By: Adam Sharp
Editor, The HIVE Newsletter
2013 was a critical year for Bitcoin adoption. BTC started the year at $13.28, and by April 8th of that year it had reached $230.
A series of events in the small EU country of Cyprus drove much of this buying. In 2013 Cyprus experienced widespread bank failures. Suddenly, there was a prolonged “bank holiday” and citizens couldn’t withdraw any cash.
What made this crisis unique is that the EU didn’t reflexively bail out the banks. Instead, citizen depositors got a “haircut” which removed up to 47.5% on accounts over €100,000 at the Bank of Cyprus. Those funds were taken and used to help make the bank whole. Depositors in another major bank, Laiki, lost all their funds.
Instead of a bail-out, it was a bail-in.
The Cyprus bank holiday was a monumental moment for Bitcoin. It was as if, overnight, a light bulb went off in the heads of a bunch of people around the world. Oh THIS is why Bitcoin exists.
Here’s a headline from CNET, dated March 28, 2013.
Lessons from The Cyprus Cycle
2013 was the year that Bitcoin became a household name (within the investment community). Millions learned that it’s sovereign money you can hold and use without any third parties involved.
Most dismissed it as a speculative fad. But some saw a decentralized, open, uncensorable, and robust new form of money.
Since then, when people start to be affected by inflation, bank haircuts, and other non-enjoyable monetary experiences, an increasing number of them turn to Bitcoin. Others, who think they could soon be affected by these issues, may decide to buy some BTC as a sort of hedge. Others are just in it for the trade.
You can see the buying pressure clearly in this chart showing the price of BTC throughout 2013, via BBC.
I’m convinced that Cyprus was the primary catalyst of the 2013 move. It set off a chain reaction, the effects of which we are still seeing today.
Shortly after 2013 ended, Bitcoin entered a bear market and would bottom at around $315 in January of 2015. But the important thing is that Bitcoin had gained many new developers and hordes of “HODLers” who would spread the word, even during bear markets.
Gaining new long-term community members is the key to BTC adoption cycles. HOLDers, the ones who refuse to sell, are responsible for creating price bottoms. And developers do the amazing work of maintaining and improving the project.
I believe we’re now experiencing a new 2013-like moment. Realization of why BTC is such an important project is growing. It’s being driven by rising inflation, low interest rates, QE (quantitative easing, AKA money printing), and a growing distrust of some institutions.
Money Printer Go Brrr
In March of 2020, when practically every market was crashing, Bitcoin briefly dipped to around $4,000. Then, like in 2013, we had a major moment of realization. It’s as if a light bulb went off for many investors. They’re going to print ridiculous amounts of money again!
And print they did. On March 15, 2020 the Fed dropped interest rates to zero and announced a new $700 billion QE program. In total more than $3.4 trillion was injected into the economy in 2020. The U.S. M2 money supply soared a record 27% in 2020 alone. Many governments and central banks around the globe followed the Fed’s lead.
But we already knew the money printer was warming up well before then. On March 11 2020, the now famous “money printer go brrr” meme was posted to Twitter by user @femalelandlords.
The comedy relief was quite welcome in a stressful situation. “Money printer go brrr” became the most influential meme of the year. Even non-finance-nerds loved it. Thousands of variations popped up.
Here’s one from Argentina, where inflation has raged for more than a decade (note the 7-digit rolling rrrrrrs):
It was a sign that the world was now acutely aware of just how much money central banks and governments were pushing into the global economy. Inflation expectations in the U.S. turned on a dime.
I don’t think it’s a coincidence that Bitcoin bottomed around that time. One year later, in March of 2021, BTC had risen from around $4,000 to over $55,000. As I write this on 1/13/2022, it’s trading around $42,000.
Inflation: A Potent New Catalyst
For most of Bitcoin’s existence, inflation in the U.S. and most of the rest of the world has been quite tame. That’s no longer the case, as even Fed Chair Jerome Powell recently admitted that we shouldn’t call inflation transitory anymore.
U.S. inflation as measured by the BLS’ CPI measure just had a 7% annual print in December. That’s the highest since 1982. And wholesale prices jumped 9.7% in 2021 according to just released numbers.
Over in the EU, official inflation is running at around 5%. In my estimation, it’s likely that both EU and US official inflation numbers understate true living expense increases seen by their citizens. But that is a topic for a separate article.
Regardless of what the real inflation rate is, it’s uncomfortably high and trending higher. At 7% inflation, most bond investors are seeing highly negative real returns. And there is a LOT of institutional money sitting in bonds right now; $45 trillion overall in the U.S. alone.
If inflation keeps rising, it’s possible that investors will continue to seek out alternative investments such as Bitcoin. We’ve now seen financial giants such as MassMutual, Fidelity, Tesla, Twitter, and JP Morgan jump on board. And we’re only 2 years into this grand new monetary experiment that could go on for some time.
Today Bitcoin has a roughly $900 billion market cap. That’s less than 1/50th of the U.S. bond market, and less than 1/8th the estimated market cap of all the world’s above-ground gold.
BTC’s Killer Feature: Self-Sovereignty
It’s important to note here that there simply aren’t many liquid investments you can actually hold yourself. It’s a surprisingly rare trait.
Almost no one actually holds their stock or bond investments themselves. It’s all controlled and kept track of by big centralized organizations. Almost no liquid investments today can be held directly by the owner. Gold and silver can also be self-custodied, but they can’t be transmitted electronically like BTC (they also have a more conservative risk/reward profile).
Bitcoin is internet-native money. It’s scarce, divisible, and secure. More than any other descriptor though,I think of BTC as sovereign. It allows investors to fully control their own money.
And we think that’s going to be an attractive trait over this tumultuous financial period.
Cyprus Still Relevant
Let’s go back to Cyprus for a moment. Why is this story relevant to us today, 9 years later? Well, there’s a theory that during the next bank crisis, the U.S. and E.U might use a similar “bail-in” strategy to rescue banks. It’s just a theory, but there was some legislation passed in the wake of the 2008 crisis which suggests it’s now a possibility. For more on that, I recommend reading Investopedia’s Why Bank Bail-Ins Will Be The New Bailouts.
And just recently, the IMF and 11 nations held a large “war game” simulation named “Collective Strength”. It features a cyber attack that disrupts global financial systems. Here are some of the issues discussed, according to an exclusive report by Reuters.
The participants discussed multilateral policies to respond to the crisis, including a coordinated bank holiday, debt repayment grace periods, SWAP/REPO agreements and coordinated delinking from major currencies.
The cyber attack is certainly a low probability event. But could inflation run hot for years? Certainly.
My guess is that inflation may stick around a while, because in some ways, it is the most politically-viable path. If inflation runs at 10% a year for 5 years, all of a sudden that unpayable pile of debt looks a lot smaller in comparison to the inflated currency.
Of course, that’s just one possibility and we have no way of knowing what will happen going forward. But if we look to the past, we see that central banks such as the Fed have reversed course once their tightening efforts cause a major fall in stocks, or a large rise in bond yields. There seems to be too much debt and leverage in the system to sustain higher rates.
I believe HIVE is well-positioned for an inflationary environment. Over the past 2 years the team has invested more than $160 million in crypto miners, real estate, and new construction. Our high-tech data centers have access to clean, cheap power, and stable governments. And we’re still building. New machines are being installed en masse weekly as they come in from prior orders. And new buildings are going up.
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Editor, The HIVE Newsletter