Crypto Market Commentary
25 February 2020
Doc's Daily Commentary
The 19 February ReadySetLive session with Doc and Mav is listed below.
Mind Of Mav
The Principle Reasons Behind A Bitcoin Resurgence
Bitcoin has started 2020 at another inflection point.
It has gained as much 84% from its low point in late 2019, but, despite a valiant effort, was unable to successfully penetrate the crucial $10K level on a sustainable basis in recent weeks.
“Don’t despair!”, came the cries of many. If we look closely we see that this is likely only a temporary setback:
We have a potential cup and handle pattern in development. With the formation of the handle, and Bitcoin could break out above the $10K-$10.5K resistance soon.
The next level of resistance will come at $11K, and then $12.5K-$13K.
Once Bitcoin can break out above these levels, it’s likely headed to $15K, then to previous all-time highs around $20K, and then higher after that.
Purely looking at the Stock To Flow model, we’d expect Bitocin to close 2020 at $14K, and hit $37,000 next year.
Taking an average of that, we can forecast a return to the 2019 high of $13,200.
But, let’s ignore the price analysis for just a second.
Why this is relevant, and why this helps any narrative around continued price increase, is that Bitcoin and other systemically important cryptocurrencies are leading components of a rapidly-developing industry which has enormous growth potential going forward. Bitcoin and other digital assets are likely to become more popular and could become widely used over the next several years.
While that’s been a favorite card to play for years, we can’t deny the power of the network effect. The correlation between active wallets on the Bitcoin network and the price is rather strong.
Despite there being so much noise about Bitcoin, there are only about 46 million blockchain wallets worldwide. This is roughly 1% of the global Internet-using population. Furthermore, if we factor in that many blockchain wallets have been abandoned due to various reasons (lost keys, many users having multiple wallets, etc.) the number of Bitcoin owners/users is substantially smaller than 46 million.
The real number today is likely closer to 25 million, which implies a market penetration rate of roughly 0.5%. With a potential 99.5% untapped market it’s very likely that Bitcoin and other digital assets are still in the early stages of their development cycles and have a lot of growth ahead of them.
But again, let’s ignore this metric in favor of a broader point.
I believe that many people still do not understand how the banking and monetary system of the world really works. What’s worse is that many don’t seem to care as they have become accustomed to the current monetary financial order.
Without my own judgment, let’s just consider what the numbers tell us.
In 2017, there was around $90.4 trillion worth of broad money supply, and a high end estimate of $1.2 quadrillion in derivatives in the world. I’m convinced that these numbers are likely much higher now. In fact, just from the U.S. there’s around $670 trillion worth of derivatives floating around. I want to emphasize that this is up from just $89 trillion in 2000, which is astounding.
It’s not just derivatives. In fact, if we look at financial statistics in the U.S. and in other developed nations the image is stunning and quite troubling.
For now, let’s focus on the U.S. since it’s the largest economy in the world and still creates the world’s “reserve currency.”
? The U.S.’s national debt is now at more than $23.3 trillion.
? The “actual” federal budget deficit is more than $1.3 trillion.
? National debt to GDP ratio is around 107%.
? In 2000 debt to GDP was at 60%, and in 1980 it was at around 34.5%.
Now Let’s Look at Money Creation Figures
?Since 2000 the monetary base has expanded from roughly $600 billion to about $3.5 trillion.
?The M2 money supply has more than tripled to more than $15.5 trillion in that time.
?Derivatives we talked about, moving up by around 650% since 2000.
The takeaway here is that the Fed and other major central banks need to continuously create more fiat currencies to fuel their country’s enormous budget deficits and servicing payments. Even with the 10-year at around 1.5-2% the U.S. will pay around $350 – $470 billion in debt servicing payments alone over the next year or so.
Therefore, the debt will continue to rise, and it will most likely rise faster than GDP. This means that the Fed will need to lower rates further and will have to expand the money supply perpetually to keep up with servicing payments and to essentially try to inflate the debt away.
There’s also the fact that a recession, or recession indicators, will arrive eventually. This also will require lower rates and fresh rounds of QE to enable the U.S. to absorb the financial shocks of a recession and then to help stimulate the economy back to growth. Thus, we could be looking at “QE 4ever” going forward, and naturally this means a whole lot of fiat money creation. Finance is trending towards speculation. Negative interest rates push investing towards risk. Risk becomes more palatable in a speculation-heavy environment.
The obvious problem is that this will hurt the USD (and, by extension, the current global financial order).
Furthermore, all major central banks are essentially doing the same thing, lowering rates, continuously flooding the financial system with new capital, etc. Therefore, inflation resistant assets like gold, silver, and potentially Bitcoin with other market-leading digital assets should continue to appreciate perpetually on a long-term basis.
Given the current economic circumstances and considering that fiat creation will likely intensify in the future, people may begin to lose faith in the old world financial order.
This comes at a very interesting time.
You see, this is happening as the Digital Economy is hitting a new golden age — the second renaissance. Importantly, the Digital Economy exists above and beyond the borders of sovereign states.
The Digital Economy is worth three trillion dollars today — about 3.2% of the worldwide GDP. This is about 30% of the S&P 500, six times the U.S.’ annual trade deficit or more than the GDP of the United Kingdom. What is impressive is the fact that this entire value has been generated in the past 20 years since the launch of the Internet.
The Digital Economy thrives on future speculation and developing the means to support it. We’re going to see that 3% figure rapidly expand over the coming decades, because that’s primarily where growth-based feedback loops will live. The entirety of retail and manufacturing is largely trending towards automation, so let’s focus on the means of digital production instead.
I think often about where we are and what we need to accomplish in order to become a type 1 civilization on the Kardashev Scale. In particular, I consider that technology advancements like the Internet are fundamental building blocks of becoming a type 1 civilization — we will never escape this planet if we cannot form distributed consensus around economics, energy, and the rights of humans.
Coming back down to Earth, and considering the present, we can conclude that substantial price appreciation in this segment is extremely likely due to future demand which ultimately drives price. Due to this phenomenon, Bitcoin’s past price movement trajectory, and other elements Bitcoin’s next peak could be around $75K-$100K, and may arrive within the next 2-5 years.
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