Bitcoin is back in bull territory again in a rush to pile up risk-on assets as the dollar pulls back and stocks start creeping upwards yet again.
When Thomas Greene was a young boy, he didn’t much like George Lucas’s Star Wars franchise even though all the neighborhood kids went crazy for the space operatic series of movies.
So naturally, when Star Wars toys first hit the stores, he wasn’t overly exciting about buying them either.
Flush with cash from his paper route, washing cars and mowing lawns in the summer and shoveling snow from driveways in the winter, Greene was a science fiction junkie but felt that the Star Wars franchise didn’t address many of the issues that proper science fiction writers of the time did.
Yet when he saw the other neighborhood boys spend months’ worth of their saved pocket money to buy the plastic figures and vehicles that were rolled out by toy company Kenner, he saw an opportunity to make some money.
Even though he had no interest in Star Wars, he asked his parents and anyone else who cared to, to give him all the latest figurines, toys vehicles, you name it, for his birthday and at Christmas.
And he used what money he had saved to buy up whatever Star Wars toys he could afford, selling the more hard to find toys to kids in the neighborhood and then buying up even larger and more rare toys, including a massive AT-AT walker that was the centerpiece for the Empire Strikes Back movie — a massive hit at the box office.
But instead of busting the precious toys open for play, Greene stored them carefully away in his room, making sure that each toy was sealed in its original packaging and in mint condition.
Fast forward thirty years and several hit-and-miss Star Wars movies later and Greene, who was never a Star Wars fan to begin with, had built up a massive collection of some of the rarest toys from the franchise, selling them over the years for a massive profit.
According to Greene,
“You don’t have to like something to make money from it.”
“For me, it was Star Wars toys. I’ve always been more of a Trekkie (Star Trek fan) myself, because it was closer to my brand of science fiction. But Star Trek never had that mass appeal that Star Wars had — too technically accurate.”
Greene figures he’s made just over a million dollars buying and selling the toys over the years since he started collecting.
And though he has no great love for the Star Wars movies, Greeme is grateful for how they funded his early retirement from his day job as a commodities trader.
Which brings us to Bitcoin.
Betting Big on Bitcoin
Of late, the world’s premier cryptocurrency has been making headlines.
First, for rising in tandem with gold — leading some to speculate that Bitcoin had become the digital equivalent of gold and then for crashing back down again just as quickly as it rose.
Today, Bitcoin has soared back above the US$7,000 level — which many traders view as a key level of resistance — leading some investors asking whether or not they should buy into Bitcoin.
To many of these investors, one needs to ask the question — what are you buying Bitcoin for?
If it’s to make more dollars, then there are far less heart-wrenching ways to do so.
To be sure, the coronavirus pandemic has roiled markets, meaning that there are few safe harbors if any.
And the number of queries both from Google searches as well as fielded by firms such as ours on how to buy Bitcoin and whether or not this is a good time to buy Bitcoin has reason significantly of late.
To that end, before an investor considers buying Bitcoin for bullion, their rationale for doing so needs to be more properly understood.
Purely from a technological perspective, there just aren’t the number of dApps or decentralized applications, being built atop the Bitcoin blockchain as its closest competitor, the world’s second largest cryptocurrency by market value — Ethereum.
In other words, investors punting on Bitcoin are doing precisely that — buying on the belief that one day Bitcoin will be worth far more dollars than they are today and not necessarily because they’er betting on the technology behind Bitcoin.
Because Bitcoin’s use as a technology platform is likely to be stymied in the medium term, due to difficulties in gaining consensus in changing its core code — which is why there are so many flavors of Bitcoin today — Bitcoin Cash ABC, Bitcoin Satoshi’s Vision, Bitcoin Gold — each playing to a different audience — Bitcoin investors are probably looking to the cryptocurrency as a long term store of value.
And there are more than a few reasons why it’s entirely possible for Bitcoin to buy more than a fistful of dollars in the future.
Printing Has Started
For starters, central banks all across the world are embarking on an unprecedented money-printing exercise — the world simply hasn’t seen anything like it before.
Not so long ago, in a financial crisis not so far away, the U.S. Treasury Department was caught in a bind — or “moral hazard” as the term was used, when asking Congress to greenlight a U.S. government-funded backstop for all of the toxic debt that banks, key to the global financial system, had carried onto their books.
That backstop, proposed at US$700 billion, was famously a three-page document carried to Congress by then-U.S. Treasury Secretary Henry Paulson.
And in those days the bailout was considered a “moral hazard” — because the free market economy was supposed to let failing companies fall — that was the very core of a capitalist system.
Yet there was a Republican administration, the supposed defenders of capitalism, coming to Congress hat in hand, asking for a handout.
Numbers like US$700 billion seem quaint in our current context.
The last stimulus package proposed by the Trump administration was closer to the tune of US$2 trillion, to bail out failing airlines and a score of other companies.
And even that stimulus package has been considered insufficient, with ever larger and ever more fictitious-sounding numbers being tossed about — what’s next? A quintillion? A gazillion?
And the casual way that these numbers are being proposed makes it sound as if dollars were like Monopoly money — which in many ways — they are.
Inflating An Economy A Trillion Dollars At A Time
Thus far, the inflation genie has been somehow kept in its bottle.
Despite record-low interest rates, which have by now fueled countless asset bubbles of the worst kind, the rich world has yet to witness the debilitating effects of rampant inflation, or even the dreaded stagflation — low to zero growth, high unemployment and rampant inflation — something which our current economic situation may very well be hurtling towards.
Bond yields, especially on long-term U.S. treasury bills, despite the rampant money-printing, are still very low — 73 basis points for the benchmark 10-year U.S. Treasury Bill — which have a published coupon rate of 1.5%.
Then there are stocks — given the way things are going, investors are somehow looking for “bargains” that will bounce back during the “recovery.”
But when most of the world is essentially on an indefinite “timeout,” where is this “recovery” going to come from?
To be sure, lockdown does not age well.
And it’s entirely possible that when the lockdown ends, consumers will rush out to go and buy all the things from all of the shopping malls that they couldn’t visit, board the planes to travel to all the places that they couldn’t go to, and drink all the alcohol at all the bars and restaurants they couldn’t frequent during the lockdown.
But that also begs the question — how are they going to pay for it?
As recently as January this year, only 41% of American households had enough money to cover a US$1,000 emergency, which means almost 60% didn’t have over US$1,000 to cover an emergency.
And what’s happening right now? An emergency.
For millions of Americans, you can’t spend money if you don’t make any money. And you can’t make any money if you can’t go to work.
Workers in the high tech industries and those for whom the coronavirus epidemic are likely to affect the least have the privilege, the skill and the technologies to support their continued productivity and their lifestyles.
But a busboy can’t be clearing tables from home. A housekeeper can’t be cleaning your apartment from their home.
A record 6.6 million Americans applied for jobless claims, far higher than the 5 million expected.
And as the lockdown drags on, those numbers are only likely to soar.
Against this backdrop, who’s in the mood for some shopping? A strong drink, maybe. But is anyone going to be getting aboard a plane to Europe or a cruise to the Caribbean anytime soon?
Which is why the recent rush into risk assets such as Bitcoin may not be as ill-informed as it may seem.
Betting Either Ways is Betting
Even if we were to assume that Bitcoin is worth nothing and can’t be backed by anything — the way accounting works is that money is needed to keep score.
Imagine if you’re playing Monopoly and each time you pass “Go” the banker keeps handing out more and more money.
Pretty soon the game isn’t worth playing any more.
Because it wouldn’t matter if you had to pay the rent on someone else’s Park Place or Boardwalk, just as you rounded that corner, you’d be stuffed full of cash again.
From that perspective, Bitcoin doesn’t seem like such a crazy bet after all.
On Monday, Bitcoin blasted well past US$7,000, the highest level in nearly a month — the biggest one-day gain in a fortnight and capping an 11% rally since the start of April.
Some claim that the recent surge reflects a rally in stock markets — but it’s easy to miss the forest for the trees because a rising tide floats all boats.
There are sure to be some in the investment circles who are buying into Bitcoin not necessarily because they see it as a risk-on bet, but rather a “what-if” bet.
Because when you print money faster than the rate that people are willing and able to spend it — it’s only time before the thing that you’re printing isn’t even worth the paper it’s printed on.
And that’s why you shouldn’t care that Bitcoin is at US$7,000 right now. You should care what that means to you as an investor.