Since the inception of Bitcoin in 2009, blockchain technology has steadily gained worldwide attention. Current figures suggest that about 4.2% of the global population owns some form of crypto. More importantly, the broader discussion around the potential impact of this technology on the economy, society and innovation has expanded beyond niche crypto-anarchist circles.
In this article, I will explore how the current geopolitical and macroeconomic environment, societal and technology trends, and regulations influence crypto and shape its future.
The original Bitcoin whitepaper set foundational concepts of decentralization, privacy, financial independence and disruption of traditional financial systems. While blockchain technology has evolved and been stress-tested over the years, these principles remained relevant and have been further validated by recent events in modern history.
Geopolitical and Macroeconomic Landscape: A Shifting Era
In his book “The Changing World Order,” Ray Dalio examined World Economic Cycles across five centuries, showing how empires’ rise and fall often coincide with internal and international conflicts. Today, we find ourselves at the turn of the era, witnessing a shift in global power from the U.S. to China.
In March 2022, the Russia-Ukraine conflict led to an approximate freeze of $281B of Russian Central Bank Foreign Reserves in the U.S., EU, Japan and Canada. A precedent was already set in earlier years, with Venezuela’s gold assets worth $1.7B frozen in the Bank of England. Years earlier, Iran and Libya’s foreign reserves faced a similar fate. While these actions are ethically debatable, they have undoubtedly eroded global trust in foreign nations’ ability to hold countries’ wealth abroad safely.
It is not a secret that Russian citizens resorted to using crypto infrastructure for cross-border payments as Russian banks got cut off from the SWIFT and the United Nations has been sending crypto stablecoins to support Ukrainian refugees. The largest USD-pegged Stablecoin Tether is rumored to be used for large international trade settlements between Hong Kong, China and Latin America. The use of crypto is on the rise in countries with rapidly devaluing currencies, such as Turkey and Lebanon.
In 2023, China’s foreign reserves stand at $3.2 trillion. The country’s competition with the U.S. for global economic dominance has led to a trade war and stirred potential open conflict over Taiwan. In response to this geopolitical uncertainty, China has taken steps to reduce its dependence on foreign financial infrastructures and limit further expansion of its foreign reserves.
At the same time, the U.S. faces its economic challenges. Arthur Hayes, in his essay, “Patience is Beautiful,” points out that the U.S. economy is operating at a deficit fueled by defense spending and entitlement costs for an aging population. An annual deficit of $1 to $2 trillion is projected to become the norm over the next decade.
To finance the government, the U.S. Treasury has to generate trillions of dollars in debt. However, the lack of demand for long-term bonds forces the Treasury to rely on issuing short-term debt.
The post-Covid period of stimulus checks and free money has triggered inflation and led to an inversion of the yield curve, where short-term debt offers higher yields than long-term debt. This situation has incentivized depositors to withdraw their money from banks, preferring to invest in money market funds tied to the Fed’s RRP or short-term U.S. Treasury securities.
More than $1 trillion has been withdrawn from the U.S. banking system over the past year, driving several banks into insolvency and exerting additional inflationary pressure through implicit government bank bailouts (BTFP). Hayes argues that the net effect of the Federal Reserve’s quantitative tightening has been offset by the interest paid by the U.S. Treasury to debt holders.
Whether the Fed continues to raise rates or changes its course, the money supply will inevitably increase, leading to persistent and long-term inflation. Unlike during the Covid period, when stimulus checks were distributed universally, the Federal Reserve and the U.S. Treasury are channeling free money to wealthier individuals through interest on government bonds and central bank deposit facilities. This redistribution of wealth is already visible in the flow of money into the stock markets and Bitcoin as digital gold.
Regulation as a corporate weapon
Regulators have spooked U.S. investors from investing in crypto as the SEC went on a crusade against crypto exchanges operating in the U.S. They have pressed charges against Coinbase, Kraken and Binance US, which facilitate most crypto trading in the U.S. After the field had been cleared, corporate powerhouses such as BlackRock and Invesco, boasting a combined AUM of $11 trillion, have simultaneously filed applications for a Bitcoin spot ETF.
Cameron Winklevoss commented on this event on Twitter: “The Great Accumulation of Bitcoin has begun. Anyone watching the flurry of ETF filings understands the window to purchase pre-IPO bitcoin before ETFs go live and open the floodgates is closing fast.”
I predict that one of these BTC ETFs is going to be approved this time, as regulators and corporations have effectively enabled capital controls to prevent capital flight from the U.S. – at the end of the day, allowing one to invest in a Bitcoin ETF is not the same as allowing one to own bitcoin.
Recent news about Hong Kong allowing the trade of select cryptocurrencies also fits the same trend. We are likely to see Bitcoin ETFs approved in Hong Kong. I subscribe to the view that China is incentivized to weaken the yuan and, at the same time, lower its foreign reserves – approved BTC ETFs in Hong Kong can serve this goal well.
In summary, the expectation of persistent and prolonged inflation, coupled with geopolitical uncertainty, will drive the behavior of parking the worldwide wealth in gold, stocks, real estate, and ultimately bitcoin and other digital assets.