Back during the cryptocurrency mania of 2017 I explored Bitcoin as a foundational asset of a different monetary system. Built on blockchain I put together a crude crypto-version of Exter’s Pyramid to visualize this.
Today with Bitcoin soaring past $11,000 we may be entering a new mania phase but this time for completely different reasons than in 2017-18.
However, before I get started, let’s review what Exter’s Pyramid is and why Bitcoin, necessarily, today sits at the bottom of it in the crypto-space.
John Exter visualized the global financial system as an upside down pyramid.
Exter’s Inverted Pyramid of the Monetary System
For the crypto-space I see it similarly (if we ever get to a true private crypto-based monetary system.
Bitcoin as the reserve asset of the Crypto-World
Bitcoin being the oldest and most trusted blockchain imparts it with the most monetary character as a proxy or competitor to gold for safe-haven capital.
The crypto-world doesn’t look like the graphic today because Bitcoin still dominates with just under 59% of the total crypto ‘market capitalization.’
This is because cryptocurrencies are not dominating transaction settlement. If they were, we’d have a massive inversion of the market cap of the sector relative to it.
We’d also be having a much different conversation.
With that in mind (and the limitations of this presented analogy acknowledged) let’s review some history.
Like in most of Bitcoin previous spikes, this one, is happening as a safe-haven trade. Those looking for a way out of the current monetary system are worried the central banks are losing control of their carefully-prepared narratives.
In previous run-ups it was fears from China (2012-13) which saw Bitcoin top $1000 for the first time. Cracks appeared in China’s shadow banking system as the PBoC (China’s central bank) began cracking down on Wealth Management Products which were an outgrowth of massive capital inflow.
Later that morphed into copper-collateralized business loans and other Byzantine products created to maintain credit growth.
This helped support Bitcoin’s rise back to $1000 during 2014-16.
Today we’re seeing similar issues in China. We’ve had a couple of bank failures, some interbank lending seizures, etc.
Some of this is the product of the Chinese government’s latest attempt to prick its shadow banking bubble. Some of this is stress emanating from Trump’s trade war.
The early impetus for the 2017 rally came from Europe, however. The beginnings of the EU’s war on capital flight intensified thanks to the Brexit vote and the increasing need to control euroskepticism by the ECB.
Yes, eventually, speculation took over and we saw a classic blow-off top at around $20,000 in January 2018. The subsequent 85% correction looks just like the one in 2013.
But I think the history lesson is apropos given the period in history we are entering now. None of the issues that spawned Bitcoin in 2009 have been fixed. The monetary system broke in 2008. For the past eleven years the central banks have done yeoman’s work keeping it afloat.
But what is broken is still broken, no matter how much hay-string and duct tape they use to keep it together. Cryptocurrencies are exposing so many of the fundamental problems of the monetary system that they can’t help but eventually eat away at the confidence in it.
This is one of the philosophical reasons why I’ve been bullish on cryptocurrencies as safe-haven assets, even during the bear market of 2018 and early this year. It’s theory, not reality.
But a chart posted by one of my Patrons yesterday in our private forum elegantly highlighted what’s happening here. And this cannot be denied by the most religiously ardent Bitcoin-haters.
Pictures are sometimes worth a helluva lot more than a thousand words. In the past 48 hours ones like this are worth billions. This is Bitcoin’s performance in 2019 overlaid versus the most liquid, most important, single deepest market in the entire world.
The 10-year U.S. Treasury note is the foundation for so much of the global financial system that you cannot deny this relationship has some merit, if not real power.
The deep inversion of the U.S. yield curve is not just about a recession straight ahead. It’s about capital markets that are spooked into what I think is the mother of all defensive trades. And this has all the classic safe-haven asset classes in massive bull markets or just beginning them.
It began in high-quality sovereign debt — U.S., German and Swiss — but has also translated into equities of major economies as blue chips are still trading at relatively high yields.
Bitcoin led Gold in the market for ultimate defensive capital inflow because:
It was beaten below its cost of production
Gold had a strong run into February and needed a correction
Gold is a much more liquid source of dollars
Central and primary dealer banks have a far stronger hold on the price.
But with gold breaking above $1400 on war fears and both the Fed and the ECB throwing in the towel this week, we’ve reached an interesting inflection point as we head into the end of Q2.
The fear that sustained gold on Friday was that Iran is serious about causing everyone real financial pain if Trump doesn’t back down. And the problem is that the markets know Trump doesn’t want to back down.
Elijah Magnier is reporting today that Trump asked Iran to let him bomb some irrelevant targets so he could save face. And the Iranians told him to go pound sand.
They are not going to give Trump an inch because he doesn’t deserve it. They hold the cards, as I’ve been saying for months. We were always getting to this state where Trump would be staring at the abyss of War or begin exposed as a bully.
So the current dynamic doesn’t change until he quietly lets Iran export oil. Russia will help them with that, given the latest reports and Trump will be left begging Putin and Xi at the G-20 next week for help, which they too, won’t give him.
If you still think Bitcoin and its derivatives weren’t designed for just this occasion, then you haven’t been paying any attention at all.
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