Bitcoin
Bitcoin closed last week higher by +4.92% at $28,070 on thinly traded volume. Interestingly, the U.S. dollar index was 1% higher last week - which typically adds pressure to asset prices and commodities. Gold, for example, dropped by -1.58% last week.
If we consider that the driver of the broader rally in recent weeks has been stellar earnings by Nvidia and other technology companies, the difference in performance between bitcoin and gold starts to make more sense.
Bitcoin is trading higher largely because it trades like “tech-enabled gold 2.0” - meaning, investors see potential in technologies like cryptocurrencies and artificial intelligence, and they pay a premium to own assets that provide that potential upside.
Looking at the bitcoin derivatives market, we see that the bitcoin futures curve is still showing a healthy contango across most major platforms.
Perpetual future swaps funding rates are also hovering around 0%, meaning that long and short investors are balanced.
Short interest for bitcoin in the spot markets remains near historical lows.
Overall, the current setup suggests that investors are not expecting a large move in either direction any time soon.
In terms of technical support and resistance levels, we continue to monitor the 200-week moving average price as support, currently at $26,367. In terms of resistance, we continue monitoring the $30k level.
Digital Asset Markets:
My deficit is your inflation
Like people and companies, governments have revenue (taxes, nationalized industry. etc.), and expenses (building and maintaining infrastructure, social programs, etc.). But unlike people and companies, governments can “print” money when they don’t earn enough to cover their expenses.
When a government spends more than it earns, it runs a deficit. When it earns more than it spends, it runs a surplus.
In practicality, virtually all governments run deficits, all the time. See the chart below (from one of our previous issues).
In simple terms, when a government says “we’re running a deficit of 3% of GDP this year” - that essentially means that they’ll have to print an equivalent amount of new money units out of thin air to finance the expenses of that fiscal year. (Note: there are other ways governments can raise money, but practically speaking they print it 9 times out of 10).
“Maybe we do print money out of thin air, but we’re the U.S. government”
Congressman Brad Sherman. May 10th, 2023.
Because of the above, I like to think of inflation as “the monetary impact of governments having to print and inject new money units into the economy every year to finance their deficits.” In other words, adding any percentage of additional “money units” into an economy in a year, keeping the same asset base, should inflate the price of the assets by the same percentage of new money units that were added in that time period.
Who do you think is paying for those deficits? That’s right! We are!
To corroborate this, let’s compare government deficit data vs. inflation rates in the U.S. and Europe.
First, let's look at the U.S.
Going back to 1965, and the U.S. inflation rate (shown inversely on the graph to align with the deficits) tracks the government deficits almost like a glove. As you can see, the 2 lines are tightly correlated.
Now, to Europe:
Again, dating back to the year 2,000, we can see that both the annual government deficit and the annual inflation rate (inversely), are tightly correlated.
To dive deeper into the data, the average annual deficit in the U.S. from 2000 to 2020 was -4.46%, and the average inflation rate in the same period was +2.49%.
In Europe, the average deficit from 2000 to 2020 was -2.98% and the average inflation rate in the same period was +1.99%.
Why is the relationship between them not 1:1? Because there are more variables to the intensity of domestic inflation than just money supply.
The primary other variable can be summed up as domestic and international and demand for your (newly printed) currency.
For example, if the U.S. prints 5 billion new dollars one year, and 1 million people travel to the states and bring back $1,000 in cash to store under their mattresses and protect from higher devaluation in their local currency in the same year (like happens all the time), that means that 1,000,000 * 1,000 = - $1,000,000,000, or one billion dollars will not make it into the U.S. economy to bid up asset prices and services. And so, in this example, the practical inflationary impact to the U.S. economy is reduced by the amount of dollars taken out of the economy. Making the impact 20% lower.
A similar thing happens in Europe. The Euro is a “solid number 2”. Some people prefer saving in Euros over U.S. dollars.
However, countries like Argentina and Venezuela have the opposite problem. Nobody wants to save in Pesos or Bolivares. And so, the inflationary impact of budget deficits is made worse by the fact that everyone is just selling the local currency units, along with the newly printed units, like a hot potato.
What drives demand for local currency from domestic and international investors broadly comes back to political trust and interest rate policy.
Political trust can be simplified into how many people believe the current government can get its financial house in order. Are they making the right investments? Are their plans consistent with their tax base and expected revenue? Does the money they spend actually make it to the street (corruption index)?
And beyond that, interest rates can also drain “circulating supply” of money units temporarily by tying up investor capital in government bonds. A high central bank interest rate that can compete or match local inflation (as we are seeing now in most central banks), will entice investors to place their money with them. This will reduce the rate at which asset prices are bid up in the economy (less money units to go around) - but it wont stop price inflation entirely so long as more money units are being printed every year.
A low interest rate (as we saw in 2020 in response to the pandemic), will entice investors to spend their money units in other things - thereby accelerating the rate by which asset prices and services prices are bid up.
Why does this matter for bitcoin?
Because all things being equal, the biggest driver in an asset or good’s price nowadays is the value of the unit in which the price is being denominated in. The value of those money units is going down every year as governments around the world run deficits.
To illustrate this, let's look at the prices of gold and oil (both of which have theoretically finite supplies), since 1971, the year when governments currencies went off the gold standard. Prices are in U.S. dollars.
As you can see, gold and oil prices have gone from $37.88/oz and $3.56/barrel in January 1971 to the current $1,990/oz and $76.78/barrel. That’s +51.530% for gold +20,560% for oil and in 52 years. Do you think an ounce of gold or a barrel of oil are that much different now than they were 52 years ago?
Bitcoin has a known finite supply. And a known production inflation schedule. It is easier to store, transport and transfer than gold or oil. It allows for much more privacy. It is globally accessible. Anyone can own it.
Not only can bitcoin take market share from the “new money units” being printed every year. It is also taking market share from existing stores of value like gold and the U.S. dollar.
In investor terms - bitcoin offers you the inflation protection of gold or oil, with a call option to absorb even more value from those very same asset classes, thereby outperforming them.
The sky is blue. Governments will continue running deficits. And asset prices, like bitcoin and gold, will continue to inflate.
Don’t let the noise distract you.
The Week Ahead đź“°
The week ahead will deliver earnings from 2 publicly traded Bitcoin mining companies, a check on the deteriorating consumer confidence indexes in the U.S. and Europe, as well as another read at U.S. unemployment. Full details in the calendar below.
Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans.
As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.
Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts.
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