The Big Bluff Of Bitcoin Is Exposed By Rate Normalization

Jun. 21, 2022 12:28 PM ETBitcoin USD (BTC-USD)113 Comments
J.G. Collins profile picture
J.G. Collins
2.53K Followers

Summary

  • Bitcoin's outrageous appreciation was a spill-over of excess money supply; it always was.
  • The appreciation of the last couple years tracks almost perfectly with the expansion of M2 and the Federal Reserve's balance sheet.
  • When too much money has nowhere to go, it goes into nonsense.
  • Look for Bitcoin and its associates to go to just $10,000 or less before year end.
Silhouette of growing tree in a shape of a bitcoin sign. Eco Concept.

The light of day blowing the Bitcoin bluff away.

Evgen Zaitsev/iStock via Getty Images

NEW YORK (June 19)-As I write this, Bitcoin (BTC-USD) is struggling to stay above $19,000. It had sunk to around $17,700 last night. It's doing what will probably be a "dead-cat bounce" this morning, what can I say? "Fools rush in...".

Long time followers know me as a long-standing Bitcoin skeptic, first in comments and then in this first article from last March, as Bitcoin peaked, as I heard friends of my adult children fall for the ephemeral internet phenomenon. But something else happened around that time: Congress passed and the president signed H.R.1319 - The American Rescue Plan Act of 2021, that pumped $1.9 trillion into the U.S. economy that was already in recovery from the Covid 19 pandemic. (2021Q1 GDP printed at 6.3%; Q2 at 6.7%)

Chart
Data by YCharts

Bitcoin's ultimate peak at nearly $67,000 came on November 10, 2021, in anticipation that the House of Representatives would pass "Build Back Better", another planned $1.7 trillion stimulus. But when Sen. Joe Manchin (D-WV) and others effectively killed the stimulus in January, Bitcoin plunged, again, to its first quarter nadir of $35,047 on January 23rd.

Thereafter, Bitcoin bounced around a narrow range from around $30,000 to a high of around $47,000. Then, as talk of a June Fed rate hike accelerated, the Bitcoin bluff came into full view: if people have a place to put their money, they won't put it on nonsense and hype. Bitcoin's rapid appreciation was always a function of the Fed's excess liquidity and easy fiscal policy. It was always a function of the Fed's ZIRP or thereabouts.

Bitcoin's collapse was always going to happen when the macro environment changed. It was a fool's errand. But what about all the canards of the crypto cult?

  • "Bitcoin is only available in a limited quantity, unlike fiat currencies."

Except that it's not. As I have related previously to critics on my previous Bitcoin articles, when you go to Baskin-Robbins and they're out of Chocolate, most people will take Vanilla, or Strawberry or some other of their 31 flavors. If Bitcoin is too expensive, there is Dogecoin (DOGE-USD), Ethereum (ETH-USD), Solana (SOL-USD), ad infinitum to the 10,000+ cryptos currently available.

  • "Bitcoin is a store of value."

This canard is refuted by a simple glance at the chart above. But the Bitcoin cultists will almost always reply, with another canard:

  • "it's like gold or silver; it's a commodity."

Except that it's not. It never was. It doesn't even meet the definition of a commodity, save for some literary analogical definition (e.g., "the dearest commodity is time"). Investopedia defines a commodity as " a basic good used in commerce that is interchangeable with other goods of the same type", such as oil, lumber, potash, etc. Bitcoin isn't a "good"; it's ephemera; it has no use. Nobody's going to give their spouse a pair of Bitcoin earrings or a Bitcoin necklace. Nobody's going to have a cavity filled with Bitcoin.

  • "Government doesn't control Bitcoin."

That is less a canard than a purported strength that is, in truth, a fatal flaw. It is a "strength" to something that aspires to be a currency the way that the Maginot Line was a "strength" against the Third Reich.

It's true no government controls it, so no government supports it. That means when Bitcoin enters a free fall vis-a-vis real government-backed currencies, there is nothing there to support it. Of course, when real currencies collapse relative to their creditors, the central bank of the currency's issuing country can decide - or not - to support it. For Bitcoin, there is no "trading band"; there is no "floating exchange" determined by a country's fiscal policymakers. There is only the vagary of the market.

  • "Bitcoin is gaining acceptance by Wall Street banks."

Bitcoin is gaining acceptance by Wall Street banks because they are responsive to the desires of their clients. It's like the latest skin treatment or fat-burning drug. A doctor may prescribe it because his patients want it; it's not that the doctor thinks it's good for the patient. This week will be telling for Bitcoin. Some may think that it is a good time to hodl. I can't warn away from such thinking enough. You are better off in cash. Earning 1% in a savings account in an 8.5% inflationary environment so that you lose 7.5% in real dollar value is superior to losing far more when Bitcoin suffers its inevitable loss (which could continue at any time).

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This article was written by

J.G. Collins profile picture
2.53K Followers
Before establishing The Stuyvesant Square Consultancy, J.G. Collins spent some 30 years building a career in executive and consulting financial roles, with a particular emphasis in business taxation. His experience spans work for Fortune 100 companies, one of the former “Big Eight” international accounting firms, and client service for large middle-market public accounting firms. He has advised domestic and foreign clients in the tax-efficient structuring of legal entities, effective tax rate planning, mergers and acquisitions, corporate reorganizations, treasury operations, financial instruments, international taxation, tax accounting under GAAP, state and local taxation, and sales and miscellaneous taxes. He has managed countless federal and state tax audits to successful resolutions for clients. His experience spans a diverse array of industries, including private equity, motion pictures and music entertainment, fashion, real estate, publishing, technology development, retail, and oil and gas. Mr. Collins conceived and branded the specialty industry entertainment practice of one of the nation’s leading accounting firms and oversaw the business tax marketing program for business enterprises of another large regional firm. Mr. Collins’ marketing collateral and published articles have been extraordinarily well received because of his ability to present intricate and complex aspects of tax, business, policy, and politics in clear, concise, easily understandable prose devoid of jargon and irrelevant detail. An astute, data-driven observer of business, politics and economics, Mr. Collins has advised political candidates and public officials on campaign, political and policy matters for more than two decades, and has twice been a delegate to his political party’s national quadrennial convention to nominate the American president. His expertise as a champion debater and orator in his student days, along with his savvy marketing expertise, has allowed Mr. Collins to coach private and public sector executives and candidates on public speaking, speech writing, message development and successful business presentations. Campaign collateral he developed for political campaigns has been used in university courses as an “excellent example of persuasive campaign advertising”. Mr. Collins holds degrees in Economics and Accounting from the Stern School of Business, New York University. His elective coursework included a number of political science courses, including International Politics, International Organizations, European Politics and other more basic political science courses.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The views expressed, including the outcome of future events, are the opinions of the firm and its management only as of June 19, 2022, and will not be revised for events after this document was submitted to Seeking Alpha editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers. We associate with principals of Technometrica on survey work in some elements of our business

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