‘For the first time since the 1970s, we have a combination of rapidly decelerating economic growth with still high inflation and, in some cases, still rising inflation. When you look at recent economic cycles, normally when you have a downturn, you get this reduction in demand. You have somewhat overcapacity in terms of production. You normally get somewhat disinflationary pressures when you have that type of downturn. But because we have a lot of supply-side issues and because we have had such a large increase in the money supply for many countries in the past couple years, this is the first downturn in decades where we have had high inflation at the same time, basically a true stagflationary type of environment.’ – Lyn Alden.
In an interview with Max Keiser macro analyst Lyn Alden, she breaks down bitcoin in relation to the PMI environment and the broad money supply. Although bitcoin is a relatively new asset, Alden argues that price action is somewhat predictable as each time it goes into a consolidation cycle, it reaches higher highs and higher lows in the next cycle.
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The same can not be said for alternative coins. Lynn argues that although altcoins can reach new highs in a cycle, they typically do not have a second or third cycle, which ultimately makes it a big risk to buy, particularly in a low liquidity environment.
In addition to the risk because of cycle concerns, there is the concern of rug pulls and Ponzi schemes, which unfortunately we have seen play out in the headlines in the past few months.
‘Over the past decade or so, which is a pretty short sample because bitcoin is still a relatively new asset class, generally, it does well during rising PMI environments, when economic growth is accelerating. It generally goes towards bear markets or stagnation during declining PMI environments, which are economic decelerating environments. There was a big wild card at this time saying, okay, we have a declining PMI environment that should probably be bad for bitcoin and all coins. But then the question was how that was going to work with so much inflation that one would end up winning?
Generally, what we’ve seen is that bitcoin tracks global liquidity very closely. When you have global M2 increasing at rapid rates, generally, bitcoin is doing quite well as a decentralized fixed supply asset, decentralized bear asset. That’s a very attractive thing to hold when you have all these different fiat currencies expanding their broad money supply very rapidly. When they start to contract, that’s when bitcoin and then the whole coin ecosystem kind of starts to run out of kind of euphoric buyers and starts to go through this consolidation and the CPI inflation that we’re seeing now, the price inflation, that’s coming with a lag from the money supply growth. So when people talk about bitcoin copy trading not being a good hedge against CPI inflation really, that’s because it was a good hedge against the actual increase in the money supply, especially in the global sense, when measured in dollar terms.
Now they are getting kind of the hangover and central banks, or at least around the margin, are trying to tighten policies to some extent. We have the fiscal taps turned off. That’s putting more pressure on this whole space and generally what we see in these cycles, you know, bitcoin goes through these consolidations when you have declining liquidity environments, of course, four times. It snapped back very strongly in the next cycle. It keeps having higher highs and higher lows as it monetizes over more than a decade and counting.
The altcoins generally respond very differently where you know they have a similar timing mechanic mechanism where they go up very sharply during that rise in liquid environment and then fall, but the difference is that historically very few of them have a second or third cycle in them. They usually have one or two cycles before rolling over for good, especially when denominated in bitcoin.
I’d be very cautious about touching any of the altcoins. As you point out, a lot of them would be considered registered securities based on how you look at the Howie test and things like that, so both in terms of insufficient network effects and Ponzi-like dynamics in many cases, I think the vast majority are untouchable. Whereas bitcoin is obviously right now, it’s in a very kind of tough spot.
I think as you can look forward to the next cycle, I think this is a deep value zone and one way that the two markets are interlinked is that bitcoin is often used as collateral for companies to go and speculate on all these coins. If someone puts bitcoin in one of those lenders that they own, and then they take the stable coins or take fiat dollars, and then you go and speculate on leveraged coins, and then those blow up, their bitcoin cloud gets liquidated. Then that lending company just sells the bitcoin immediately, you have a lot of force sellers in the market even though a lot of the actual bets were not on bitcoin itself. So bitcoin was the pristine collateral used in that ecosystem, so that’s how they end up being unfortunately linked for periods of time, but it’s really about that decoupling over multiple cycles.
The broader point is that, and actually, Adam described this very well, money is a very limited design space. There are only so many variables that you can change to try to come up with better or worse things, and most of what we see in the altcoin space is that they claim something is better but then they hide the fact that they had to make so many trade-offs and copy trading crypto in order to have whatever advantages that they have, and the most common thing that they sacrifice is decentralization.
Bitcoin, on the other hand, is intended to be as simple and secure as possible, as well as decentralized as possible. It makes purposeful sacrifices in other areas to be that kind of hard underlying money, that hard settlement layer that other layers like lightning. On top of that, it focuses so heavily on that, it focuses so heavily on that, whatever it can do to remain decentralized, which is the most important thing for its immutable long-term success, whereas a lot of altcoins come along and do that. Unlike Bitcoin, they do not launch an IPO but rather an ICO. Bitcoin did not do that. They just kind of put the open source program out into cyberspace. Satoshi didn’t give himself any pre-mined coins.
A lot of these other ones come out, they do pre-mine, they raise capital, and then they launch a project that, on the surface, looks like bitcoin, but it’s a much more centralized version. The reason they do that is because they want it to be faster, they want it to have more attributes, but if you sacrifice the decentralization, you pretty much entirely defeat the purpose of using blockchain money in the first place, and so a lot of it is basically different entities wanting to create seniors. They want to, you know, make a token, sell it to the public, and then kind of get out of it before the next cycle comes along.
And when it comes to proof of work, first proof of stake, this really goes back to the whole gold era and then the rise of fiat currencies, where money that you know no one can create without putting energy into it, putting resources into it, it ends up being truly hard money, truly scarce money. It’s not politically controlled because there’s no entity that can just create more of it without expending resources, whereas you generally see a lot of entities come along and say “We want to have our money not require resources; we want to have some entities built to issue it without any sort of cost going into it.” That’s how you have the rise of fiat currencies, and it’s actually surprising and interesting.
We’ve seen kind of a similar thing happen, accelerated in the whole quote-unquote crypto space where bitcoin comes along. It’s basically recreating scarcity but in the digital realm where money has a cost attached to it. The only way to mine bitcoin is obviously to put energy into finding those new coins, whereas proof of stake is a more circular system. It’s more kind of like a perpetual motion machine where the ledger is determined. The state of the ledger is determined by whoever has the most coins, and whoever has the most coins is determined by the state of the ledger. So you can picture it like an aurora borealis eating its own tail, and that only works as long as there are no bugs and no problems, but if it ever goes down for one reason or another, they have to manually restart it, often in a discord channel. We see that all the time with Solana, for example.
The way I would phrase it is that they try to save energy, market themselves as green, and try to have other efficiencies around that. The big trade-off that they make is that they have to put in more human governance and more centralization into the whole project, which again defeats the whole purpose of what Satoshi tried to make, which is a decentralized money system that is rules without rulers. As clean would say, basically a system that operates from its initial design and only has opt-in upgrades over time improving the protocol without touching any of the core attributes, whereas these other ones they make so many trade-offs in crypto trading but then they give up kind of the heart of what makes bitcoin successful in the first place.’
[This article is a transcription of a video made by Only The SAVVY]
Original video: https://youtu.be/wTzRjR-RuqI]
