Old Wall media (ie. WSJ, Bloomberg), banking (ie. Jamie Dimon), governments (ie. China et all) and even sellers of competing investment products (ie. Ray Dalio, physical gold dealers) are unleashing a relentless public communications assault against bitcoin. The messaging is clearly focused on a fear-based narrative that bitcoin mainly exists to serve drug dealers, murderers, and money launderers. This is factually incorrect and in the case of Jamie Dimon, intellectually dishonest.
JP Morgan has been investing in blockchain technology and applying for cryptography patents for at least four years. What Mr. Dimon knows is that one of the aims of blockchain technology developers is to eventually cut out the banking middleman for payment processing transactions and to reduce the role of traditional banks in savings accounts.
Behind the scenes, banks have been trying to figure out how to stay relevant in a future dominated by disruptive fintech and blockchain technology. When they get uneasy about being left behind bankers quickly turn the conversation towards responsibly fighting an insurgent war against drug dealers and money laundering as if that is something they have ever genuinely cared about other than when they are forced to by regulators.
Blockchain technology pioneers essentially want to make JP Morgan’s business model obsolete by replacing it with something better that doesn’t reward the same too-big-to-fail financial institutions that have paid billions of dollars in fines for repeated offenses of fraud, abuse, and market manipulation. Banking fraud was famously rampant in the run up to the 2008 financial crisis and more recently appeared on the radar when Wells Fargo representatives signed up an alarmingly high number of its customers for services without their permission or knowledge in order to “meet the numbers.”
Believe the false murderers and thieves bitcoin narrative if you insist. At Assist FX we take a deeply analytical, multi-layered approach to research in order to achieve the most accurate analysis of what is really going on and how it will impact global financial markets going forward. We don’t always get it right but you can be assured a substantial amount of thought and data goes into the process behind the scenes. Biases, mindless sloganeering, and herd thinking are simply too “expensive” from a trading loss perspective to utilize merely for convenience or propaganda purposes in the investment business. At least that is certainly the case for those of us with skin in the game so to speak.
That is why in order to have a reasonable chance at assessing future probabilities accurately, we must begin with the base foundation of the topic at hand. Why did bitcoin gain so much popularity in the first place? There is zero credible evidence that more than say, 2% of all bitcoin owners purchased their digital assets in order to conduct illicit activities. One could argue there is at least as much illicit activity going on right now with credit cards, data breaches, and identity theft as there is with bitcoin. Why did the more than 95% of legitimate bitcoin owners make their purchase(s)? Where did the demand come from? And how can it be “a crowded trade” beyond saturation when only about 300,000 people total own more than $5,000 worth of bitcoin?
The answer to the demand spike is this: cryptocurrency demand primarily increased as a means to protect against currency debasement and financial repression in the post-Great Financial Crisis era. This is evident by the fact that nearly each new wave of bitcoin demand in the past five years was sourced from those in countries with rapidly depreciating currencies, high monetary system risk, and negative real interest rates.
What a coincidence that most of the so-called murderers and thieves buying bitcoin happened to congregate in Ukraine as Crimea was being annexed by Russia and the hryvnia currency plummeted; China as the yuan was sharply devalued alongside increased capital controls; India as the war on cash unfolded; Venezuela as it experienced hyperinflation and tightened currency controls; Japan as the BOJ experimented with negative interest rates and bought 75% of its stock ETF float using yen created from thin air; South Korea as nuclear war threats hit the won; and finally, the US as political dysfunction and trade protectionism began taking a toll on the dollar.
There is a plethora of aspirational reasons for growth in blockchain technology. These include streamlining payment processing by eliminating the middle man, enhancing record keeping with smart contracts, settling financial market transactions in less time, tracking charity donations more effectively, and crowd funding capital for businesses. While many of these secondary blockchain growth enhancers are noble objectives, they are not what propelled the epic run above $5,000 USD/BTC in August.
The main driver of cryptocurrency demand, which we describe as “revenge of the savers,” is what concerns central banks, governments, and too-big-to-fail banking behemoths such as JP Morgan Chase. Decentralized cryptocurrencies represent a direct threat to centralized power by reducing their ability to enact negative interest rate policy and internal devaluation or for governments to rack up unsustainable debts without capital flight.
The current global central planning regime has collectively decided to do anything possible to incentivize spending and disincentivize saving in the name of “stimulating demand.” It is an exceptionally dangerous policy goal based on short-termism and flawed Keynesian economic assumptions. It creates larger imbalances than it solves and increases the risk of future economic crises.
If given a choice, many individuals would prefer to take their assets out of the traditional banking system eating away at the purchasing power of their savings during times of financial repression or high monetary system risk and put them into alternative assets that empower individuals rather than reward too-big-to-fail banks.
Here is a theoretical sample of what tends to happen: Government X runs perpetual budget deficits by issuing debt it can never pay back unless the money supply is increased continually to pay the bills, which devalues the currency over time. Historically, this system was adequate as long as debt didn’t rise too quickly relative to the size of an economy. That is because in order to compensate for inflation, savers have always been rewarded with interest on their savings in excess of inflation so purchasing power actually increased slightly over time on money parked at the bank.
That changed after 2008 with zero interest rate policy and quantitative easing across the developed world. Interest was no longer paid to savers to compensate for inflating rents, house prices, health care, education, and other essentials. Not only were bank deposits not compensated with interest, new banking fees starting popping up all over the place for the privilege of allowing your bailed out bank to accept your money and use it in part to front run government bond purchases by central banks. What a kind exercise of generosity by savers it has been!
Wise minds can debate whether financial repression was necessary or unjust given the options available at the time. What happened before and after 2008 in the banking industry seems like much more of a scam to some than bitcoin is as Jamie Dimon will have you believe in public (but not private) statements, but that isn’t the point. The point is that for the first time in modern history savers have been forced to literally pay money to deposit funds at their bank or get forced into risky assets to earn a high enough return.
Along comes bitcoin and then along comes other decentralized currencies. Bitcoin has a supply cap at 21 million digital coins by design. Your friendly neighborhood central banker can’t announce one day that he is going to “QE into existence” 5 million new bitcoins with the stated purpose of making everything you buy more expensive at a faster rate.
Then you include the other crypto demand factor of people negatively impacted by geopolitical conflict, dictators, and corruption, and you have the underpinnings of serious demand for cryptocurrencies that will exist with our without bitcoin.
It would take a powerful coordinated global effort by central planners across the world to scare individuals so much that they stop seeking decentralized digital currencies to protect their savings. We do see this however as an increasing risk relative to that of even one month ago. Blockchain assets are not immune to efforts by governments to quasi outlaw them if they so choose to the extent many bitcoin enthusiasts promised.
China is going full throttle as we speak to stop its citizens from using cryptocurrencies in almost any capacity. In actuality, if the US and Europe joined China with similar actions at this vulnerable moment for cryptos, it would likely crush the value of bitcoin by at least 80%. This is a real risk for crypto holders, though a minority percentage risk at this juncture.
What is more likely is that China’s effort to essentially outlaw cryptocurrencies not under direct government control will do more self inflicted harm than anything as the blockchain technology industry blossoms in the backyard of its competitors, leaving China behind. If that is the case, bitcoin will surpass $10,000 by the end of 2018.
Government regulation or lack thereof will be a huge driver for cryptocurrencies in the next six months. Absent major regulations on digital currency exchanges and related businesses, it is off to the races for digital token prices. But if a wider global government crackdown does ensue on the industry, it will be a rocky road ahead for the likes of bitcoin, etherium, litecoin, dash, monero, and others. Governments can’t rid the earth of decentralized currencies but the recent China actions have proven they can inflict more damage than originally thought if they are aggressive enough about targeting the surrounding blockchain ecosystem.
In our view, probabilities point to new all time highs in bitcoin and other flagship cryptocurrencies by year end but with a larger degree of downside risk than seen one month ago due to threats of increased regulation. The recent leg lower in cryptocurrency prices is likely to be a blip on the road to fantastically higher prices within five years. Once it is more widely appreciated that current global sovereign debt can’t be paid back without significantly inflating fiat currency money supply using helicopter money and other forms of unsterilized asset purchases, investors will aggressively seek decentralized alternatives to traditional money such as bitcoin or whichever blockchain assets emerge as best-in-breed.