In this newsletter we focus on four separate stories which we believe represent the primary narratives shaping bitcoin’s investment thesis. These narratives have been (and will likely continue) providing significant tailwind to the price of bitcoin.
What these stories all have in common is that they’re symptoms of a slowing global economy. The themes that intertwine them highlight the current failure in global monetary policy, globalism losing to nationalism, the role of central banks being called into question, and the fight between emerging and developed nations.
As you read through these stories, I encourage you to think about the themes that tie them together. Why are countries actively devaluing their currencies? How does reliance on foreign oil shape a country’s foreign policy? How is trade being used to shape and influence monetary policy? And what will you do to reduce the risk of these external factors on your investment portfolio?
The global currency war taking place
Global trade is dominating news headlines amidst sovereign regions desiring to manipulate their currencies to remain competitive in the face of a slowing global economy. Specifically, China and the EU are actively devaluing their currencies, and in the US, both President Trump and leading democratic candidate Elizabeth Warren believe that the US dollar has become too valuable and should be devalued in order to boost US exports and manufacturing.
When we look at the power-parity model, a popular macro economic metric used to compare the price of a basket of goods across currencies, we find that the euro, yen, and pound are relatively undervalued. It would be too simplistic to try and boil this phenomenon down to any single cause, instead it’s safer to assume that this is a culmination of global economic stressors ranging from trade imbalances, globalism, migration, and the emergence of non-sovereign digital currency.
The global currency war also has created internal tensions here in the United States. Only yesterday Fed Chairman Jerome Powell compared bitcoin to gold and said that he could envision a return to an era where multiple currencies are used in the United States. Shortly thereafter, President Trump tweeted that the US dollar is the only real currency in the US and that it is stronger than ever.
We find it difficult to believe that a single non-digital sovereign currency will be able to compete with decentralized digital currency in today's digital age. To better illustrate the idea: non-digital sovereign currency is akin to a physical book, CD, or record label - things that once digitized, made peer-to-peer, and put on the free and open internet all but disappeared.
US using oil as a way to further pressure China's economy
The US is the largest producer of crude oil globally as of June 2018 and, until recently, was the primary navy guarding the Persian Gulf’s shipping lanes, specifically the Strait of Hormuz, which the majority of Persian Gulf oil is exported through. The US sponsored protection that guarded these waterways has been significantly scaled back by the Trump administration in a campaign to reduce US hegemony to strategic places where the US can directly benefit. President Trump has directly called out China and Japan (who are both dependent on Persian Gulf oil) to secure the lanes for themselves.
Here is where things get interesting...“China has only 30 combat-capable surface ships of size that can effectively operate over 1000 miles from shore; unfortunately (for the Chinese) Southern China is a cool 5800 or so miles distant from the Persian Gulf. Only India – keeper of the world’s seventh-largest navy – is even remotely proximate.” The crux of this is that every nation needs to secure sufficient energy (today primarily in the form of fossil fuels) in order to support their domestic industries, otherwise the lack of energy can jeopardize one’s entire economy. Therefore, pulling protection from the Persian Gulf has added additional pressure on China’s economy and another leverage point for President Trump in his negotiations with President Xi of China.
EU-US tensions continuing to build
There’s no debate that the Eurozone is experiencing greater economic uncertainty than both the US and China. UK’s ongoing Brexit has shifted additional burden onto Germany’s economy (the Eurozone’s most productive economy). At the same time, Germany is seeing year-on-year factory orders decline 8.6%, the largest decline in almost a decade.
Moreover, one of Europe’s largest banks (and Germany’s biggest lender), Deutsche Bank, is struggling to stay afloat. With multiple years of declining revenues, $17B paid in fines over the last decade, and the European Central Bank expected to hold interest rates near zero through 2020, the bank has been forced to restructure and downsize globally. It’s fair to assume that if Germany slips into recession, then the rest of the Eurozone will follow suit, and Deutsche Bank may be the catalyst and narrative to grab headlines. Not so fun fact: Deutsche Bank stock is down ~95% since its 2007 high.
In addition to internal economic tensions, Europe is now at odds with the United States over Iran sanctions (which were put in place in May 2018 when President Trump withdrew from the 2015 Iran nuclear deal). In response, France, Germany, and the UK (who do not agree with the sanctions) have developed an alternative global payment rail, called INSTEX, designed to compete with SWIFT (the leading global payment rail). SWIFT supports America’s sanctions on Iran, which means that users of SWIFT (France, Germany, and the UK included) are forced to abide by the sanctions. However, the aforementioned INSTEX was announced with the explicit intent of “enabling European businesses to maintain non-dollar trade with Iran without breaking U.S. sanctions.”
The announcement has been viewed by the US government as yet another threat to the US dollar’s global dominance, which in turn has provoked the Trump administration to discuss an additional $4B in EU tariffs (which would add to the $21B of proposed tariffs which came in response to Airbus subsidy case).
Iran reacting to US sanctions and the defunct nuclear deal
Last week, as part of a response to US imposed sanctions, President Rouhani announced that Iran will not stick to the nuclear deal and will instead enrich as much uranium as the country wants. President Trump matched the tone of President Rouhani and replied via Twitter (below), making it clear that this will be a hot-bed issue for the foreseeable future.
Both the imposed sanctions and the public escalation suggest that Iran may lash out in a bid to have the sanctions lifted. Iran is already suspected of being responsible for an attack which left multiple oil tankers crippled in the Persian Gulf. Expectedly, Iran denies the allegations.
So, who is the winner from all of this?
By now we should see how all these seemingly independent events tie together. To some it may sound extreme, but in our opinion, we are in the midst of a worldwide economic war.
Enter bitcoin, a non sovereign digital store of value that operates largely outside the global monetary system. Yes, we do think that bitcoin is the winner from all of this global instability. Frankly, the numbers speak for themselves, with bitcoin starting its third ever bull run, up almost 400% since bottoming in December 2018.
Who’s buying bitcoin?
Risk On Investors With interest rates low (and more cuts expected) risk on investors are moving down the risk stack in an effort to find more yield. Eventually they land on bitcoin, the best performing asset of the past decade.
Safe Haven Investors On the other hand, risk averse investors are looking for safety in the late stages of an overextended economic cycle. Regions are publicly seeking to devalue their currencies, China is tightening capital controls, Hong Kong’s economic sovereignty is being threatened by China, and tariffs continue to be weaponized. Simultaneously, $20T of the world’s $55T of outstanding sovereign debt is zero or negative yielding. We must also take into account the collapse of the Venezuelan Bolivar (and hyperinflation in Turkey and Iran).
Macro Investors Cyclical investors are allocating small portions of their portfolio to bitcoin as a hedge against irresponsible monetary policy. The hedge is viewed as an asymmetric bet in which risk is mispriced.
Funds like Blockhead Capital Both crypto-native and non-crypto hedge funds are allocating to bitcoin (albeit for different reasons). The emerging asset class trades 24/7 and moves quickly, making it best suited for professional managers who know how to actively manage risk. Behind the scenes, funds like ourselves are in meetings with pensions, professional wealth advisors, and high-net worth individuals, teaching them about bitcoin and how magic internet money may actually be one of the most serious topics of today.