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Balaji Srinivasan’s $1M Bitcoin Bet Could Be Right, but I Hope He’s Wrong

“Deutsche Bank share slide reignites worries among investors” – was the BBC headline when everything clicked. It added to the increasingly worrying set of events that have affected the global banking system over the past few weeks: another sign that we may be at the dawn of the Great Financial Crisis 2.0. Except this time we know the playbook, because the major commercial banks are too big to fail and governments will bail them out.

Peter McCormack is the creator and host of the What Bitcoin Did podcast and chairman of the Real Bedford football club.

That the U.S. government’s debt is at unsustainable levels is neither here nor there, we know that this type of problem is one that politicians are willing to kick down the road. For politicians the present objective is always to maintain voter confidence and, thus, power. The yo-yoing between rate hikes to protect against inflation and the Federal Reserve’s quantitative easing program to protect the banks isn’t designed to resolve the United State’s primary, systemic issue: expenditure significantly exceeding income. Instead, it seems the Fed and U.S. Treasury are working overtime to protect the dollar’s position as the global world reserve currency.

These bandages aren’t sterile and carry a threat of hyperinflation. As a result, the global economic system looks set for a historic correction at some indeterminate point in the near future.

A common question within the Bitcoin community is whether the fear of imminent hyperinflation is drawing investment back into bitcoin. Is bitcoin’s recent price rise confirmation that the inflation hedge thesis, which many commentators have dismissed, is back in play?

Linking cause and effect in markets is a fool’s errand, particularly for someone who interviews experts but doesn’t profess to be one. But heck, let’s give it a go.

First, why did the inflation hedge thesis lose credibility? Well, people saw inflation rising rapidly in late 2021 and early 2022, just as bitcoin’s price quickly fell. Ergo, bitcoin wasn’t an inflation hedge. Many critics of Bitcoin enjoyed carping about this, and the tl;dr of all of their articles and interviews was “I told you so.” But some bitcoiners, such as Steven Lubka, held to their conviction. We were experiencing price inflation due to systemic supply chain shocks caused by various factors, particularly the world reopening following COVID-19. There was no monetary inflation, and so, the idea that bitcoin could act as a lifeboat amid the devaluing of the U.S. dollar could still hold true.

Further, bitcoin’s price declined partly because of the unwinding of fraud and leverage from the likes of FTX, Celsius, Luna and others. Bitcoin took a hit as the world lost faith in cryptocurrencies, but perhaps only temporarily before we relearn the value of, and differences between, a hard money asset like bitcoin and other investments.

So, what about bitcoin’s recent price rise, is that linked to monetary inflation? Bitcoin’s valuation rebounded sharply around Jan. 9. At the time, the Federal Reserve was planning another interest rate hike. There was talk of cooling inflation, continued “quantitative tightening” and bitcoin’s rise being a dead cat bounce.

While various experts on my show have set out the significant systemic risks to the financial system, I don’t think people investing in bitcoin at the beginning of the year were predicting an imminent economic slump requiring a new round of money printing. Maybe it was a January mirage, but while the economy displayed signs of distress, the worst case analysts predicted was a short recession.

My view at the time was bitcoin’s new year price appreciation was a recoil from the maddening drama of 2022. Many believed bitcoin’s price had found a bottom, and it was a good time to invest.

In contrast, the rise in bitcoin’s price beginning early March feels different. Among the largest banking failures in U.S. history, Silicon Valley Bank may require $2 trillion of new money from the Fed. Add to that the demise of Credit Suisse, one of the world’s oldest banks centered in the nexus of the world’s banking system, and the recipe was there for people to seek an exit from the U.S. dollar.

The current banking crisis has those without their heads in the sand trying to understand it all.

Take the two former significant political figures who front one of the UK’s most popular podcasts (The Rest is Politics). One of the hosts, who had previously run to become prime minister, relayed a discussion he’d had with a senior banker, who admitted that “these banks are so big, so complicated that nobody understands them. Literally nobody.”

Then there’s the Biden administration’s recent Economic Report of the President, which stated: “sovereign money does not have a fundamental or intrinsic value.” That’s a hell of an admission. In other words, the U.S. dollar is based on confidence, and when confidence starts to ebb, as we’ve seen in previous crises, this can quickly turn into a flood.

Famous stock market crashes are just that – a sudden and abrupt crash from a high to a low. As investment analyst Lyn Alden stated in her recent newsletter, “$17.6 trillion in deposits are backed up by just $3 trillion in cash, of which perhaps $0.1 trillion is physical cash.” That touch paper just needs to be lit.

In a press conference last week, Fed Chair Jerome Powell suggested the merger between UBS and Credit Suisse had seemed to have gone down well with the markets, but ominously qualified his statement by adding “so far.” When people like Powell, who are supposed to exude confidence and not mince words, express uncertainty about the current banking turmoil, it’s reasonable to suggest that savvy investors also see the danger and seek safe havens.

As we write this, the tables have turned slightly: bank shares have rebounded, and bitcoin’s price climb has stalled. But this seems like a temporary short-term adjustment in the context of a longer-term trend: fiat currencies are inflating away, and bitcoin, subject to state acceptance, is a viable alternative. That won’t stop haters from commentating on the sidelines, but bitcoiners are well-versed in blocking out such noise.

Those aware of bitcoin’s properties – like its limited supply and resistance against being seized – before the banking crisis were ahead of the curve. You can argue about what causes market movements, but in the two weeks since Silicon Valley Bank failed, bitcoin rose 37%. Such a rise in value of a scarce asset as quantitative tightening was being brought to an abrupt end, tells an obvious story.

None of this should be a surprise. Being a reliable store of value is one of the primary value propositions of Bitcoin. As Satoshi stated: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

But even Satoshi was no Nostradamus; he was an economic historian and inventor. He understood the root issues within a fractional reserve system and built a tool to protect those furthest from the spigot. His bitcoin design was based on simple core principles – scarcity, a fixed monetary policy and auditability. And these simple core principles brought trust back into the realm of money, in a trustless system, with fair, transparent rules everyone has to follow.

Bitcoin has never been a real-time solution to the problem of inflation. Like Michael Burry’s famous bet on the housing market, it has rewarded those who prepare early for financial chaos. Time the market right, and you will perfectly hedge inflation, but if you ignore the warning signs and wait too long, then unlucky sucker.

As an inelastic monetary asset, bitcoin goes through its own cycles of fear and greed. Therefore those who did not listen to the warnings from their weird bitcoin friends but instead FOMOd in as BTC sets new highs have found themselves underwater when the asset became overbought. Those who sensibly invested in bitcoin during periods of calm while the financial system overextended itself have found themselves protected when the money printer goes brrrr.

Are you too late for bitcoin? Unlikely. Will there be further problems in the economy? No doubt. Will this lead to further bailouts? You bet. Will bitcoin benefit? Highly likely. In fact, bitcoin’s store-of-value properties are resonating again with investors considering how to navigate these troubled times. Could the economic situation get bad very quickly? Quite possibly, but who knows; the financial system is chaos theory writ large. Predictions fail, repeatedly.

We all sense that the system will hit the wall at some point. However, as Custodia bank founder Caitlin Long said to me recently: “We just don’t know when it is.” It could be today, next week, next year or in 2033. I don’t buy bitcoin today for what might happen tomorrow. I buy bitcoin today for what might happen in 2033.

When the economic situation does deteriorate quickly, what will the impact on bitcoin be? Balaji Srinivasan recently wagered that bitcoin would reach $1 million by June 17. That’s June 17 this year. I’ll be honest, I’m not sure of the actual trading mechanics required to enable a sudden massive increase in valuation, but it would require significant capital inflows into bitcoin at a time when the institutions are choking the onramps.

It is evident, however, more people are being drawn in by bitcoin’s gravity as they grow increasingly tired of fiat’s fragility. Further, the people who need bitcoin are accessing bitcoin. There is adoption by communities in the developing world and on the periphery of the developed world, those suffering most from failing or collapsed currencies. While the use of stablecoins is also increasingly widespread in these locations, the populations seem to be rapidly developing the necessary technical skills to shift to bitcoin as and when required. Bitcoin, for many, is already a hedge against fiat currencies, including U.S. dollar proxies.

Either way, my concern, like many bitcoiners is that we’re still not ready for a world where Balaji’s prediction is proven correct, and if he is right, we have much bigger problems to worry about. Bitcoin’s adoption is still not wide enough to protect enough of those who most need it, or protect the Bitcoin network itself from government attack (assuming it becomes a target because of capital flight). Yes, the network will keep producing blocks, but choking the network feels like a more predictable attack now than accumulating hashrate.

The idea that bitcoin is an inflation hedge is ridiculed in the West; this includes my home country of the U.K., where people are still generally ignorant of bitcoin….

Read More: Balaji Srinivasan’s $1M Bitcoin Bet Could Be Right, but I Hope He’s Wrong

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