Bitcoin and Recessions
What to do when the economy tanks
Are we headed for a recession? Maybe not the whole world, but certainly Canada and the United States. The main factor I would point to is the level of credit based consumerism taking place. I see our current situation as “spending for the sake of spending”.
The rationale for more spending is that if we don’t spend and keep spending, then we would certainly face a recession. So the central banks have resorted to money printing and low interest rates in order to delay what I see as an inevitable recession/depression. This is called Quantitive Easing.
Quantitive Easing — Quantitative Easing (QE) is a type of non-traditional monetary policy in which a central bank buys a large number of securities (stocks, bonds) to stimulate the economy. When QE works well, the increase in the money supply encourages lending, lowers interest rates, and results in economic growth.
Other indicators typical of a recession are already showing their face.
Homelessness is up (which goes hand in hand with unemployment)
Supply chains are either strained or disrupted
Inflation is up (Despite QE trying to keep it down)
Housing prices are up
The cost of money (the central bank interest rate) is historically low
These sorts of economic conditions give me pause.
I’ve been trying to understand how the future will play out and how I can help myself (and my family) navigate the coming turbulence. I don’t think it is a matter of if there is a major economic event coming, I believe it is a matter of when.
A Major Economic Event
Major economic events sometimes earn the title of “Black Swan”.
Black Swan Event — An unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
These sorts of events are by definition unpredictable. But let’s contextualize this in recent events. We can say that we know an event of some sort is likely to occur. However we don’t know:
When it will happen
What the trigger will be
How the event will influence economic actors
How severe the impact of the event will be
If we knew the above information, we would be able to plan a lot better for the event when it takes place and set ourselves up nicely for the aftermath.
All of these uncertainties amount to an increase of risk, or at least an increase in the perception of risk. ↑Uncertainty = ↑Risk
What Happens During a Recession?
A recession is classified as a period of a prolonged reduction in economic activity. Less consumer spending, and fewer investments being made.
One of the things that can outright trigger a recession is the central bank deciding to raise interest rates. Higher interest rates are necessary to curb inflation (which is currently at a 40 year high), but it comes with the consequence of discouraging spending and investment.
Companies that have a well-established place in the market, healthy cash flows, and a low debt balance are usually the ones that fare relatively well during a recession.
Companies like Netflix, Apple, Facebook, and Google fit this description. In each of these cases they either own and manage their own supply chains, or have the majority of their offering in digital space which don’t rely on physical commodities and transportation.
The other category of assets that do well in recessions are low-risk assets. Since recessions are times of uncertainty, and people perceive uncertainty as risk, it makes sense that they would flee higher risk assets in favour of lower risk assets.
Assets like gold and/or low-interest government or corporate bonds typically do well during a recession.
A Flight to Safety
All of this fear and uncertainty will typically culminate in a single economic event that plays out over the course of days to weeks to a month. Feb-March 2020 is a perfect example of this.
Rising fear and uncertainty leading to a massive selloff from assets into “safe-haven” assets such as the USD and Gold.
Above is a chart of the S&P 500. The S&P500 is is often used as a general measure of the performance of the stock market as a whole.
From early Feb to March 16th, there was a steep decline culminating in a large selloff between March 10th - March 16th.
The drop encapsulated in the red box above is a 32% drop over the course of one month.
Above is a chart of Gold between 2016-2022.
Gold has traditionally considered to be a safe haven asset in times of high fear and uncertainty. When there is fear in the market, economic actors will often flee to high trust assets (such as the USD) or historically scarce assets (such as gold and silver).
In the earlier parts of February, while the S&P was dropping, gold was rising as expected. Then, in the selloff event on March 10th-16th, gold also fell, but by about 12% compared to the S&P500’s 32%.
Above is a picture of the Dollars Strength Index chart. This measures the strength of the dollar relative to a basket of all other world currencies.
The strength of the dollar fell in the early parts of February only to shoot up in the latter parts when the rest of the market was selling off.
The conclusion here is that when shit really hits the fan, people want dollars. Another way to think about this is when fear is maxed out, people don’t really care about having stocks or commodities, they care about being able to meet their debt obligations and where their next meal is coming from.
It’s true you cannot eat money, but you can use money to buy food.
So where does bitcoin come in on all of this? What took place in March 2020 with respect to bitcoin? Can we use that as any sort of proxy for what lays ahead of us?
Above is a chart of the price of bitcoin.
In each of the above photos, I highlighted the same timeframe to illustrate the difference between what happened with these assets respective to one another.
Although it might not look like it, the drop in the red box is about a 47.5% drop in a month. Needless to say, bitcoin was never perceived to be a safe haven asset for the majority of holders (myself not included) during this time.
It didn’t show any of the characteristics of gold (despite having the property of scarcity) nor the dollar (despite being an asset that can be trusted).
So then why am I so bullish on bitcoin moving into what seems to be a potential repeat of what we saw in 2020?
The Game has Changed
In the days/months/year following March 2020, we saw the prices of Gold, S&P, and BTC go on a historical bull run. We also saw the Dollar Strength Index decrease as dollars we “redeployed” back into the markets. This is no coincidence.
The Federal Reserve printed an unprecedented amount of money in order to save the crashing stock market. So we really shouldn’t have been surprised to see a speedy recovery of virtually all assets in the aftermath of the March 2020 crash.
When money is printed and injected into the stock market (Quantitive Easing), the prices in the stock market go up. This spurs investment and economic activity which prevents a recession.
The Federal Reserve prevented a recession from beginning in March 2020 by doing this. However, they cannot do this forever.
This is why the game has changed.
Despite there not being a limit on the amount of money that can be printed, there is a limit on how much money can be printed before having inflationary results.
It’s different for each currency and each set of circumstances, but the limit exists and it will one day be reached.
It might not be the next black swan, or even the one after that, but eventually the USD (current global reserve) will print itself out of relevancy. We know this because this is what has happened to every other fiat currency in history. I see no reason why the current USD fiat standard is an exception to this rule.
So while the Federal Reserve can delay the crash of the USD, it cannot prevent it entirely. What happens when a reserve currency collapses?
Limits - Part 2
The failure of a reserve currency is an extremely disruptive and painful economic event. This sort of event happens at the hand of manipulation in the form of money printing and interest rate adjustments.
In the event that a global reserve currency fails, the market historically has piled into the asset that is most difficult to manipulate in terms of supply and interest rates (gold).
The supply of gold is capped, and the interest rate is low because of the difficulty of pulling gold out of the ground.
The wild card here is whether or not the globe is ready to accept bitcoin as a superior form of gold.
Transfer of Wealth
Preston Pysh speaks about a nuclear economic event in our future on the Magic Internet Money Podcast. He says that there is at least 50 trillion dollars in the bond market waiting to be moved elsewhere.
This money has been growing since at least the 1970’s without much movement into other asset classes. It is difficult to say exactly what sort of impact moving 50 trillion dollars will have on the market, but once again, it could be nuclear.
Sufficed to say, when bond managers decide to move 50 trillion dollars into other assets, the world is going to notice.
Some of them will choose gold, some of them will choose bitcoin, some of them may even choose CNY bonds.
The ones that choose to stay in USD denominated bonds will lose.
It’s simple. Limited Supply, Censorship Resistance, and Trust.
Going back to a gold standard, or another fiat standard driven this time by China will not get us out of these multi-decadal boom and bust cycles.
The only way get ourselves and future generations out of the consequences of perpetually manipulating the money supply is to adopt the money that is most resistant to manipulation.
Let’s say bond managers choose to move their money into predominantly CNY and Gold and bitcoin is the recipient of just 2% of the 50 trillion being moved. That is still $1 trillion moving into bitcoin.
With the current supply of bitcoin as low as it is (and increasing slower and slower in the future) bitcoin stands to benefit immensely from this nuclear movement of funds.
The question I’ve asked myself is “Do I have good reason to believe that bitcoin will be the asset of choice when there is a flight to safety?”.
I think I do.
Since March 2020, bitcoin has grown to be a trillion dollar asset. At least one country is holding it in their country’s reserves, and dozens of multinational companies have publicly joined them.
When I observe the type of people that are betting on bitcoin, I see that they’ve studied the history, have studied major market movements, and are more or less rational about their decision to hold bitcoin through the turmoil.
Why not Other Cryptocurrencies?
Other cryptocurrencies do not stand to benefit in quite the same way.
I think they will continue to grow and accrue a lot of value simply by association with Bitcoin (rising rides lifts all sails). But other cryptocurrencies don’t present the same value proposition as bitcoin does.
They are not as trusted to be maximally resistant to manipulation.
No other cryptocurrency has the track record of 13 years of unmanipulated monetary policy.
Taking Ethereum for example; the monetary policy of Ethereum has shifted at least once since its inception (arguably 2-3 more times).
While Ethereum and associated technologies have a role to play in the future of finance, none of them are “money” and will serve the role of global reserve currency.
The Way Forward
The only way forward, is through.
My focus until the economic events play out is to maximize my return on the coming collapse.
I think the way to do this is by holding the hardest money (bitcoin). Until this all plays out, I don’t intend on investing in any stocks, bonds, or heavily into another cryptocurrency.
The reason is that I’ve already taken flight into what I perceive to be safety.
Remember, markets are largely a product of perception. People who manage their own money will move into whatever they perceive to be safe. People who hire others to manage their money (which makes up most of the money in markets) are at the whim of the decisions made by fund managers.
These fund managers pay people (and computers) millions, if not billions of dollars, to analyze the trends and make the best allocations for the future.
I don’t have to be right about them moving most of their money into Bitcoin, I just have to be right about them moving some (<2-5%) of their money into Bitcoin.
If I’m right about this, then I stand to profit immensely. Until my fear and uncertainty about the future subside, I will continue accumulating Bitcoin in anticipation of major economic disruptions.
— Thank you
This newsletter was requested from one of my readers. I always have fun catering to these sorts of requests because it gets me writing about things I’m already thinking about, but haven’t put into words.
I hope that you can benefit from the words that I’ve put together around this topic. As always, I welcome critique and criticism if you disagree with any of the positions or hypothesis I’ve laid out in this letter.
Comment, or reply. I look forward to hearing from you.
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