Time for a new boyfriend?
The purchasing power of money invested in bonds is now collapsing at quite a rate. $100 invested in Treasury Bonds in July 2020 is now worth $81.90, concluding with the worst quarter for bonds since, well, forever.
I don’t want to say we told you so, but we absolutely have been saying it quite loudly for quite a long time.
For bondholders, this is not great news. But the people really feeling the pain are pension fund managers who are now the only natural buyer of bonds beyond central banks themselves. In many cases their purchases of bonds are mandated for liability matching purposes and they don’t really have many other options. They will also point to the fact that their nominal losses are much lower than the amounts presented in the chart above. They’ll get their $100 back, it just won’t buy that much at maturity and demonstrates the increasing issues fiat currency has as a unit of account.
The rest of their portfolio now has to do more of the heavy lifting, going out further on the risk curve. Unfortunately for soon-to-be retirees, many funds will be tempted to do something stupid.
Even worse though, the natural demand created by these funds is about to unravel as the ageing population winds down their portfolios through retirement. The cohort behind them is much smaller, and won’t be soaking up the supply.
We know who will buy the bonds in the end? The government. They will use your money and simply debase it and it will be that easy. The question is, are you doing something about it?
The clock is ticking
Over the weekend the bitcoin supply reached 19 million of the 21 million supply cap. The nature of the supply curve means issuance slows over time. It will be 2026 before we get to 20 million and then, believe it or not, another 114 years until we get to 21 million.
By comparison, restricted supply in other markets gets resolved, a topical one would be natural gas. There is an almost unlimited supply of natural gas under the sea, we even know where it is. We will use it and the currently very high prices will fall because supply can be increased. The same is true of gold; there are lots of unprofitable gold mines that will become profitable as price rises, and supply will follow.
That cannot happen with bitcoin. The supply is capped, unlike anything else. It’s unlikely the penny will fully drop until the bitcoin halving in 2028.
The next bitcoin halving is now less than 2 years and 1 month away, in May 2024. The new bitcoin supply will become 3.125 BTC per block. Roughly 450 bitcoins per day. It’s not enough.
To illustrate the relative scale of the supply squeeze, the world’s largest bitcoin ETF, Canadian operator Purpose, has been buying BTC at quite a rate. In the last 50 days of the quarter they added 6,000 BTC to their holdings, roughly 120 BTC per day. Just one product, in one country, that almost nobody has heard of.
The clock is ticking. In two years there will be a lot more bitcoin ETFs, including in Australia. Likely in America too.
Most people do not understand this supply curve and its likely impact. A generational opportunity.
For US$11,000, it would need to be good. Here are the highlights for you, entirely for free.
Most significant was the announcement from Jack Mallers. His company Strike has partnered with Shopify (the largest ecommerce platform in the world) and Blackhawk (the biggest payment provider in the US). As a result, retailers in the USA, both online and physical, will be able to accept bitcoin via the lightning network quite shortly (think McDonalds, Walmart, etc).
Secondly, there were further nation state announcements. Madeira in Europe announced tax-free bitcoin transactions as well as adopting it as legal tender. The President himself turned up to announce it. Mexico has now invited a delegation to the country to discuss the same strategies as El Salvador.
In themselves, these things are not significant to volume or price. They are very important though because the more embedded bitcoin becomes in payment networks the more governments have to adapt to accommodate it. Even the rhetoric from Janet Yellen this week has changed, it was “regulation should be technology neutral” and “encourage innovation in payments”. The tune is changing fast and not because they want to change, they have to.
Finally, for the truly enthusiastic, a niche technical announcement this week known as the Taro: The Sparse Merkle Tree. You may recall late last year the adoption of something known as taproot, a new digital signature scheme for bitcoin. A developer known as @roasbeef announced a new feature which enables non-bitcoin asset issuance on the lightning network.
Expect to hear nothing about this for five years because it will take that long to fully test and deploy. In theory though it is a mathematically infinitely scalable issuance platform. For example, you could run the entire USD infrastructure for the whole world using a USD stablecoin issued on the lightning network. It’s mind-blowing but I did warn you that the combinatorial power of taproot signatures would be huge when it went live last year. It will be and by the time we are all using it, we won’t even know it.
The ECB were back on form this week issuing all manner of demented word-salads to mask their incompetence. The people’s champion Isabel Schnanel was first to go.
“An appropriate monetary-fiscal policy mix will protect people’s purchasing power.”
Meanwhile in Germany, Aldi was raising the price on sausage meat by somewhere from 20-50%
This wouldn’t worry most countries too much, but obviously Germans do like a bit of sausage and I can imagine this news has gone down like the Hindenburg. They do not like inflation in Germany. Incidentally, there has been no “monetary-fiscal policy mix” announcement from the government slashing sausage taxes, so I guess Germans will have to get used to being a bit poorer from now on.
It’s not that the ECB could do much about any of this. They have had 10 years to think about it and didn’t. Now they are resorting to rank dishonesty and they will pay for it through lost trust in their currency.
Which brings us to the quarterly Euro v BTC v USD update. New readers may not be aware but in June 2020 we started a competition about how Bitcoin and the Euro would perform against the USD.
To my surprise the Euro has held up against the USD, but this quarter the wobble began. It could well be heading for parity with the dollar.
In the meantime, Bitcoin, which has barely done a thing in six months, is up 360% in USD terms. Much too volatile I say, stick to bonds.