Think Bitcoin™ Issue #17
What Omicron means for Bitcoin; Jack Dorsey all-in; Bitcoin and culture; How Bitcoin advances women's rights; transitioning to a Bitcoinized world
Hey friends, welcome back to Think Bitcoin™. As always, if you have any questions or comments, feel free to reach out!
In this issue:
Headlines/Insights: How Omicron might affect Bitcoin; why Jack Dorsey stepping down from Twitter is good for Bitcoin
Content Round-Up: 2 articles, 2 podcasts, 1 video
As always, if you find this newsletter interesting or useful, please share it with others who might find it interesting or useful, too!
Headlines and Insights
It’s been a volatile week for Bitcoin and broader markets. The price of bitcoin, as I write, is below $50k. There are several factors at play in the drop but, in my opinion, the most significant are macroeconomic uncertainty around Omicron, which is causing a risk-off mood in the markets; uncertainty around the pace of Fed tightening; and the fact that we’re approaching year-end, meaning there will almost certainly be some institutions looking to book gains.
How Does Omicron Affect Bitcoin?
Obviously Omicron fears are rippling through markets and creating a risk-off sentiment. And what happens when markets switch to a risk-off sentiment? Risk assets, or assets perceived as being risk assets, sell off.
In the interest of cultivating and emphasizing a long-term perspective, I think it’s worth spending some time gaming out some possible scenarios, how different variables could affect markets, and what it all means for Bitcoin on a long time horizon.
There are many variables currently at play, but the two most salient ones are Omicron and the pace of the Fed’s tightening of economic conditions. In the background, I believe, is also the variable of how institutional bitcoin holders, who are looking to take some profits on their books at year-end, are viewing the aforementioned two variables.
Let’s start with Omicron, though. There is a lot that we don’t presently know about it. If it proves to be meaningfully able to evade vaccines, resulting in swift and significant government interventions, economic activity will suffer, and we’ll likely see a sustained risk-off period in markets in the near-term. This means risk assets (think high-flying tech stocks with eye-popping multiples) will sell off, as investors flee to the perceived safety of more conservative assets. Bitcoin, though competing to be the ultimate risk-off asset, is still perceived by many and, most pertinently, by the market, as a risk-on asset. So in this scenario, Bitcoin likely sells off, as well. If, taking it one step farther, Omicron meaningfully evades vaccines, sweeps the world, becomes the dominant strain in record time, and causes significant symptoms, increases in hospitalizations, etc., then we’ll see the whole market turn down in the near-term. I fully expect Bitcoin to fall along with other assets if this is how Omicron plays out.
On top of and concurrent with this is the variable of whether the Fed proceeds to tighten economic conditions. If Omicron proves to be destructive (the scenario articulated above), and the Fed still tightens or even accelerates tightening, we would likely head toward a recession. In this scenario, Omicron would be slowing economic growth, while the Fed tightens into that slowing growth, which is a recipe for a recession.
Sounds really bad for Bitcoin, right?
In the near-term, yes. In the long-term, no. Remember that the Fed historically responds to market crashes with larger and larger liquidity injections, quantitative easing, and expansion of the money supply, which debases the dollar. With debt-to-GDP already near 130%, the Fed cannot allow the markets to remain in a recession for long or else the U.S. risks insolvency on its debt. So they will print the money to prevent this scenario. This would again highlight the fragility of the debt-based fiat system and make Bitcoin’s value proposition even stronger. Long-term, this is bullish Bitcoin.
Because it would risk a serious recession, I personally don’t think it’s likely the Fed proceeds with or accelerates tightening in the event that Omicron proves to be devastating. Last week, Fed Chair Powell testified that Omicron may complicate the labor market, the perceived health of which is one of the Fed’s primary metrics for determining whether and how quickly to tighten. I read this as him giving himself (and telegraphing) some wiggle room to slow or halt tightening in the event that Omicron sweeps the country and necessitates a variety of restrictions and slowdowns. If the Fed doesn’t tighten or delays tightening, then we just continue to get the quantitative easing and artificially low interest rates we’ve had since the beginning of the COVID-19 pandemic in the spring of 2020. This means the Fed’s balance sheet and the money supply continue to expand. This is bullish for Bitcoin.
If vaccines turn out to be significantly effective against Omicron and/or if Omicron symptoms turn out to be comparatively mild, such that hospitalizations are not likely to skyrocket, then we’re likely looking at a premature market panic. In other words, this is just a dip caused by temporary uncertainty. In this scenario, I think the Fed is more likely to proceed with and perhaps even accelerate tightening. While Chair Powell noted last week that Omicron may complicate the labor market, he also noted that the Fed will be discussing an acceleration of tapering in this month, which many took as an admission that the Fed is losing or has already lost control of inflation and is looking to rein it in with more aggressive tightening.
If the Fed accelerates tightening it will be a negative environment for risk assets in the short-term. However, as I’ve written about on multiple occasions, the Fed is unlikely to meaningfully tighten for a sustained period of time for a couple of important reasons.
First, even if Omicron proves to be manageable, it will still likely slow the economy.
And tightening into a slowing economy is not optimal. It makes a recession much more likely. Second, the Fed cannot significantly raise rates, Volcker-style, because it will make the U.S. unable to pay its debts and absolutely tank the stock market, which we know they won’t do.
So what does this mean for Bitcoin? It means that perhaps the waters get choppy while the Fed does some initial and, in the grand scheme of things, minimal tightening. Long-term, though, this doesn’t affect the bullish case for Bitcoin. For the last 12 years, the Fed has attempted tightening on numerous occasions. They have always returned to quantitative easing. Do we really think this time, with our debt at an all-time high, is different? Come on.
There’s a third variable to look out for as we close out the year. Institutional investors are closing out their books for the year and booking profits. Success, for these investors, is quantified by yearly returns, so we should expect some to take healthy gains on their bitcoin. The uncertainty around Omicron and Fed tightening may actually incentivize more gain-taking. I would expect these institutions to re-establish positions in the new year, with clean P&L sheets.
Keep a long-term perspective, folks. The facts underlying the long-term macro case for Bitcoin have not changed. And the price of Bitcoin remains the one price central banks can’t manipulate.
Jack Dorsey Steps Down From Twitter
Last Monday, Jack Dorsey stepped down as CEO of Twitter to focus on being CEO of Square, which has changed its name to Block (effective as of December 10). This is the latest in what’s become a veritable migration of brainpower and operational savvy into crypto and into Bitcoin, specifically.
Dorsey’s commitment and belief in Bitcoin is well-documented. At the Bitcoin Conference in Miami this past summer, Dorsey said, “I don’t think there’s anything more important in my lifetime to work on and I don’t think there’s anything more enabling for people around the world.” He also said, “if I were not at Square or Twitter, I’d be working on Bitcoin. If it needed more help than Square and Twitter, I would leave them for Bitcoin. But I believe both companies have a role to play and I think anything we can do as companies to help find the right intersection between a corporate narrative and a community open narrative is for the best.”
So now he has stepped down from Twitter to focus on Square (Block), which is working on a hardware wallet and a decentralized Bitcoin exchange. Of course, Block is not exclusively a Bitcoin company, but it strains credulity to suggest Dorsey’s move, coupled with the company’s unsubtle name change, isn’t indicative of an enhanced focus on Bitcoin and the Bitcoin ecosystem.
I, for one, am excited to see what Block comes up with on the hardware wallet front. I think it’s clear that the experience of custodying one’s own bitcoin, a crucial component of self-sovereignty and the only way to actually own bitcoin, still leaves a lot to be desired. The user experience is still not as smooth, as intuitive, or as easy as it could be. For most people, especially the newbies to the space, using a hardware wallet is still pretty intimidating. The more we can iterate and improve custody products, especially at the user experience level, the more folks will feel comfortable using their own wallets. This, in turn, increases adoption while also normalizing best practices.
Dorsey obviously has a background in architecting products that have sleek, intuitive, easy-to-use interfaces. With his creative energy now focused on Block, I’m excited to see whether the company is able to move the ball forward on the self-custody experience. If so, I think it will be an important tool in the progression to mass adoption.
Content Round-Up
1. “Bitcoin Needs Culture For Growth,” an interview with Dawdu Amantanah on the Nature of Sovereignty show. Dawdu has emerged as one of my favorite new voices and writers in the Bitcoin space and, if you’re not familiar with him or his work, this interview is a great way to get acquainted. He discusses why he believes bitcoin is “the most intelligent move Black people can make with their money,” the importance of having a low time preference (i.e. being able to delay gratification), why Bitcoin is like digital real estate, and the importance of Black Bitcoin writers. You can find all of Dawdu’s work on his website, which I highly recommend checking out.
2. “What Bitcoin Fixes - And Doesn’t Fix - For Women,” an article by Heidi Porter. In this article, Porter runs through the issues pertaining to women that Bitcoin either fixes or ameliorates. These issues include discrimination in loan application approval, the gender wage gap, greater lifespan (which requires more capital), and several more.
3. “Bitcoin is Inevitable,” an episode of the Coin Stories podcast with Caitlin Long, founder and CEO of Avanti Bank & Trust. In this episode, Long describes growing up in Wyoming and her start on Wall Street. She then discusses what she learned from 2008 and how it led her to Austrian economics and, eventually, Bitcoin. Long believes it’s inevitable that Bitcoin becomes the global reserve currency and, unlike some folks in the Bitcoin space, is optimistic that the transition to that world can and will be smooth, all things considered. When asked what she wants folks to know about Wall Street, she said, “it’s a credit-based system, which means it’s inherently unstable. And Bitcoin is an equity-based system, which makes it systemically more stable.” Long ultimately believes Bitcoin will get us to fair and stable markets, correcting a lot of the “bad system design” of traditional finance in the process.
4. “The World Bitcoin Will Build,” an article by Cory Klippsten, CEO of Swan Bitcoin. “If we’re going to decide how to spend our money and time today, we need to have a vision of where we’re going,” Klippsten begins. And I very much agree. I think it’s increasingly important for Bitcoiners to articulate (and promulgate) the bright future Bitcoin could usher in. This article does precisely that. Klippsten describes how he envisions the world in 2035 and 2050, respectively. Do yourself a favor and read the 2050 section twice. And, freshly inspired, ask yourself what you’re doing to bring this world to fruition.
5. “Bitcoin vs. Gold,” an episode of the Smart People Shit podcast. Speaking of the transition from a fiat world to a Bitcoin world, in this episode Dennis Porter interviews Lawrence Lepard, who does a great job guiding and navigating listeners through our present macroeconomic reality, with historical detours to explain how we managed to find ourselves in this position. He then argues for sound money solutions (Bitcoin and gold). I just really found this to be a useful summation of the perils of unsound money and how it creates an unsustainable economic system. If you need another podcast for your commute or your next walk, this is a good one.
Bonus/Miscellaneous
Michael Saylor has made some excellent (and lengthy) podcast episodes recently, which I highly recommend checking out.
With John Vallis:
With Peter McCormack:
I’ve been thinking a lot lately about the actual transition period during which we move or partially move to a Bitcoin standard world. As part of this rumination, I revisited a 2014 article by Daniel Krawisz. Despite his later (and unfortunate) affiliation with BSV, which I unequivocally denounce, I think it’s a thought-provoking article in its distinction between a demonetization event and a hyperinflation event. It seems like everyone is talking about hyperinflation these days, which is prompting many to lob the readily available, pre-packaged rejoinder that hyperinflation is widely considered to be 50% inflation month-over-month, which we obviously do not have in the U.S. and which does not appear to be imminent, despite elevated CPI levels. That being, said, we can look around the globe and start to see some evidence of demonetization, meaning a voluntary abandonment of one money for a superior (and available) alternative. Turkey immediately comes to mind, with the Lira plummeting against the dollar. I view this as a harbinger of things to come and will certainly be writing more about it in future issues as I continue to gather and organize my thoughts. Jason Lowery has a number of excellent tweet threads about demonetization, for those interested in chewing on this idea a little bit.
As always, thanks for reading! If you enjoyed it or found it useful, share this newsletter widely and freely!
“Civilization is in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.” -H.G. Wells
See you next week,
Logan
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DISCLAIMER: I am not investment advisor and this is not investment advice. This is not, nor is it intended to be, a recommendation to buy or sell any security or digital asset. Nothing in this newsletter should be interpreted as a solicitation, a recommendation, or advice to buy or sell any security or digital asset. Nothing in this newsletter should be considered legal advice of any kind. This newsletter exists for educational and informational purposes only. Do your own research before making any investment decisions.
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