Recently an October 2023 US treasury bond auction for 30-year bonds did not do as well as hoped [see https://finance.yahoo.com/news/treasury-bond-auction-runs-weak-034418412.html]. Many traditional buyers are hesitant for several reasons. One is a long-term but remote credit default risk where the US debt is too large for it to pay off. As fewer buyers show interest, the US is forced to offer higher yields on the ten-year and thirty-year bonds which causes US debt to become even larger. The other is duration risk, which is what happened to Silicon Valley Bank and others, where newer and higher yield bonds cause older but lower-yielding bonds to lose book value pre-maturity.
Many are now looking to Bitcoin as an alternative safe haven. Unlike bonds in a Treasury auction which could be as much as the US Government wants, there are very few things being sold that have a fixed supply. If the price of gold or fuel goes up, then miners and producers mine more of these commodities out of the ground, thus inflating the supply further. If bread prices go up, more bakers want to bake more bread to meet the demand, and this brings the price back to normal levels.
Fixed supply asset examples include limited edition albums, books, NFTs, Taylor Swift tickets, and the like. The supply is intentionally fixed to drive the price higher.
Bitcoin, the granddaddy of all cryptocurrencies got its start in 2008 with the release of its white paper, in time for the subprime mortgage crisis and resulting Occupy Wall Street movement. The resulting financial crisis threw a lot of people out of work, and the prevailing mood was one of anger against the big Wall Street investment banks, that caused the crisis. The public anger at that time was why Wall Street created these complex financial instruments that blew up, but none of their senior bankers were held to account for it.
Because of the public hatred against investment bankers at that time, software developers were thinking of ways to replace the traditional financial system with a means for two people to transact financially without a “trusted third party” like a bank. While Bitcoin has many features, in particular, let us tackle the role of its fixed 21 million supply. This makes it non-inflationary since the supply of Bitcoin is fixed.
To be accurate, every time a miner successfully verifies a transaction, it receives a payment in Bitcoin. Over time, this payment is “halved” and the supply released into the open market gets less and less until the 21 million Bitcoin is exhausted.
This is against the backdrop of global central banks, such as the US Fed, the Bank of England, the Bank of Japan, the European Central Bank, and their counterparts in various countries. Global central banks often control the supply of their fiat currencies that circulate in the economy, to control and avoid inflation, deflation, stagflation, recessions, and other negative impacts to maintain price stability and steady job and economic growth.
Unfortunately, the result of the global overprinting of money worldwide during the 2020 COVID pandemic has resulted in an oversupply of fiat money globally. In the United States, the M2 money supply [see https://fred.stlouisfed.org/series/WM2NS] is now at around $20.7T, a lot of it printed and released to the public during the pandemic. The US Fed has tried to cool down the economy over the past few months by hiking interest rates to make debt more expensive. They are also doing something called Quantitative Tightening, meaning that they have slowed down on buying back bonds and mortgage-backed securities (MBS) from the banks so these have less money to lend out.
Unfortunately, the amount of cash in the economy is still huge, so it is taking a while even if they have been engaging in quantitative tightening.
Traditionally it has been the stock market, especially the high-flying tech growth stocks that have led the way in terms of returns for investors. The problem is that, in an era of high-interest rates, corporate debt becomes more expensive. The hurdle rate, or the minimum return that investors want, goes higher when interest rates go high. Also, the valuations assigned to companies whose earnings are more speculative a few years down the road go down, as higher interest rates lower the present value of future cash flows.
It seems that over the past few years, America has forgotten the value of savings and a well-balanced budget in favor of running huge deficits to pay for whatever foreign war, fuel subsidy, and other line items that Congress wants to add. Unfortunately, instead of collecting more taxes and raising the GDP, the favorite way to pay for these expenses is to issue debt through bonds and print more dollars, thus inflating its value.
That’s dangerous. Think of 1939 pre-Nazi Germany, and various examples in South America. When a government has so much debt that it can no longer pay it back, a default occurs. Hyperinflation can also occur. In Argentina, people sometimes pay their restaurant bill before they eat because the price changes so fast that it could become more expensive after they finish.
In Bitcoin, many fans see the inability to inflate the number of available coins as a strength. As demand grows, the fixed supply will ensure that the spot price will rise significantly over the next few years. Some economists view Bitcoin as a global liquidity indicator, meaning that if the world has access to low-interest cheap debt and excess money in the system with an appetite for risky assets like crypto and Bitcoin, then its price has no choice but to go up given the fixed supply.
The fixed supply value of Bitcoin is that it shows us the opposite of the current inflatable fiat currency system. As more people learn of its potential, it appears that Bitcoin is headed for better days ahead.
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