Last update we mentioned the massive growth of the United State’s Debt to GDP ratio. We see a similar story across many countries with Canada leading the pack, nearly doubling its Debt to GDP ratio over the last 3 quarters.
Why does this matter? At today’s ultra-low interest rates, (some) countries are able to service their debt primarily with revenue (taxes) while others are going to the printing press. However, what happens when rates start to rise? The United States interest rate is currently 0.25%, far below the 50 year average of 5.56%.
Political leaders are unwilling to face the reality of what will happen when interest rates start to climb – either due to sheer ignorance or as a “future generations” problem. As an example, this video shows Canada’s Minister of Finance refusing to disclose what Canada’s debt payments would become with only a 1% increase in interest rates, still far below the historical average.
From our perspective we see only 3 options on how this story can end:
- Governments and citizens tighten their belts and use savings to pay down debt (highly unlikely as no politicians would risk their political futures by proposing austerity measures)
- Countries service their massive debts with additional money creation
- This would likely result in the massive devaluation of the country’s currency, especially for countries whose currencies aren’t used for global trade.
- Holders of these currencies will experience a reduction in their purchasing power due to massive inflation of their money supply
- System reset – as citizens increasingly grow frustrated with their governments and don’t feel they are getting value from their hard-earned tax dollars there is a possibility of a “system reset”. This is much harder to define and we will explore this topic in more details in future updates. There has been an IMF announcement regarding change to the existing Bretton Woods agreement Link.
Bitcoin’s properties make it the hardest asset in existence. Bitcoin’s immutable 21 million supply cap means that no individual, corporation or government is able to artificially inflate or change the 21 million bitcoin supply at the expense of Bitcoin holders. This fixed supply stands in stark contrast to Fiat currencies. Twenty-two percent (22%) of U.S. dollars were created in 2020 which will likely result in some form of disproportionate benefit to the “haves” vs “have nots” (in other words – we’re seeing the Cantillon effect in action)
This message is growing. As of writing Bitcoin price is nearing its all time high of $19,700 while it’s market cap of $350bn (price X total BTC’s mined) is at All Time Highs.
Bitcoin Market Cap (Price x Outstanding Supply)
Bitcoin’s recent rally feels more sustainable than the 2017 ramp. This isn’t to say we don’t expect continued volatility in both directions, but the fundamentals supporting this rally are much stronger. Some notable highlights since our last update:
Paypal now supports the purchase and sale of Bitcoin, and will enable users to purchase goods using Bitcoin in 2021.
JP Morgan (who’s CEO in 2017 called Bitcoin a “scam”) is predicting that Bitcoin is posed to challenge gold and could triple in value (link)
Public companies are adding Bitcoin to their treasuries; Microstrategy converted $450M of USD dollars it held on its balance sheet to Bitcoin, and Square has purchased $50M of BTC (link, link)
Billionaires Bill Miller and Stan Druckenmiller have both publicly announced they hold Bitcoin (link)
Alternative Digital Assets (Alt Coins)
Exciting developments aren’t exclusive to Bitcoin. Ethereum, the second largest blockchain (sometimes considered the decentralized Amazon Web Services) launched Ethereum 2.0 on December 1, 2020. Ethereum 2.0 promises to bring increased security, scalability and efficiency to the world’s most popular decentralized application blockchain. As holders of ETH we are watching the developments of Eth2.0 closely.