Financial uncertainty makes people do strange things.
In April 2020, people bought oil contracts, silver, and shares of companies that have no customers or revenue. This, despite massive job losses, pandemic disease, and a global economic meltdown.
Silver plays no role in modern finance and we have enough oil above ground to last six months under normal economic conditions, longer if economies stay closed. Companies that have no customers and revenue can’t make any money.Yet these same people think we’re crazy for buying bitcoin.
Prepare for a great depression or a mild downturn?
Perhaps these people know something we don’t?
Millions have lost jobs and businesses over the past two months. Economic output has fallen off a cliff. Some national currencies have started to crumble. Emerging market economies face imminent debt crises.
As fearful as people might get about the future, there’s no reason the world has to fall apart.
Big, deep, long-lasting financial crises do not come from short-term downturns in economic activity, even if those drops are significant. People are resilient and economies tend to adjust more quickly than you’d think.
Those devastating, multiyear, civilization-threatening collapses happen when “safe” assets lose their value quickly.
As long as safe assets hold up . . .
In modern economies, safe assets form the basis of all financial activities. In the U.S. and many countries, these assets include cash, residential real estate, and treasury notes.
Households, businesses, and governments create all sorts of financial arrangements based on the assumption that these assets carry relatively low risk. Countries build economies on that assumption. Banks and financiers do trillions of dollars in business on that assumption.
When that assumption fails, everything else does.
There’s a reason crashing oil prices don’t threaten the global financial system. People know it’s risky and volatile. They factor that into their decisions. Nobody will ever pool oil contracts into collateralized loan obligations. Mortgages? No problem.
Safe assets, not risky assets, screw everything up.
Take, for example, the last three big global economic catastrophes—2008, 1929, and 1873.
What caused the 2008 crisis? U.S. housing market crashed.
In 1929, it was U.S. and British stocks. In 1873, it was railroads and gold.
At the time, people saw these assets as sure bets, assets that could never fail. Then, those assets failed. All hell broke loose.
Outside of those three events, we have had many economic downturns and plenty of regional financial crises. Terrible events that nobody should ever want to live through, but none of them threatened the global economic order.
You can have pain, hardship, and turmoil without systemic failure. People suffer, then recover. Life goes on.
Contrary to popular belief, most economic pullbacks last about a year or so. Yes, they can last longer, but they usually don’t.
Also keep in mind, none of those previous pullbacks were confronted with a massive, coordinated global financial intervention at the beginning.
We have many people trying to save the financial system. What makes you so sure they won’t succeed?
And this matters for bitcoin because . . . ?
Perception is reality.
Some look at crumbling financial markets and a big drop in economic activity, combined with massive government intervention, and conclude we’re going to get hyper-inflation and a global depression.
Others look at crumbling financial markets and a big drop in economic activity, combined with massive government intervention, and conclude we’re going to get a modest recession and relatively fast recovery.
They can’t both be right.
If you’re buying bitcoin because you expect fiat to go to zero, or the U.S. dollar to collapse, how different are you from the people buying silver, oil contracts, and junk stocks?
What if we never get inflation, much less hyperinflation? What if the financial system survives? Will people want bitcoin once the BRRRR meme dies out?
The opt-out moment is coming
If all you care about is the price of bitcoin, don’t bet on inflation that may never come or an economic crisis that may end within the next year.
Bet on people.
Specifically, two types of people: the rich and the angry.
Rich people like Paul Tudor Jones, who bought a little bitcoin to protect his wealth from the devaluation of all the world’s currencies.
Angry people like your uncle who gets pissed about huge corporations using loopholes to pocket taxpayer-funded bailouts at the public’s expense.
Imagine you spent decades building a nest egg, pension fund, or endowment, only to see the government drive yields down. Or, built a career or business hurt by COVID-19, only to see your government throw an unlimited amount of cash at banks and corporations while giving you a $1,200 check, a restructured loan that barely covers your needs, or nothing.
You might get so mad that you look for an “out” that doesn’t involve the banks, governments, and corporations.
There are many people like you.
Instead of buying stocks or taking out loans, they may switch to DeFi platforms while adding bitcoin or some other cryptocurrency as a portfolio asset. Entrepreneurs may create their own cryptocurrencies or blockchain businesses instead of kissing up to Wall Street or begging for money from venture capitalists.
They may ditch the legacy system.
It doesn’t need to be better, it just needs to work
Am I saying today’s cryptocurrency industry can support the world’s financial needs?
No.
Still, the technology has come far enough.
Some businesses already use cryptocurrency as part of their services to customers. Lightning Labs is developing a payment platform that can compete with Visa. Bakkt raised $300 million to launch merchant services that integrate with its global cryptocurrency marketplace.
Microsoft is developing a decentralized ID product using bitcoin’s blockchain. Earlier this year, Ernst & Young unveiled its Baseline protocol for private business transactions on the ethereum blockchain. IBM still has World Wire. Some national currencies now have stablecoins.
Lots of smaller projects and developers continue working on better platforms and infrastructure. And, of course, some altcoins now offer real utility.
Crypto wins no matter what happens?
With cryptocurrency, you can program all rules, protocols, and governance into the blockchain. As long as the math works, the system will work.
As a result, you can safely transact with millions of people who you have never met, with whom you have no relationship, who live in a country with different laws and regulations. No government needed, no banks necessary, and no Wall Street firm getting in your way.
In fact, none of those entities can stop you.
When the global economy recovers, governments may have just planted the seeds for a massive migration of money and talent into cryptocurrency.
It won’t come from debt problems or currency devaluations. It’ll come from people opting out of the system.
If you’re betting on one thing to get bitcoin “to the moon,” don’t bet on inflation or global depression.
Bet on people.
Mark Helfman is the publisher of Crypto is Easy and a top writer for bitcoin and investing topics. His book, Consensusland, explores the social, cultural, and business challenges of a fictional country that runs on cryptocurrency. In a past life, he worked for U.S. House Speaker Nancy Pelosi.
Resources
https://www.businessinsider.com/united-airlines-lawsuit-cuts-bailout-2020-5
https://www.npr.org/2020/05/04/850177240/not-so-small-businesses-continue-to-benefit-from-ppp-loans
https://blockchain.news/news/want-bitcoins-price-to-go-up-bet-on-peoplenot-inflation
https://markhelfman.com/consensusland-a-cryptocurrency-utopia/
Inflation or no inflation, cryptocurrency will always win against fiat currencies and traditional assets. What we are experiencing now is the key to that.