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.

Sign up to the Bombthrower Mailing list today and get a free copy of the aforementioned Crypto Capitalist Manifesto – I’ll also send you my forthcoming e-book The CBDC Survival Guide when it drops this fall.

Follow me on Twitter here, or Nostr: npub1elwpzsul8d9k4tgxqdjuzxp0wa94ysr4zu9xeudrcxe2h3sazqkq5mehan

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?

To receive future posts in your mailbox join the Bombthrower mailing list or follow me on Twitter. We had to push the launch of The Crypto Capitalist Letter into the week of March 22nd, get on the invite list here for when that goes live.