The Million-Dollar Bitcoin Bet

Today, we'll continue our coverage of the "stealth financial crisis." But we'll be coming at it from a different angle, specifically, the Bitcoin angle.

If you need a recap on the banking crisis, we’ve published three separate reports on USDC’s depeg, SVB’s collapse and Credit Suisse’s implosion.

This particular story began last week when Balaji Srinivasan sparked chaos on Twitter with this absolute pearler.

For those of you who may not be familiar with Balaji and why what he says has a tonne of weight in this space - he's got a PhD in engineering, previously sold Earn.com to Coinbase, is the former CTO of Coinbase, correctly predicted COVID-19 and recorded a 7-hour podcast with Lex Fridman about Maths & Crypto.

Seriously everyone, listen to Balaji for an hour on any podcast, and you'll understand what we mean. He oozes genius. And he has a track record for being right.

How Did We Get Here

Back to Balaji's Tweet. We need to go back a little to understand why it went batshit-crazy viral. And by "back a little", I mean scrolling further down his Twitter.

Since the SVB meltdown, Balaji has been turning up the volume on how all banks are zombies, carrying huge losses from their portfolios of long-dated bonds. Remember, the FDIC has reported that US banks are sitting on unrealised losses of ~$600 billion.

While these losses are unprecedented, Balaji goes one step further to say that this is not just an issue confined to SVB or the US but widespread across the global banking ecosystem. He's also doubled down on the fact that the Fed is to blame for everything because of their "unexpected" rate hikes.

Suppose that wasn't crazy enough for you. In that case, Balaji then calls for hyperinflation to occur in the Western world off the back of the central banks' “stealth” money-printing that started again last week.

Now, this claim of hyperinflation is severe. The last time someone did it in public was the founder of Twitter, Jack Dorsey - and he got taken to the dogs for it.

This time was no different, with Balaji's accusations pissing off many TradFi people on Twitter. He even got Nassim Taleb to berate him in public.

Hyperinflation

We all know that inflation is the erosion of one's wealth or purchasing power through increased prices of goods and services. The old saying goes;

Now, hyperinflation is that, but where the wealth erosion happens with a far greater magnitude. It's excessive, out-of-control inflation.

And, it can happen fast: prices in 1945 Hungary doubled in 15 hours!

The modern-day case studies of hyperinflation lie within countries like Argentina, Venezuela and Zimbabwe. Economic life in these countries includes:

• Rapidly rising prices.

• Complete devaluation of the currency.

• Shortages of goods and services and widespread poverty.

Think of the worst that could happen to a country economically; that usually happens because of hyperinflation. Argentina has an inflation rate of 80% per year. While in Zimbabwe, at the height of the country's hyperinflation in 2008, the 100 trillion dollar banknote was printed by the government because their currency had lost all of its value. This note could hardly afford Zimbabwe's people a few groceries.

I know it's hard to visualise in the Western world. But the truly crazy thing is, is that a lot of the factors that cause hyperinflation have happened and are happening right now in the Western World:

• Excessive money printing from central banks leads to the devaluation of global currencies.

• Unprecedented levels of debt governments hold with fiscal spending deficits cause inflation to soar.

• Decaying confidence in a country's economic policies or political stability leads to capital flight from a country.

• And supply-side shocks, like the Russia-Ukraine war, disrupt the production of goods and services, which means prices rise, causing more inflation.

You might see Balaji's tweet calling for hyperinflation, ignore it and call him a crazy-grifter-Trump-supporter. However, with the proper framing of what's happening and realising that the Fed just injected $300 billion back into the economy in a week while simultaneously hiking rates. You could see why people may believe him.

Especially the Bitcoin Maximalists. After all, Bitcoin was born to combat hyperinflation.

The Bet

After the hyperinflation claim came the historic bet.

Essentially, Balaji bet a pseudo-anonymous Twitter user that Bitcoin would hit $1 million in 90 days because of hyperinflation in the US. Yes, that's just a short three months, ladies and gentlemen.

The stakes? If he wins, he gets 1 Bitcoin (which could be the global reserve currency at that point). If he loses, he's $1 million in the red.

You won't be the odd one if you're looking at this and scratching your head. But, unfortunately, and rightly so, the odds are not in his favour, given his 90-day criteria.

So, why did Balaji make this bet in the first place?

The internet has been trying to figure this out in the past week. The way I see it is that Balaji didn't do this to win some Bitcoin. He did it to start a movement, to shift a narrative.

He did it to draw attention to the fact that there's something sinister happening in traditional finance - something that could lead to the system's collapse entirely. The problem is that while most people agree that the financial system is at risk of collapsing, the 90-day part makes the whole thing non-sensical.

However, going deeper, the 90-day time limit is irrelevant. Balaji winning the bet is irrelevant. What matters is what the BitSignal stands for. It's become a viral meme on Twitter that's drawn the attention of the masses to Bitcoin as a potential lifeboat for their wealth.

The punchline would fall flat if less money was on the line or the bet's expiry was years instead of months. The fact that Balaji put his entire reputation on the line is why the chance has blown up.

Sheer Dystopia

Ram Ahluwalia broke down what the world would look like in 90 days if Balaji's theory came to pass.

Buckle up because it's not pretty.

The TL;DR is that we'd see inflation of 3,700%, banks collapsing, and regional wars sparking up. Dollars would be worthless, gold and crypto possession would become illegal, and wealth inequality would skyrocket. If that weren't enough, energy shortages would be widespread as America descends into chaos, with China dominating global trade and becoming the de-facto superpower.

As Ram says, even if you're the most die-hard Bitcoin maximalist, you've got to be careful what you wish for. So I'll go out on a limb and say that the maximalists wouldn't give a damn about their $1 million Bitcoin if the world becomes like a Mad Max movie.

The terrifying thing is that crypto people agree with Balaji. For example, Pomp gave Balaji a 5% chance of winning the bet. At the same time, the Bankless guys couldn't argue against Balaji's points when he came on their podcast.

I can't sit here and tell you what may or may not happen with something this outrageous. But I hope the Western World hasn't blown up by June.

What does this mean for BTC?

But before we become too hysterical, let's return to the real world and look at the evolving narrative around the demand for Bitcoin, the asset.

Balaji sparked a shift in consensus around Bitcoin within the broader market. It's been fascinating to watch.

For those of you who were around for the 2020 bull run, you'll recall that it's eerily similar. You have many of the same characters in Bitcoin as you had back then, calling for the inevitable dollar collapse because of inflation and heralding Bitcoin as the saviour of the world's wealth.

While the influencer's claims can get euphoric, I've identified four key factors causing Bitcoin's medium-term investment thesis to become more bullish, aside from Balaji.

Price Action

Bitcoin is up nearly 60% this year; this past week alone, it's up about 10%.

Zooming out on the Bitcoin chart since the FTX lows give loads of perspective.

When you're in the thick of it every day, it's so easy to lose the forest from the trees. With each banking collapse, inflation print and Fed rate hike, the Bitcoin price has continued increasing over the past three months. The public only took notice when Balaji made his bet.

Things always seem to be wrong until they don't. Bitcoin could be back from the dead.

Social Sentiment

There are murmurs amongst the crypto community that something might be happening. You can see it on Twitter.

Those beaten up by Terra & FTX are peaking their heads up and starting to FOMO in.

Tourists are trickling back in, and retail is again loading their longs. This is usually how these rallies begin, with an evident change in sentiment.

On-Chain Analysis

On-chain data clearly shows that Bitcoin is beginning to undergo a bullish transition. This gives legs to the Twitter sentiment.

Looking at Glassnode, some key metrics confirm this:

The number of new users operating and transacting on-chain has reached 112k new entities daily. Only 10.2% of other days analysed by Glassnode have seen higher new user adoption - namely at the 2017 peak and during the 2020-21 bull run.

As a result, network congestion is climbing, increasing pressure on transaction fees. This has led to miner revenues flipping positive for the first time since late 2021. This is a common occurrence before new waves of adoption, expressed via increasing demand for blockspace.

Finally, One of the more powerful metrics in the on-chain analysis is the lifespan of coins. This helps identify when old coins (predominantly held by long-term, high-conviction HODLers) are being moved.

The chart shows that the proportion of USD wealth held in 'hot coins' (defined as coins transacting within the last seven days) has slightly increased. The metric increases when old coins are spent to take profits and are transferred to new buyers at high prices.

Even with today's uptick, the movements of old coins remain close to cycle lows (we're far off 2017 and 2020). This tells us that most owners of older coins are still unwilling to take profits, nothing unusual for a transitional period post a bear market.

All of these on-chain metrics indicate bullishness returning to Bitcoin. Moreover, it suggests that the market is transitioning out of conditions historically associated with deep bear markets and back towards greener pastures.

Liquidity

This is the cherry on top.

The TL;DR is that the crypto market, particularly the BTC/USDT pair, is experiencing some challenging issues when accessing liquidity. From the closure of USD payment rails to the removal of zero-fee trading pairs affecting market makers, this contributes to dwindling liquidity.

While the thread is well worth the read, my takeaway is that when a wall of demand hits a fixed supply asset like Bitcoin and liquidity issues in filling buy orders, the price could moon. If not, expect lots of volatility over the coming months until the liquidity issues are resolved.

Ironically, Balaji agrees with me.

All these four factors I've gone through: BTC's price action in 2023, social sentiment, on-chain data and liquidity issues provide a strong backdrop for a Bitcoin run in the medium term.

Balaji's bet will only add further fuel to the already-burning fire.

The Bitcoin Lifeboat

Taking a step back to avoid euphoria, it's worth remembering what Bitcoin's value proposition is and why it became so valuable in the first place:

• It's the first truly decentralised digital currency with a fixed supply of 21 million coins, making it the hardest money humanity has ever known.

• Its transactions are recorded on a secure and immutable ledger, making it the only currency that is truly censorship resistant.

• And it's governed by the world's most transparent, programmatic monetary policy, underpinned by code.

Bitcoin's value has become widely known and adopted by 100 million individuals worldwide. This grows each day. And no matter what happens with its price in the market or what bank fails next, Bitcoin keeps creating block after block after block every 10 minutes.

Bitcoin doesn't care about this stuff; it keeps doing what it was created to do.

I don't think Balaji set out to gain financially from this bet. Instead, his motive stems from a deep-seated belief that he's held for many years. Many other people have this same belief.

That's what's leading the investment into Bitcoin, not the chance of getting rich. It's the belief in a better financial system for humanity. The bet is just the meme that delivers the message.

Overall, it's clear that we are living through a moment in time. 

Whether Balaji wins his bet or not doesn't matter - what matters is that mainstream consensus is going through another monumental shift in its view of the traditional financial system, as it did in 2008.

Bitcoin was born out of the crisis of 2008, and it could accomplish its mission in 2023's crisis.

And so, to close, I thought I'd leave you with a quote that's been floating around Twitter this week:

That’s all for today. If you found this post insightful, share it with a friend or anyone who might appreciate it.

Thanks for reading,

— Luca