Apr 26, 2022
Discussed in this episode of #Bitcoin and Markets is the concept that the inflation-based investment thesis for bitcoin is dangerous and offering an alternative group of points that form a better more sustainable thesis. You can see the original version in issue #188 of the Bitcoin Fundamentals Report, or the edited and more complete version at BTCM.co.
There are a couple reasons that the inflation-based narrative is dangerous for bitcoin:
1) It doesn't respect recessions. We currently are experiencing high CPI but are heading headlong into lower CPI, recession and a credit crisis that threatens to be as big or bigger than 2009's GFC. A deflationary crisis, like any recession with credit-based money, destroys the inflation reason to hold bitcoin.
2) The CPI argument is empirically wrong. Bitcoin has not gone up as consumer prices are going up. In fact, it is quite the opposite. All you have to look at is the last two years. In April 2021, CPI broke 3% for the first time in 10 years, and that is exactly when bitcoin peaked at $65k. When CPI slowed to flat in July - September 2021 bitcoin's price began to rally again. Finally, most recently, as CPI has once again accelerated on its way up to 8.5% in March 2022, the bitcoin price fell or has been flat.
3) The end result of this wrong and simplistic investment thesis is that the new marginal investor on Wall St or in the upper-middle class or higher, has bought in with that inflation narrative in mind. Now, as the market tips into lower inflation and recession, they will likely sell.
This won't harm bitcoin, but it can hurt investors and isn't a vote of confidence for the bitcoin space.
My alternative is to stress 3 specific characteristics of bitcoin that will benefit in the real situation in which we find ourselves in.
1) Bitcoin has thrived in flat to falling CPI as a counterparty free safe haven. Bitcoin is better gold, and not a dollar denominated asset with 100% pure counterparty risk.
2) Bitcoin's ecosystem is relatively insulated from a credit crisis because it is based around a different currency. The ecosystem is booming and will likely continue to boom because it doesn't have pure dollar risk like all other industries.
3) Bitcoin is a technology with network effects in its early stages of adoption. This gives it extreme asymmetric risk/reward profile. It might be an accident of history that bitcoin is the technology at this point in its adoption at this perfectly suited moment.
Stand by for Part 2 coming out later today!!
Issue #188: https://bitcoinandmarkets.com/r188/
Edited and complete version: https://btcm.co/the-danger-of-an-inflationary-thesis-for-bitcoin/