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Inflation and Government Financial Threats Will Fuel the Rise of Bitcoin

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While most articles predict mass adoption of cryptocurrencies by focusing solely on the merits of blockchain technology (which certainly looks promising), this article focuses on the two most immediate real-life events that will push the majority of the world toward lightning-fast adoption of cryptocurrencies, with Bitcoin predicted to be the biggest winner.

Reason #1: Inflation as a result of flawed government response to COVID-19 pandemic

Reason #2: Geopolitics, rise of government tyranny and debanking of dissenters, both domestic and international.

Let’s start with the reason #1. While the current Administration blames inflation on Russia, the truth is inflation in the United States started well before Russia became the 24/7 topic on the news. While the economics of inflation are rather complex, the three main causes of inflation are:

Demand-pull inflation: occurs when there is an increase in the supply of money and credit available for people. This drives the aggregate demand for goods and services in an economy a lot more rapidly than the economy’s capacity to produce. The government’s response to the pandemic caused both the increase of money supply (the government printed 40% of ALL US dollar supply in 2021), and the economy’s reduced capacity to produce (the extended business lockdowns and vaccine mandates decimated the US economy). All of a sudden, the US economy (people) had 40% more cash, to spend on a vastly reduced amount of goods produced. The 7% inflation we are experiencing right now is only the beginning. 

Cost-push inflation: as the demand-pull effect takes place, with more money spent on less goods, the cost of production for most commodities invariably goes up. 

Built-in inflation: describes what happens when people expect inflation rates to continue going up for the foreseeable future. For example, workers demand higher wages to be able to afford those higher prices (this has been happening ubiquitously during the past two years, with multiple states passing high minimum wage laws). This makes inflation a self-fulfilling prophecy. If workers demand higher wages, the cost of production goes up, which means that operators will raise prices for the consumers, in order to maintain their profitability. 

As such, the past two years have created the perfect storm for record-level inflation in the present and the near future. The annual inflation rate in the US accelerated to 7.9% in February of 2022, the highest since January of 1982. 

As consumer inflation and asset inflation is rising to at historic levels, smart money is looking to hedge against this inflation with a liquid asset that has a hard cap on supply, and an independent monetary policy: Bitcoin and possibly other cryptocurrencies.

The other reason why Bitcoin is a very attractive option in 2022, is because Bitcoin is apolitical, and no government, foreign or domestic can confiscate your Bitcoin or shut down your Bitcoin wallet. 

The biggest unreported story of 2022 is the impact Western governments’ actions will have on the US Dollar and the Western banking system in general.

Two events stand out: 

  • Canadian Prime Minister’s Justin Trudeau’s decision to invoke the never-before-used Emergency Act to outright confiscate citizens’ cash and freeze their bank accounts for protesting against his COVID-19 policies. This short-sighted action sent the message to Canadians as well as Americans and others around the world, that the government has the power, authority, and most important, the will to shut down your account and take your money, for simply protesting. This is outright tyranny.
  • The US and Europe-led sanctions against Russia. In another shortsighted move that will have long-lasting effects, the US and EU confiscated Russia’s FX reserves, confiscated Russian citizens’ moneys and assets in the Western hemisphere, and kicked Russia out of the SWIFT banking system. These actions have effectively sent a unified message to the world: The US Dollar is no longer an asset; it is now a liability. It can get confiscated and taken away at will, for going against the will of the US government. 

The largest impact of these sanctions (which still have not stopped Russia’s invasion of Ukraine), is that they undermine the credibility of dollar debt as an international savings device. For decades, the dollar has been considered the safest form of collateral in the world for two reasons. First, because most of countries of the world have to buy US dollars, in order to purchase energy (Petrodollar). Second, because the US dollar has never been used as a weapon.

It might have looked like a smart move to weaponize the US Dollar and the Western banking system against Russia, but with its actions, the Biden administration has officially forced the de-dollarization of the world.

At the international level, other countries are watching with increasing concern how the US, or Europe will confiscate their reserves, default on their debt, and punish their citizens by stealing their monies and assets, if these other countries dare disagree with US or Europe’s foreign policies.

The message was heard around the world: if you ever want to have a dissenting opinion internationally, your country will get punished, and potentially canceled out of the monetary system.

Their solution is understandable: they will de-dollarize their assets and wealth. They will sell their dollar reserves, divest their investments and holdings away from America, from Canada, from Europe. 

In divesting away from the US dollar, other countries and governments have two options: align with a different dominating currency (i.e. China’s Yuan), or decide on an apolitical asset that is out of reach and cannot be controlled by other countries and politicians; something that cannot be taken away by anyone else: Bitcoin.

Efforts of moving away from the US Dollar system and breaking the US Dollar’s dominance in the world are already underway. In a devastating blow, Saudi Arabia indicated they are now considering pricing oil in Chinese Yuan as opposed to US Dollars. This might have barely made the news, but it could be the final deathblow to the Petro Dollar system – the very system that had backed the US Dollar ever since President Nixon took the Dollar off the Gold Standard. This action alone will severely reduce US influence in the world in an unprecedented way, if acted upon, as it is estimated that almost 80% of all global oil sales are priced in dollars.

While choosing a different currency as the dominating trading tool of the world could happen in the short term, the reality is most countries are exploring ways of introducing their own national cryptocurrency (i.e. digital dollar, digital yuan). However, all those national cryptocurrencies are expected to be issued by each country’s central bank, giving their respective governments an even tighter control over their currencies.

While I do not believe Bitcoin will become the world currency anytime soon (if USD falls, it looks like the Yuan will take over), I do believe Bitcoin will become an asset used by most countries and individuals to store their wealth, as opposed to FX accounts, Swiss Bank accounts, and other financial instruments. This makes sense for all the reasons listed above: Bitcoin is apolitical, no one country can control its price, no governments control access to Bitcoin in order to kick others out, and equally as important, it is liquid and has a hard cap on its supply – no one can dilute it.

With individual citizens as well as governments all over the world looking for alternative ways to store their savings and assets, in this new world of financial threats and monetary cancellations, Bitcoin could be the biggest winner, with a large portion of citizens’ and countries financial reserves looking for a safe home.  

However, before the adoption of a cryptocurrency as a potential world reserve currency there are formidable problems that must be overcome and the required change in infrastructure are intimidating. All foreign-exchange marketplaces where the dollar is the world reserve currency would have to be necessarily modernized and supporting a new reserve currency can’t be achieved overnight.

There are also numerous problems and obstacles associated with any cryptocurrency serving as the world reserve currency that would preclude them from being a sovereign, effectual, and universally acknowledged as the unit of exchange. A cryptocurrency system based on blockchain is fundamentally burdened with high-tech problems (i.e.: Ledger size, power consumption, limited supply, computing power, etc.), price volatility and anonymity relating to regulatory issues (banking insurance, taxation, and illegal usage) that must be overcome.

In short despite its advantages, cryptocurrency as the unit of value replacing the U.S. dollar has a hard and long road to travel before its universal acceptance as the worlds reserve currency.

RESOURCES:

Trading Economics – United States Inflation

CoinDesk – Inflation Worries Top Concerns before Fed Meeting

Policy – Saudia Arabia Considers Using the Yuan instead of Dollar for Oil

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