Why Bitcoin? Why Now?
“What the Fed ultimately wants is a smooth market.” Lyn Alden, Founder of Lyn Alden Investment Strategy explains to Travis Kling, Founder and CIO of Ikigai Asset Management, that major economic forces are boxing the Federal Reserve in to a corner. The problem, as they both see it, is multifaceted; the treasury market has had periods of illiquidity that need intervention, a heavily leveraged economy, wealth inequality that is leading to populism & civil unrest, an economy in need of stimulus because of a pandemic and the implications of the dollar being the global reserve currency. All of these factors are playing to Bitcoin’s strengths.
The Bitcoin View – Adoption of Bitcoin continues to be a bullish driving factor in the eyes of Alden. Based on conversations with institutions, a common question continues to be “How do you buy Bitcoin?”
This anecdote leads both Alden and Kling to the conclusion that Bitcoin is still in the early stages of its next bull run.
Another point of note was the anti-fragility of Bitcoin that was on display after the March selloff. When price sold off as the markets digested the COVID fallout, it recovered on its own devices. By comparison, Kling pointed out, the equity market needed massive QE from the Fed.
“Here comes Coronavirus, and you could just tell from the magnitude and the swiftness of the response of the Fed and the Treasury that they knew how fragile this thing had become,” Kling said.
The Treasury Market and The Fed – Resiliency is an appropriate word to describe Bitcoin. There was a notable period of time that appears to show an inverse relationship between the Treasury market and Bitcoin in the eyes of Kling and Alden. The Bitcoin bull run top at the end of 2017 coincided with the Fed’s attempt to raise rates and lower their balance sheet exposure.
“It wasn’t until [the Fed’s] dovish capitulation in January of 2019 where it became real clear that they just didn’t have any path to try end this thing and that they were just going to keep going,” Kling noted.
Since that low in 2019, Bitcoin has steadily increased in value and in that time, the Fed has had to stave off several disasters. A prolonged debt cycle, reduction in velocity of money, a global dollar shortage leading to illiquid treasury markets are examples of the emergencies the Fed is fighting.
“We saw a precursor back in August of 2019 when we had the repo rate spike,” Alden said. “So basically, the Fed was trying to do quantitative tightening. You saw, left to its own devices, the financial system breaks.”
Threats to Bitcoin – Can anything slow down the momentum that is behind Bitcoin currently? In the eyes of Alden, that depends. There is the threat of governments banning bitcoin, but if enough people and institutions have bought it, banning or unfavorable regulation becomes problematic. In fact, Alden thinks even if a government did ban it, others may adopt it out of opportunity.
“Bitcoin could recover from that, because you’d have other countries that choose not to ban it and double down on it and attract that capital and attract those businesses,” Alden stated.
What ultimately matters at this point in the cycle for Bitcoin in Alden’s view is “watching the demand trends, watch the number of more and more people getting interested in Bitcoin.”
If adoption continues, Bitcoin will strengthen.
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