Putting the Recent Crypto Carnage Into Perspective

This week ended badly for everything, with the DJIA losing %1 on the day, 1.7% on the S&P500 and 2.55% for the Nasdaq, Zerohedge called it “Kamala Karnage,

“and boy was it an epic flush: everything – like literally everything – and certainly anything with a high beta or even a trace of momentum, imploded with a sheer violence that made Aug 5 look like amateur hour.”

Bitcoin, touched as low as $52.7K – a week ago it was flirting with $60K -prompting the usual no-coiners to gloat that Bitcoin was “imploding”, seemingly implying that everything else wasn’t tanking as well.

When August 5th Black Monday hit, the alert sent out to my Bitcoin Capitalist Letter readers said

My view is that this entire selloff in crypto is 100% a macro induced liquidity crisis and globally contagious margin call.

 

It has very little (nothing?) to do with Bitcoin, it has everything to do with a few chickens coming home to roost and a mad scramble for solvency.

 

Pretty well everything is down hard and the reason cryptos are down harder is because, as we all know, there are no circuit breakers or “plunge-protection teams” for Bitcoin or anything else in the space, and it all trades 24x7x365.

 

That’s why it tends to overshoot to both the upside and down.

Contrast this summer softness in Bitcoin with 2021-2022 crypto winter, which was 100% subject to the internals of the digital assets economy itself: Terra/Luna, 3AC, Celsius, and of course, the FTX debacle brought a well deserved purge to the space and the (some of) the most egregious offenders are where they belong: in prison.

Many look at the unrestrained volatility of Bitcoin and gloat, arguing that it makes it untenable as a store of value. (I wonder who was around during the Weimar hyperinflation who, looking at the volatility of gold compared to the rapidly disintegrating Reichmark said the same thing: “Too Volatile to function as a store of value”. That’s right, nobody remembers them).

You’ll often see charts from Weimar Germany of gold priced in the paper mark going parabolic.

What that chart doesn’t show is the sharp drawdowns & volatility that occurred during the hyper-inflationary period. Speculating using leverage got wiped out multiple times.$BTC 1/2 pic.twitter.com/tZhpP1KMS1

— Dylan LeClair (@DylanLeClair_) May 23, 2021

Something I’ve said since 2013 – when Mt. Gox imploded and everybody was calling it “The Death of Bitcoin”. This is what a free market looks like, no circuit breakers, no plunge protection team and even contrast to some of the cryptos, like Ethereum, no “do overs” in the form of hard forking your way out of a jam.

Because BTC is getting clobbered along with everything else, this is reminding me more of the COVID panic of 2020 more than it resembles the onset of the crypto winter, in 2021 (I think I launched The Bitcoin Capitalist Letter right at the top of that cycle, as luck would have it).

People point at the volatility as proof that Bitcoin is not a safe haven and it’s not a hedge – one prominent newsletter writer I’ve known for a long time constantly berates me that Bitcoin doesn’t move opposite to the dollar, as one should expect it to if it’s some sort of hedge against inflation or debasement.

Others say that “Bitcoin is basically Tesla” or that it simply moves with, and trades like just another high flying tech stock or the Nasdaq as a whole.

They’re not entirely wrong about Bitcoin’s correlation with high tech, but they’re not seeing the entire picture either.

Our current era is driven almost entirely by technological advancement, that idea isn’t controversial to most people – however they do fail to grasp the ramifications of the feedback loops technology creates and the accelerating pace of change that comes with it.

This is why the tech sector is moving faster and outperforming everything else and it’s why Bitcoin is outperforming the tech sector. My mantra, as laid out in The Crypto Capitalist Manifesto, is:

Bitcoin isn’t a trade. It’s a monetary regime change.

In Ferdinand Lips’ “Gold Wars” (cited in “Sound Money Makes for Short Wars“), he talks about how the global move to a gold standard happened without governments (or globalists) decreeing that it should be so, owing to gold’s superiority as a monetary metal:

By 1900, approximately fifty countries were on a gold standard. including all industrialized nations. The interesting fact is that the modern gold standard was not planned at an international conference, nor was it invented by some genius. It came by itself, naturally and based on experience. The United Kingdom went on a gold standard against the intention of its government. Only much later did laws turn an operative gold standard into an officially sanctioned gold standard.

This is exactly what’s happening today with Bitcoin, only the people who have been so wrong about it for so long are digging in even harder now, despite it becoming more obvious by the day that this is the direction things are going (I can imagine some future history teacher stumping her class with “You’ll never guess which nation state was the first one to adopt Bitcoin as legal tender, I’ll even give you a hint: It wasn’t any of the former US Republics”).

What’s so disorientating about it happening now is because where in the past, when the incentives impelled market actors toward a gold standard, it took place over decades or even centuries. For most people, in any given lifetime, the current monetary regime of the day was something that had been in place already the day they were born, and it probably wasn’t going to change over their own lifetime.

Those exceptional occasions when it did are where history books come from. Panics, wars, hyperinflations throughout the ages were once-in-a-lifetime or generational events. Today you’re seeing it unfold in your twitter feed.

Now, because of the technology curve and acceleration in the rate of change, they happen all the time, with increasing frequency and magnitude.

Most of the ridiculous bullshit people believe today

… and nearly all the policy blunders that are so catastrophically stupid as to appear to be intentional conspiracy

– are pure and simple Future Shock.

Go back and read the entire series.

Then you’ll get what’s actually… pic.twitter.com/9xGmhtnJJk

— Mark Jeftovic, The ₿itcoin Capitalist (@StuntPope) June 18, 2024

People like Peter Schiff (and my anonymized newsletter writer colleague) delight in seizing on any one-day squiggles where Bitcoin goes down and gold goes up as proof positive that “the Bitcoin trade” is over, and they trot out all the usual eulogies (“Tulips, backed by nothing”, “ponzi”, “NSA psyop“, et al).

It takes an act of concerted motivated reasoning to blot out the cognitive dissonance that just looking at the factual record of Bitcoin’s performance must induce in the skeptics:

I included Berkshire Hathaway here because it’s run by Cantillionaires that hate Bitcoin and frequently lauded as tried-and-true capital allocation machine  (despite its outperformance over the S&P being in a secular downtrend).

Also interesting to note that gold is barely keeping up with the expansion of M2 over a 10-year timeframe, and none of the Bitcoin-loathing goldbugs trash talking BTC on Twitter ever responds when I point out that gold still hasn’t surpassed it’s inflation-adjusted high from 1980.

Bonds are dead capital walking, “Return-free risk”, as they say. A cornerstone of my thesis is an eventual bond exodus that sees even a fraction move into Bitcoin (1% to 3% would put BTC somewhere in the high-6 or low-7 digits).

Bitcoin simply is the highest performing asset in absolute terms of all time.

At the end of the day, I’d be worried in the short term if there was something specific to the Bitcoin or crypto markets driving this pullback (like Tether finally being revealed to be a fraud,  which we covered in latest letter) – but so far that’s still just speculation and it hasn’t become an issue.

• The Bitcoin ETFs have not been dumping though the weakness. Many said they would, that the spot ETFs would make it easier to dump positions at the first sign of trouble.
  

  “Despite price volatility, ETF holders have shown resilience, with no major outflows since March. But overall inflow rates have slowed considerably post-launch” — via Ecoinometrics

  But as we’ve been saying over the last few issues, so far this cycle, it’s been all institutional – meaning, for most of the bull run this year (remember, Bitcoin is still up 22% YTD and 106% over the past year) so while institutions may prefer to garner their exposure via ETFs, they tend to take a longer term outlook and not to make sudden moves.

• I’ve noticed that miners have been accumulating meaninfully for the first time in this year:
• And finally, we’re pretty well in line with previous halving cycle years with the notable exception that Bitcoin put in fresh, all-time highs before the halving event in April, which is something that didn’t happen in previous cycles until several months afterwards.

In my mind, the major parabolic “up-only” move for Bitcoin is still ahead, perhaps dead ahead with the remainder of the cryptos to follow thereafter (except maybe Ethereum

The global rate hike cycle is over, the central banks are trapped between dilemmas of their own making, policy makers are openly espousing capital controls, wealth taxes, if not outright communism – it’s really hard to see a scenario where Bitcoin doesn’t continue to attract more capital and take its place as the ultimate safe haven asset in this modern-day Fourth Turning.

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(From “Notgeld” to Hyper-Bitcoinization in Under Two Decades)

“Just because something is inevitable doesn’t make it imminent”
— Douglas Casey

For a long time, anybody paying attention knew that central banks printing fiat money out of thin air, then lending it to nation states at interest and blowing it out into the economy would inexorably, eventually lead to such wealth disparity that the society would break down.

It would get to the point where popular revolts would threaten to overwhelm the position of the elite class; those Cantillionaires who lord over this phantasmagorical system that created value ex nihilo and caused, through inflation, the vast majority of wealth to accrue to society’s “capstone class”…

One of my personal favourite quips is:

Eventually always shows up sooner than everyone expects.

It’s been over three years since I released The Crypto Capitalist Manifesto, and in it I laid out my base investment thesis that “The Great Reset” wasn’t actually anything to do with climate change or any of the United Nations Sustainable Development Goals – what it really was all about, is the debt:

“YOU WILL OWN NOTHING, AND YOU WILL BE HAPPY.

The messaging coming out of global elites such as the World Economic Forum, The Party at Davos, the International Monetary Fund and even places as disparate as The Vatican and Hollywood are all riffing on the same theme: You, the middle class, the lower class, the masses – are going to have to get used to a lower standard of living.

 

The real reason why isn’t because of climate change, or even COVID. It’s because of the debt. The world has finally run out of runway from kicking the can down the road all those times the global economy threatened to backslide into recession or when previous monetary bubbles imploded. All those decades of collectively living beyond our means have finally hit the wall. This is it. We’re here.

 

Governments have spent beyond their means for decades, and now the bills have come due. The only way to pay them will include inflation and austerity. It will resemble a controlled demolition of the entire middle class. The easiest way to do that will be to turn them into a completely dependent welfare class via endless rolling lockdowns, Universe Basic Income programs and mandatory health passports.

 

However “The Great Reset” is basically at its core, a monetary reboot. A way to restructure the global debt overhang and turn “money” into technocratic lube for enacting grandiose social engineering projects: most of them geared toward ratcheting down the standard of living for the masses of the developed world and suppressing the standard of living for the so-called Third World.”

(If you want a free copy of the entire manifesto, just sign up for the Bombthrower mailing list and we’ll send you the PDF).

“The Great Reset” and “Build Back Better” attempted to lay the groundwork for the eventual (and still somewhat inevitable) pivot of fiat money into Central Bank Digital Currencies (CBDCs). They will almost certainly be fused with social credit systems denominated in carbon footprint quotas – and thus a mechanism to implement forced austerity across the debt-drowning economies of the world resulting in a kind of “monetary Apartheid”.

What I Got Wrong in My Manifesto

Aside from the fact that events I assumed would play out over decades happened within 18 months, there was another fundamental flaw in my analysis:

I first discovered Bitcoin during the Cyprus banking crisis of 2013 – when people began to understand that “as safe as money in the bank” didn’t quite mean what it used to anymore.

The Cypriots got hit with a 10% “bail-in”, but more ominously – bail-in provisions started showing up all over the place (from the Manifesto, again):

As the bail-in was being planned and executed in March 2013, Eurogroup president Jeroen Dijsselbloem told interviewers that Cyprus would serve as a template for future bank restructurings in the euro zone.

 

In April 2013, the idea of enshrining the framework for bail-ins surfaced in my home country of Canada, with the Conservative Harper government’s budget

 

The Canadian bail-in language was been preserved in the budget even after the Liberals under Justin Trudeau assumed office in 2015. In 2018 it officially became The Bank Recapitalization (Bail-in) Conversion Regulations. 

 

In Australia the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill of 2017 gave the Aussie government the power to facilitate bail-ins.

 

And in case you’re wondering, the USA was a front-runner for codifying bail-ins into legislation: the Dodd-Frank Bill that was passed in 2010, ostensibly to reform the banking sector after the Global Financial Crisis contains provisions for “Statutory Bail-Ins” to recapitalize any “systemically important” banks that gets themselves into trouble.

 

In fact, new supra-national bail-in laws took effect across the entire G-20 in 2014.

It was during the Cyprus bail-in that Bitcoin surged above $100 USD for the last time. It would never again trade at the double-digit level.

Even so,  I never thought Bitcoin would become the world reserve currency or even a component of whatever comes next after this post-post-Bretton Woods era we now live in.

My mental model for Bitcoin, right up until 2022 was as a kind of globally emergent “Notgeld” – a German term that came into being during their 1920’s Weimar Hyperinflation, and translates into English as “emergency money”.

In Germany, individual towns began printing their own scrip, during the Zimbabwe hyperinflation, people began using prepaid phone and gas cards. Every hyperinflation has its Notgeld, and until early 2022, that’s what I assumed Bitcoin was, on a global level.

Two things happened that changed my mind:

1. The US seized the foreign asset reserves of two nation states – it doesn’t matter who those states were or what they did to “deserve it”.
2. During the #FreedomConvoy, the Canadian government declared martial law and seized the bank accounts of truckers and any citizens who supported them.

The first sequence of events forever changed the calculus that nations would employ for deciding how to allocate and hold their sovereign wealth.

The second did that for individual citizens. It alone orange-pilled Robert F Kennedy Jr, who a year later would make Bitcoin a US election issue when he opened his historic keynote at Bitcoin 2023 in Miami with the words:

“I became a Bitcoiner when I saw what the Canadian Government did to the truckers” 

From that point on – Bitcoin shifted from being “Notgeld” – emergency money amid a slow-rolling, global hyper-inflationary event, and it became inevitable component of a future, successor monetary regime.

The Next President of the United States Has Been Orange-Pilled

No matter what you think of Donald Trump, whether he induces either type of “TDS” (Type 1 = “Trump Derangement Syndrome”, Type 2 = “Trump Divinity Syndrome”), or  you’re more dispassionate and objective, the fact remains that a Trump-led GOP landslide is all but baked-in come November 5th.

Like RFK Jr., Trump has firmly jumped onto the Bitcoin bandwagon. He’s been orange-pilled (props to David Bailey Bitcoin Magazine for doing so).

Trump declared that he “wants all future Bitcoin to mined in the USA”. Granted, it doesn’t quite work that way, but he went on to reiterate that, and the right to self-custody at: the Republican National Convention:

Donald Trump makes EPIC promise to US crypto holders: pic.twitter.com/LqCRtEZTbD

— Altcoin Daily (@AltcoinDailyio) July 19, 2024

The Big Announcement Will Drop on July 27th

This year Trump will be delivering the keynote address at Bitcoin 2024 in Nashville, Tennessee. RFK Jr will also be on hand. Both candidates firmly on board with Bitcoin, albeit one destined for the Presidency more than the other (I expect RFK will land somewhere within a Tump administration come January 2025).

The inside baseball is that at that keynote address, Trump is expected to announce his intention to create a strategic reserve of Bitcoin for the US Treasury.

HUGE BREAKING: Trump to announce a USA #Bitcoin strategic reserve in Nashville – Sources

— Dennis Porter (@Dennis_Porter_) July 18, 2024

Doing so could be as simple as a stroke-of-the-pen on inauguration day, as the US is already sitting on about $5B worth of BTC:

The next President of the USA should sign an executive order to convert the $5.5 billion held by the US Government into a strategic reserve at the US Treasury then use that reserve to back the dollar with #Bitcoin. pic.twitter.com/NYjcbCWXmV

— Dennis Porter (@Dennis_Porter_) July 18, 2024

Once that happens, we’re in a whole new ballgame. The Game Theory of Bitcoin will irrevocably change globally, and nation states will be incentivized to follow suit.

Regardless of how it plays out, Bitcoin has already crossed the Rubicon. It’s here to stay, it isn’t some kind of “emergency money” to temporarily sidestep the ongoing unraveling of the global fiat standard – it’s now part of the plumbing.

Read my special report on what a Trump presidency means for Bitcoin, and which companies stand to win big right here.
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If Bitcoin didn’t exist,
we’d have to invent it right now.

The conventional take on Bitcoin and crypto-currencies in general from the mainstream skeptics is that it’s some sort of speculative bubble. The recent mania in NFTs seemingly adds credence to this argument. However, the NFT craze, as unfathomable as it is, even to somebody like myself, has precedents that show it doesn’t invalidate the crypto thesis.

Coming up in the domain and DNS business, I’ve seen this movie before. I’ve also made the point back in the 2017 crypto cycle that the Tulipmania analogy for Bitcoin was a bad one for many reasons, and that it was a more accurate comparison to the domain name aftermarket of the 2000’s era. When companies and speculators were paying millions of dollars for strings of words from the dictionary with “.com” appended to them, that was a speculative mania and it was akin to Tulipmania. And from our vantage point in the present we can draw the comparison to NFTs.

But when the .com aftermarket fizzled, the entire internet kept right on plugging along using DNS as the carrier tone, and domain names for endpoints. That didn’t change and to this day, without DNS you’ve basically  got nothing.  It’s part of the internet plumbing (yes, there are multiple projects seeking to supplant DNS via blockchain, separate convo for another day).

The overall point is, a seemingly speculative mania can erupt out of a relatively new protocol, be it the long defunct hedge fund that rang the bell at the top by purchasing “fund.com” for $10M USD, or an NFT selling today for $69M USD, and that doesn’t make the underlying protocol from which it sprang forth a speculative bubble (we discussed this along with attention markets and BAT on the latest AxisOfEasy Salon #40).

But if everything from NFTs to stonks to real estate and gold and cryptos are all hitting fresh all-time-highs, it seems to be that the obvious pattern here isn’t necessarily that “Everything is in a Bubble” as much as that the numéraire is collapsing.

Most people reading these kinds of articles know that bonds are a dead man walking and M2 money supply is going up everywhere. I was going to pull in charts from multiple places (my home country of Canada’s is below). Japan, Eurozone, China, there’s no point, they all look the same, everything looks like this:

And if you zoom in on the last year, the Pandemic Year that will bisect modern history into The Beforetimes and The New Normal, they all look like this:

The Pandemic panic and the monetary response to it pulled forward what I’ve been calling The Great Bifurcation by decades.

That acceleration and its intensity is a big reason why everything that can be construed as an asset in the world is going like this:

We aren’t in a hyperinflation yet. Policy makers are still trying to pretend inflation is undershooting and they’re still trying like hell to ignite it. As Charles Hugh Smith noted recently, money velocity is plummeting, even as M2 is blasting off (hold that thought).

When you read about historical hyperinflationary episodes, you will find that what invariably happens is that capital flight occurs in all directions and people end up using some sort of “notgelt”. From Jens O. Parsson’s “Dying of Money”

The recent institutional move into Bitcoin and cryptocurrencies is a reaction against systemic, global financial repression. What the naysayers like Peter Schiff and Nouriel Roubani don’t get about where we are in history is this:

If Bitcoin didn’t exist, we would have to invent it, right now.

Fortunately Bitcoin and the other crypto-currencies do exist, and they’ve enjoyed a spectacular debut onto the world stage and into monetary history.

Fortunately proof-of-concept has already occurred and countless FUD cycles surmounted.

Fortunately the decentralized crypto ecosystems are ready for prime time, exactly when humanity needs it the most. Necessity really was the mother of invention.

In my Crypto Capitalist Manifesto (30 pages), which is one of the documents subscribers receive after they sign up to my new Crypto Capitalist Letter, I lay out some scenarios which show the theoretical effect of an exodus from bonds and cash on the price of bitcoin, I’ll extract a couple below:

This one estimates the lift to the Bitcoin price in nominal terms based on capturing a fraction of a fraction of a secular exodus from the nearly $20 Trillion USD in negative yield bonds. If half of the capital fled negative yielding debt and of that, 10% moved into Bitcoin, it would push it up over $100K (extrapolating in linear terms of the price is where it is today when this happens).

There’s at least another $100 Trillion USD in nominally positive yield bonds, but mostly negative real returns that would also be good candidates for re-allocation. The second table tries to model Bitcoin capturing a fraction of a fraction of that as well. If there was a 25% exodus out of bonds and Bitcoin caught 10% of that, that alone would put Bitcoin up over $6 Trillion. Other alternative assets like other cryptos, and gold and silver and real estate would all experience similar lifts.

Of course those are all linear extrapolations based on the current price. In the manifesto I model out a bit more, such as Bitcoin capturing more of the exodus out of bonds as it accelerates. There would also be a generalized acceleration of the Bitcoin price once the market participants became increasingly aware of this dynamic.

In other words, this is what I think is happening, metaphorically….

The Crypto Capitalist Letter will (hopefully) be in the tradition of The Privateer, but with a tactical focus on investing in crypto stocks.

Given what has happened to asset prices and crypto in response to just an inkling of inflation, imagine if Charles Hugh Smith is right, looking at the collapse in money velocity occurring now, that this is one final deflationary “tide receding” before the inflationary tsunami hits. Then what happens to the price of Bitcoin, cryptos and gold?

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