very unorthodox monetary policy,” said Bernstein.
Bernstein pointed out that this problem is not only found in the United States. Indeed, it is this desire for central bankers to devalue their own currencies that illustrates the value of a Bitcoin-like asset with an apolitical supply schedule.
“[Quantitative easing] is monetary crack, and we’re about to relapse,” said Bernstein.
Bernstein is certainly not alone in his beliefs. Famed billionaire investor Ray Dalio (who is not a Bitcoin fan) indicated to Bloomberg late last year that the U.S. dollar could easily see a 30% drop due to the need to increase the monetary supply in order to pay off government debt. In addition to pointing to Dalio’s comments, Bernstein also noted that former IMF Chief Economist Olivier Blanchard recently recommended that the U.S. Federal Reserve buy stocks during the next recession as an example of the unusual monetary policy options that are currently being discussed by central bankers around the world.
As one final anecdote, Bernstein noted that Japanese citizens purchased physical safes in massive numbers in response to the announcement of a negative interest rate policy by the Bank of Japan back in 2016. In Bernstein’s view, Bitcoin is the ultimate financial “safe” due to its use of cryptography for security and high degree of scarcity.
Bernstein concluded: “[All] Bitcoin needs is greed and reckless government spending, and spoiler alert, neither of those two are decreasing anytime soon.”