This is the second instalment of The Jackpot Chronicles: Four Possible Post-Coronavirus Scenarios.

Force Majeure means:

a chance occurrence or superior force that renders a contract unenforceable and frees all parties from their obligations under it.

We are frequently told that there exists some manner of “Social Contract” to which we are implicitly bound by virtue of being alive. This implied Social Contract confers legitimacy upon the institutions that order our world, the national governments, the central banks, the miltary and police. And by extension certain communication outlets and media are endowed with a status of official curators over the narratives around institutional power.

Under the Force Majeure Scenario, the first of four possible Coronavirus aftermaths posited in “Welcome to the Jackpot”, the overwhelming or superior force is not the pandemic itself, but rather the collapse of the debt supercycle, the monetary system that derives from it, and the structure of nation states that are burgeoned by it.

The last time we were here, when a systemic crisis has shaken the foundation of the social order, the policy response was favourable to one party of the social contract at the expense of the others.

The GFC, which I now call GFC 1.0 or GFC ‘08, saw the financialized class, those closest to the monetary spigots of the Central Banks enjoy accelerating prosperity as their asset values rose, whilst the rest of the population endured stagnation and a steadily increasing cost-of-living (which mainstream commentators refused to acknowledge as inflation).

The policy response from the last crisis has led us directly, in a straight line to this one. The only surprise being the exact nature of the catalyst which would pop the Everything Bubble, and perhaps the ferocity with which the air began to let out once it did.

The signs were certainly there that we were nearing some kind of archetypical “shoeshine boy”moment or phenomenon. Complacency in passive investing, extreme overabundance in the unicorn population, the fact that there exists (existed) an entire industry around arbitraging long term leases with short term rentals via AirBnB, there was a sense of Roaring 20’s around it all and all those vile contrarians were wondering “just how long can this go on?”

Under Force Majeure the public begins to understand that the people who populate institutions are just that, people. Despite specialized training perhaps, they are not endowed with any superhuman intellect or wisdom. Success within the matrix of the institutional elite comes from proxemics and adroitly navigating the system itself, not much more.

“An era can be considered over when its basic illusions have been exhausted”
— Arthur Miller

 

An era like this comes to an end when the public realizes that their betters aren’t intellectually superior but rather institutionally privileged. Now facing an existential crisis of their own making, they are completely out of touch with the public mind and out of their depth to deal with it.

Then The System Finally Comes Unglued. Now what?

The central banks and national governments have fired their bazookas in unison yet despite a typical relief rally in the form of a standard issue dead cat bounce, reality continues to insist on asserting itself. On a recent Jelly Donuts podcast, Grant Williams talks about forthcoming GDP numbers coming off 30% “truly apocalyptic”.

Yet, the incumbent institutional custodians will continue to deny reality and to discredit themselves, what will it look like then the populace comes to realize that the old social order, and the institutions that curate it are being deprecated?

Breaking: A new bull market has begun. The Dow has rallied more than 20% since hitting a low three days ago, ending the shortest bear market ever. https://t.co/06YS0XqWGP

— The Wall Street Journal (@WSJ) March 26, 2020

Ontario Premier Doug Ford recently advised citizens who couldn’t pay their looming rent bills at the first of the month to simply “not pay”. He later tried walking that back, but when this sentiment gets writ large, with governments printing money and sending out cheques, what happens when people and businesses simply decide not to pay their taxes either?

Can political leaders say, with a straight face, that citizens should stiff their landlords or mortgage lenders but not the State?

And if the State can simply print up money and send out cheques, why do we need taxes anyway? Have we arrived at full MMT?

All of the central bank and fiscal stimulus portends a secular shift from deflation to inflation and I don’t think very many people understand what that means.

It means a whole lot of broken clocks are gonna be right for once, but at a time it counts the most.

Now, every company that levered up on debt to buy back their own shares over the last 10 years wants a bailout. Grant Williams points out in Things That Make You Go Hmmm that the airline industry spent 47B on buybacks since 2010, they want a 50B bailout.

What the chart, right, doesn’t show is the total dollar amount spent by the airlines on buying back their own shares between 2010 and 2019.

That number is $47.3 billion (of which American Airlines – whose negative cumulative free cash flow between those dates was $7.9 bln – contributed $13 bln).

Even the private jet industry wants a bailout.

And what will public citizens get? Those whose businesses have been ordered to close, whose jobs have already been lost? They’ll get a check for $1,200, or a tax deferral until August. Bfd.

Charles Hugh Smith’s books speak a lot about this type of secular wane in institutional relevancy, which we discussed on our podcast once and it bears repeating here:

MJ: when I look at  Pathfinding [Our Destiny] like part seven where where we’re talking about what the way forward looks like, that it’s outside of the control of the of the establishment, that it’s outside of the system I get this sense that for society to flourish and adapt around this and evolve. I guess that’s the key word, we’re going do this around the institutionalized hierarchies.

They’re not going to get religion one day, we’re not going to elect the right candidate, we’re not going to have the right party gain power that’s suddenly going to say “I read this great book by Charles Hugh Smith and this is how we’re going to do it”.

It’s going to be something like institutionalized hierarchies will just lose more and more relevance as these new social and business and financial configurations start gaining more and more relevance.

CHS: That’s an excellent point and I think if anything I didn’t emphasize that enough. That really what we’re talking about is kind of like hacking the system in in the old time sense that a hack was a workaround. It wasn’t like you were breaking into the system to steal something, you’d created a workaround for a kludgy system that just didn’t work anymore.

And so I think you’re absolutely right, it’s going to be working around us and and Bitcoin is one example of how workarounds are manifesting and of course the status quo is going try to suppress those and/or co-opt them but what we’re really talking about is when systems fail at a systemic level you can’t reform them. You’re not going to make a policy tweak that’s going to fix higher education or the health care system. It just isn’t going work.

People are going to start working around that and they’re going be starting to pay cash for for medical care from pop up providers or remote physicians. Or there’s lots of different solutions to that in education. What I see the model that’s going to emerge whether people like it or not and is that students are going to start taking control of their own education and they’re going start organizing their own education.

They don’t need this bloated structure that charges them $70,000 a year and so that’s where technology, the internet and networking has really enabled a whole suite of solutions that basically bypass all the institutions that now hold the wealth and power, that have all this as you say institutionalized lethargy as as their their model.

It’s actually quite an exciting time but for those who are dependent on the system within these institutions it’s a very disturbing time

Under Force Majeure as the institutions become understood to be out of touch with both the causes and remedies to the immediate crisis, they begin to signal their own hypocrisy and irrelevance more intensely.

It will not be long before citizens will face the dilemma of continuing to observe the edicts of their governments, whose policies inexorably stripped them of their ability to weather any kind of economic speed bump. They will come to realize that despite what the government decrees, especially if that means keeping their businesses closed or their jobs on hold for much longer, they may be better off working around that.

That’s when myriad alternative economies and ecosystems will explode, black markets, grey markets, Local Exchange Currencies, private blockchains, invisible agoras.

As governments at all levels teeter on insolvency and their inability to control their own populace everywhere or to be in a position to guarantee security and order, I could envision neighbourhood watch groups morphing into localized militias. I would anticipate an explosion in private security and ex-military contractors.

Don’t be surprised to see Facebook resurrect their Libra, either under that monicker or some rebranded version as the large corporations, the ones that have revenues larger than most national GDPs begin to reassert some of their plans which may have been impeded earlier.

However it plays out, the key points to bear in mind are that:

• It would be a mistake to think of the next 20 years as a linear, albeit accelerated version of the previous 20 years (a la Chris Martenson)
• We are about to undergo a change in secularity from deflation to inflation (a la Grant Williams, Peter Schiff and many others)
• The incumbent institutions of the fiat currency era are about to be swept away, akin to the way the royal houses of Europe were after World War 1 (the last major “Force Majeure” transition period that comes to mind for me).

It will all be very reminiscent of Neal Stephenson’s “Snow Crash”

If you want to receive the rest of the Jackpot Chronicles series, or get on the list for my Business Survival Blueprint (available to subscribers only), sign up for my mailing list.

I meant to write this back around May 7th or so, after I listened to “What Bitcoin Did #104” with Tuur Demester and then read his “Bitcoin in Heavy Accumulation” paper. The title of my post was supposed to be “Is Bitcoin finally putting in a bottom?” Real life got in the way of my writing, for a few weeks and then Bitcoin went and did this

I saw a thread in a crypto group on Facebook polling the members, “What is the catalyst behind the Bitcoin price surge” and I personally think it was the release of that Tuur Demester paper. Until then, there were too many head fakes and too much volatility but he made a cogent case that overall, the whales were back in accumulation mode.

Bitcoin’s inelasticity of units

One of the more interesting takeaways from the “What Bitcoin Did” podcast interview was his observation that, with a max 21 million Bitcoin that will ever exist, and an estimated 3 million Bitcoin lost forever through various forms of misadventure, that leaves 17 million BTC now with a global population of millionaires somewhere around 20 million. That means that there is not enough Bitcoin in existence for each millionaire in the world to possess one full BTC.

This leads to the dynamic Kurt Detlev S. Schlichter predicted in his Paper Money Collapse when he throughly debunked the objection that money can never return to a hard-backed currency because of there being a shortage of a fixed unit currency like gold to fulfill all of an economy’s transaction volume.

Said differently, one of the arguments against an inelastic currency, such as Bitcoin – is that there isn’t enough of the monetary unit to go around to accommodate an expanding economy.

According to Schlichter:

“A monetary system with a money commodity of essentially fixed supply will experience secular deflation. A growing economy, with an entirely inflexible money supply will exhibit a tendency for prices to decline on trend, and for money’s purchasing [power] to steadily increase. But the key question now, is why should this be a problem? We have already seen that historically secular deflation was rather minor and that it certainly never appeared to present any economic difficulties. No correlation between deflation or recession or stagnation is evident under commodity money systems. [T]here are no reasons on conceptual grounds to consider deflation to be a problem”

The ostensible reason why central bankers and policy makers target inflation is to expand the number of currency units to service the economy. But that’s disingenuous, and the real reason inflation is targeted is because it enables various governments to borrow more than they should, and then pretend to pay it off in currency units with diminished purchasing power. Inflation is theft, yet very few people understand this (not the least of which is “Politics of Bitcoin” author David Golumbia, who insists that inflation increases purchasing power).

What actually happens in terms of an inelastic currency, is that prices go down over time. We would also expect to see the currency unit itself sub-divide into smaller denominations, something which Bitcoin and crypto-currencies are uniquely suited toward.

Should the ascent of crypto currencies continue, we should expect see the subdivisions of bitcoin being used in everyday parlance and transactions reference smaller subdivisions of BTC, from bitcents (0.01 BTC, or cBTC) to millibits (0.001 BTC or mBTC), then microbits (0.000001) or eventually even satoshis themselves (“sat”, 0.00000001 BTC).

What makes a secular cycle in crypto?

“Systems like Ethereum (and Bitcoin and NXT, and Bitshares, etc) are a fundamentally new class of cryptoeconomic organisms — decentralized, jurisdictionless entities that exist entirely in cyberspace, maintained by a combination of cryptography, economics and social consensus”

— Vitalik Buterin

One thing Demester said in passing was that we are in still in an intact singular secular bull market in Bitcoin, which started in 2008. When I wrote “Welcome to Bitcoin’s Trough of Disillusionment” I posited that the secular bull market ended in 2017, making for a 9-year secular run. My best guess was that we were then entering a secular bear market in crypto and that would need to be measured in years, not months.

I get hung up on this because as I’ve previously wondered, if crypto-currencies are indeed a new form of asset class, and I posited in “This Time is Different: What Bitcoin Actually Is” that they are, then I would expect them to behave like other asset classes, and switch leadership between secular bull cycles.

That’s not a law by any means. But in general, whatever lead the market up in the previous bull (think Nifty 50, .COMs, housing and now the FAANGs), leadership shifts to different sectors on subsequent bull cycles within the asset class. Each bull market has a defining narrative unto itself (mostly variations on a “this time it’s different”). When the narrative changes, the sectors that lead the bull are the ones that correspond to that new mythology. The next equities bull may be biotech, or nanotech.

But crypto is so new, what are “the sectors”? Was the last spike defined by the ICO craze, and the next one, if and when it occurs, will be defined by something else? Whatever it will be may not even exist yet. With crypto we repeatedly find ourselves in uncharted territory. To paraphrase William Gibson,

Crypto-currencies were like a deranged experiment in social Darwinism, designed by a bored researcher who kept one thumb permanently on the fast-forward button.

Events move faster in this space, and it’s still early going. Maybe each successive all-time high in the price of Bitcoin in USD terms was a secular cycle unto itself?

It is tempting, to look at this recurring pattern of Bitcoin price spikes and extrapolate into the future and envision yet another one that will dwarf the 2017 high in manner congruent with previous bull cycles. Where that would put it is almost impossible to guess, the following chart from the same article as the one above extrapolates the trend of “exponentially higher all-time-highs”:

But extrapolation of the past is one of the primary fallacies of investing. And, I think Demester said as much as well, that eventually Bitcoin volatility will settle out and into more normal ranges and away from these periodically expanding super-spikes. I actually think it would be better for the space and open the door to wider penetration among the general economy if that happens.

As interesting as you might find all of the forgoing, none of it is useful. Does it mean you should back up the truck and buy Bitcoin before the next super-spike? Or has it gone up too much, too soon and now it’s a screaming short?

Bitcoin stocks are not confirming this move

The Bitcoin equities, if we can actually point at any stocks and call them that, maybe OSTK, NVDA, possibly RIOT, don’t seem to be confirming the move. When that happens in precious metals it usually means the rally is a head fake or destined to stall out.

Any other “Bitcoin equities” have been ground all the way down into penny stock dust. MGTI and DPW Holdings are beyond trainwrecks. HIVE was the only penny stock I found whose chart doesn’t look absolutely terrible, but the fundamentals are a disaster.

GBTC is moving in tandem with Bitcoin, which makes sense, yet the premium is currently around 33%, not the completely insane 70% or 80% that it commanded during the blow off top of 2017, further the premium to NAV has actually dropped a few points since this BTC move really took off:

Overall, the bitcoin stocks space is too new and too damaged to be able to tell us anything useful, other than making note that at least here, there is a conspicuous absence of exuberance.

Bitcoin on the other hand, is enjoying a lot of optimism right now and it’s not uncommon to see lofty price targets being bandied around in social media again.

That said, I am tentatively in agreement that winter is over for Bitcoin, and that we are at least entering a basing phase ahead of a new bull cycle. Remember what I warned when I wrote Welcome to Bitcoin’s Trough of Disillusionment:

I have personally and notoriously been “too early” calling bottoms of gold bears since 2003. Possibly profitable advice would be: wait until I call for a bottom in Bitcoin and then wait another year.

It’s impossible for anybody to tell you how to the future will pan out, but I can tell you what we’re doing, how I’ve played it until now, and the approach that has worked for me in the past and never let me down:

Don’t buy Bitcoin. Earn it.

The best way I’ve found to invest in something like Bitcoin was an approach we took going back to the digital gold currency days of yore, when e-gold was a thing, and we became the first and only ICANN accredited registrar who would accept it as a payment method. Instead of converting those sales to fiat, the transaction volume was comparatively small enough that it wasn’t material to our cashflow. We could accumulate it, and over time, it added up to a few pounds of bullion, which we were diligently converting to physical via the secondary market.

In 2013 we ran the same play again, becoming effectively the first ICANN registrar to accept Bitcoin (and then Ethereum, and lately we dropped Bitcoin Cash and added Litecoin). From 2013 through to the super-spike in 2017, we for the most part accumulated it.

After the bubble peaked out, we kept accepting Bitcoin, but switched gears to converting half of it into gold, again, this time using Goldmoney / Bitgold. We don’t look at things as Bitcoin vs gold. We look at global financial repression and economic rigging as a situation that one defends against with Bitcoin and gold. They are natural compliments and not at all orthogonal to each other.

We’ve since shifted our weighting and are back in 100% accumulation mode for crypto-currencies. On this stretch of the crypto-currency journey I am talking to more business owners who want to do the same thing: offer Bitcoin as payment option to their customers.

If you own a business and want to add Bitcoin as a payment method so that you can essentially dollar cost average your way into a decent position, it may be a fortuitous time to start. Every bit of Bitcoin you earn now has that inexorable deflationary wind at its back that will hold and gain value in fiat money terms over time. Given global debasement of worldwide fiat currencies, perhaps spectacularly so.

As an example, during the blow off top in December 2017 I remember logging into a wallet I had setup for a tipjar on an old blog that had received a single tip, something like $2 or $5 (maybe even less), and was astounded to realize it had become worth $1500 or so. Think of that every time you accept a $5 or $20 or $150 payment from your business in Bitcoin, and if you’re doing that, as we were for years between 2013 and 2017, several times a day, you start to get that snowball effect.

If you don’t have the technical time or inclination to dig into this and set it all up, fear not, easyDNS is launching a fully managed easyCoin Payment Gateway, which runs under your own domain and collects Bitcoin into your own wallet. You can sign up here for an invite.

[Read on Medium]

To me and many others, bitcoin is not a technical revolution as much as it is a triumph of political and economic incentives.

— Two  Bit Idiot

“Systems like Ethereum (and Bitcoin and NXT, and Bitshares, etc) are a fundamentally new class of cryptoeconomic organisms — decentralized, jurisdictionless entities that exist entirely in cyberspace, maintained by a combination of cryptography, economics and social consensus”

— Vitalik Buterin

In Part I we took a look at “What Bitcoin Isn’t”, where all the usual comparisons and analogies around Bitcoin were shown to be poor fits in explaining what the phenomenon really is, ending on the obvious next question:

What is Bitcoin then?

Money is one of those “aquarium characteristics” of life. Aside from worrying about our bills or investments, the general structure  of “money” is a background medium that underpins everything and for the most part we don’t really pay attention to it. Other examples are the base utilities like electricity and running water.

As we live our lives in these “aquariums”, we don’t really question the nature or the delivery mechanisms of these structural/cultural mediums we’re immersed in, unless they stop working or until they undergo a radical change.

A brief history of monetary innovation

What we are experiencing today is a technological innovation that is moving the nature of money itself from one form to the next and that is something that has only happened a few times throughout recorded history. It is because we are talking about a fundamental restructuring of the nature of money, and not an asset bubble occurring within the confines of the prevailing monetary system, that we can apply the “This time is different” label to Bitcoin.

Centralized, opaque, debt-based, money is being disrupted by decentralized, open source, competitive crypto-currencies.

This disruption has occurred out of necessity, given the irreparable harm central bank policies have inflicted on the citizenry over the last century, reaching what can only be considered a crack-up crescendo of targeted inflation, QEternity, ZIRP and NIRP, the war on cash and capital controls over the last 10 years. The most fitting label for all this is Chris Martenson’s “financial repression”.

During the era of debt-based money/fiat currency whenever an asset bubble occurred, “this time is different” was never actually different. Galbraith’s observation from the Part 1 bears repeating and it holds up:

The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.”
(emphasis added)

But as mentioned in Part 1: Bitcoin is not a debt based bubble. Leverage doesn’t account for the majority of the price action, at least not yet. As I write this, CBOE futures went live this week. Also, most exchanges are offering margin and a lot of traders are dumb enough to try using it, but that is not the driving factor pushing Bitcoin adoption. These emerging stories of people mortgaging their homes to buy bitcoin are “newsworthy”, and thus still sporadic. Debt would be a driving force of the bubble when it’s systemic.

Looking at Bitcoin as a technology shift, there have only been a handful of really big shifts in money throughout history: We had barter, then either money then debt, or debt and then money.

Anthropologist David Graeber (Debt: The First 5,000 Years) makes a case that contrary to conventional theory, barter did not beget money, but rather debt in the form of obligations came first. This was the first true abstraction of deferring present consumption into future value. Owing somebody something, whether it was returning a favour, or later, some symbolic representation of that favour, and that was the progression toward “money”.

Graeber’s larger point is that debt, the first big monetary innovation after barter, has been used ever since by a small minority of people to enslave the rest of the populace.

It’s a compelling argument. In either case, aside from subsequent innovations such as the creation of the banknote, which facilitated transmission of value at a distance, and double entry accounting, nothing much has happened in the structural shape of money since the last big innovation, which was the rise of fractional reserve banking.

Everything since then, from various fiat currencies, to credit cards to the magnetic strip or PIN chips have been variations on a theme, the theme being debt is money. As long as the various modern welfare states continue to spend more than they receive, they have to keep creating and monetizing more debt in order to keep the wheels on the system as a whole.

Crypto-currency is not debt

Crypto-currency is built on mathematics, open source, consensus and decentralization. These attributes combine to give us a monetary system with defining characteristics which set it apart from the current, fiat based model:

Inelastic

It’s Inelastic because as we all know there are only a set amount of coins that will ever be created. This is in stark contrast to the supply of money in fiat terms. As somebody jokingly tweeted the chart I included from Part 1 “Wow look at that bitcoin price! Oh wait, that’s the chart of the money supply” – more on this below.

This inelasticity makes Bitcoin and any other similarly constructed crypto-currency….

Deflationary

A deflationary currency is closey related to being inelastic, but we need to look specifically at the deflationary aspects of Bitcoin because conventional economic thought is that “deflation is bad”, and it is — if you’re using debt for money.

The reason why is because debt-based money, enabled by fractional reserve banking allows monetary units to “exist in two places at once”, so to speak. When I first started thinking about and researching all this economics and history stuff, it was in the immediate aftermath of the crashing of the dot com bubble. It was then when I realized that I had no understanding of economics, or finance and ultimately, money. So I began a “deep dive” into these matters which continues to this day.

One of the first books I read about it was Ferdinand Lips “Gold Wars”. Lips, Swiss banker, and expert on the Classical Gold Standard was reputed to have been the cryptic and anonymous “Friend of Another (FOA)” financial and gold markets commentator of the late 90’s (foreshadowing of Satoshi Nakamoto?).

When I pulled out my copy of the book recently I found I had scribbled the following into the back cover after I had finished reading it:

“Gold, like every other ‘normal’ thing cannot be in two places at once. Fiat money, however, is credit, redeemable into nothing, that is simultaneously counted as ‘money’ by multiple parties – this works as long as the bubble is growing – but can’t work if it starts to contract. If N parties hold the same ‘fiat’ and one suddenly uses it to retire debt, N-1 parties have the carpet pulled from underneath them. Because under a paper fiat money system, reducing debt (either by paying it off or defaulting) reduces the money supply”

My understanding of this today, is that Bitcoin is inelastic and thus deflationary. It has no counter-party risk (but there is consensus risk, but fiat has it as well), and it solves “the double-spend problem”. Fiat money, by contrast is one big double spend problem. The defining characteristic of inflationary debt-based money is mathematically and cryptographically eliminated under crypto-currency.

Under an inelastic or hard-backed monetary regime, such as the era the Classical Gold Standard (when there was no income tax and mild deflation) or the one emerging today, deflation is virtuous, not the other way around.

By contrast, debt-based inflationary money creates a treadmill economy, which perniciously pushes assets up the wealth inequality ladder, as the Plutocrats on top spend their compounding wealth on buying up assets, while the lower tiers (the non-super rich) must continually and incrementally spend more of their purchasing power on staying alive.

Many conventional economists say deflationary currencies wouldn’t work because:

1) There wouldn’t be enough “monetary units” to go around to purchase all the good and services available within the economy, and

2) It leads to HODLING, or hoarding. The theory states that people wouldn’t spend any money today, because doing so would forgo the increased value the money would have tomorrow.

Detlev S. Schlichter’s “Paper Money Collapse” is a dispassionate, objective look at why fiat money always goes to zero, every time, throughout all history, no exceptions and what would happen in an environment with a deflationary currency instead:

“A monetary system with a money commodity of essentially fixed supply will experience secular deflation. A growing economy, with an entirely inflexible money supply will exhibit a tendency for prices to decline on trend, and for money’s purchasing [power] to steadily increase. But the key question now, is why should this be a problem? We have already seen that historically secular deflation was rather minor and that it certainly never appeared to present any economic difficulties. [ What economists today fear in a ‘deflationary death spiral’ scenario is debt collapse and accompanying contraction of the money supply, not deflation itself – markjr] No correlation between deflation or recession or stagnation is evident under commodity money systems. We will now show that there are no reasons on conceptual grounds to consider deflation to be a problem”

Which he then spends the rest of the book doing exactly that. From personal experience, as a merchant who has been accepting bitcoin payments since 2013 I know that the increasing price of bitcoin has not slowed down transaction volume or aggregate payments received (in dollar terms):

A deflationary currency sees prices drop over time as purchasing power increases.

The chart above depicts the trendlines of transactions in Bitcoin on easyDNS from 2013 to present. I haven’t put the Bitcoin price trend line in there but we all know what it looks like, if it were in the graph it would be a hockey stick with the inflection point starting around Jan 2016. We clearly see the pricing in BTC dropping as the price rises, yet the transaction volume and sales in CAD remain steady, with a moderate uptrend.

Bitcoin is Transparent

It’s Transparent in two ways, first is the blockchain, where we can see the flow of bitcoin and all the transactions; and second the underlying code is open source.

Anybody can look at any block in the blockchain, and anybody can pull down the source code that actually runs all this and read it for themselves.

Contrast this radical transparency with, say, The Federal Reserve, which has an exclusive monopoly on the creation of money, creates it out of nothing and then lends it to the State and charges interest on it. Further, it is owned by a cartel of private banks and operates with no oversight. This is the crux of the current monetary era. For the longest time it was possible to dismiss criticisms of this system as “conspiracy theory”, but given that the damage Fed policies have caused to the economy, especially since the GFC is felt by all but a few, it is increasingly difficult to ignore this reality.

Anybody who actually analyzes this system going beyond the mainstream narrative of what The Fed is supposed to be doing would come up with the same conclusion I did some time ago:

“if smart, scholarly people happen to believe that government fiat money is both feasible and beneficial to society, and they put serious thought into devising such a system, what they will not come up with is one run by private central banks issuing debt-based money. They just won’t. Any critical analysis would grasp that such an architecture would become a parasitic cancer on the entire society. When you realize this, it’s hard not to posit a far-reaching conspiracy to institutionalize inequality. While I am a big believer in the maxim “never ascribe to conspiracy what can be explained by stupidy” it to me falls short in this case. When we look at the structure of the entire monetary system and realize that it’s the worst way possible to design a such a system if you have the best interests of the wider society in mind then you can’t help but ask ‘in whose interests was it designed and implemented?'”

Antifragile

Nassim Taleb, in his seminal work by the same title, invented the term “antifragile”, describing any phenomenon that gets stronger when it encounters volatility. The “imminent death of Bitcoin” is probably the one thing that has been predicted even more than the “imminent death of the Internet”, which was a popular recurring theme back in the late 90’s or so.

Both technologies – the Internet and then crypto-currency are decentralized, largely open source protocol stacks that have transformed our civilization.

These qualities make crypto currency something that is anathema to the previous paradigm’s debt-based fiat. As such, it poses an existential threat to existing incumbents, be they technocrats, banksters, career politicians, or complicit corporate cartels, whose position depends on their proximity to and relationships with the money centre apparatus that creates money and preferentially distributes it out amongst this network.

What does it all mean?

When we ask ourselves this question we’re back to Graeber’s assertion that the entire monetary system is a control mechanism that uses debt to keep the wider populace in line.

This was largely tolerated by a general population that was largely ignorant of the working dynamic of the money system and how it enslaves them. Keynes himself observed that

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

For a long time Keynes was right. Then, as the century-long debt super-cycle started to crescendo a couple of key events happened.

The first was the Global Financial Crisis 2007-2009 and the purported “near-death experience” of the modern economy. Wall Street was bailed out, who used the money to give themselves bonuses, while the middle-class was decimated and continues to be ground into poverty to this day. There was incongruence in this picture, on one hand incompetence and financial recklessness was rewarded while the rule-following middle class were penalized.

The 95 White Papers

It was at this moment, that the Satoshi White Paper appeared on the scene, and proposed a different way to structure the monetary system.

Nobody really noticed. But it set off a chain of events as sure as Martin Luther’s “95 Theses” set in motion the secular decline of another hitherto undisputed hegemonic central power: The Catholic Church. In that time the result was The Reformation and the Catholic Church never regained its central power position.

One document galvanized an entire movement, and the harder the Papacy pushed back on Luther to try to contain it, the faster Protestantism spread — there’s that antifragility again.

Protestantism presented enough benefits to enough royal houses throughout Europe that when weighed against the authoritarian and decadent papacy, the upside to the new paradigm looked better than the old system – and that is precisely what it is happening, again, today, in the monetary sphere.

For the first few years after Satoshi’s paper, Bitcoin didn’t really break into the public consciousness but the wheels were certainly in motion and those people who had a lot at stake and were coming to gain a visceral understanding of the hypocrisy and capriciousness, not to mention the destructiveness  of the current monetary regime were paying close attention.

It wasn’t until another event, years later, that people would begin to see the efficacy of crypto-currency in protecting wealth and savings. That event was the Cyprus bail-in. The framework for “containing” that event was quickly adapted by other nations, slipped into the “back pocket” to be used down the road. It became law here in Canada:

“In the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.”

This provision, originally from the Harper government has been reiterated under Trudeau the 2nd.

Of course, the language here is telling, belying the assumption on the part of the political elites that the rabble is ignorant and easily fooled. Similar to how barely “one man in a million” can diagnose inflation, they assumed even fewer would know that “certain bank liabilities” are the depositors’ savings.

But people do know what that means. Now it was clear – unless we owned a bank we were all pretty much on our own, and even worse, whenever those banks went off and painted themselves into a corner of insolvency, we were the ones who were going to have to make them whole. Banks are “too big to fail”, everybody else is expendable.

Bitcoin is a hole …in a burning building

“I had the thought that Bitcoin is like a hole in the wall of a burning building. The burning building is the petrodollar. The Bitcoin hole in the wall doesn’t meet any standard definition of a door. It wouldn’t pass a building inspection and it may not last long. It will most certainly be replaced by something else in the long run. But in the short term, no one inside that burning building really cares about any of that and the ones that first smelled smoke are already pouring through it. Many more will follow and some, sadly, will die in the fire. There are other exits from the building too, some may be safer than others, but the most important thing is getting out of the burning building as quickly as possible.

— from the comment thread on Zerohedge for Part 1 of this article (the only thing I would add to this is that the other exits lead to other burning buildings – markjr)

And this finally brings us to what I think Bitcoin really is. It’s a type of capital / currency flight. In a way, (and I didn’t coin this analogy but I can’t find who did) all fiat currencies are experiencing a hyper-inflationary collapse against Bitcoin. It makes a certain amount of sense, the logical outcome for the vast monetary printing of the last century is an inflationary blowout. But that conjures up images of Weimar Germany and wheelbarrows full of cash, the recent Zimbabwe collapse or perhaps Brazil – where banks installed a second clock to display the value of your money eroding while you waiting in line, it all seems so unthinkable here.

And yet, here we are with Bitcoin in a bubble, stocks in a bubble, bonds in a bubble, real estate – in a bubble, is everything in a bubble? Or are we experiencing a slow motion breakdown in the underlying fiat regime in a typically cavalier and nonchalant Western way? Not some James Rawles “end of civilization” novel but rather a mass exodus into anything perceived as “an asset” whilst Bitcoin surpasses them all because of a combination of inertia and the fact that’s it’s effectively an antidote to a global parasitic economic blight?

Having said this, even if this were true, it doesn’t mean “the price of bitcoin will go up…forever”. Even true hyper-inflationary episodes themselves usually last about 12 to 18 months, after which a new currency regime comes in to replace it.

What we could be seeing here are the early innings that usher in the end of USD as the world reserve currency and the beginning of “what comes next”. The fact that USD hegemony will eventually end is no surprise to anybody, even mainstream economists. However “eventually” has this vexing habit of showing up sooner than most people expected.

So while there have only been a handful of monetary innovations throughout history, there have been many currency regimes, rising, overshooting, collapsing and giving way to the next.

What may be unique about this one is that we’re rare witness to a double faceted shift: the technology shift from a debt based fiat money system to a decentralized crypto currency regime; along with the demise of the prevailing currency regime.

Also See:

• This Time is Different (Part 1): What Bitcoin Isn’t.