By Saifedean Ammous, Soona Amhaz
Saifedean Ammous, Bitcoin economist, author of the best-selling book "Bitcoin Standard", this book has been translated into English, Spanish, French, Russian, Turkish, Korean, traditional Chinese, etc.
Translated by: Chuan
Translated by: Chuan
The financial crisis is one of the most widespread and affects the largest number of people in the world today. Its impact is far-reaching and has brought long-term and difficult-to-heal pain to the world. Every crisis is a major asset collapse.
Problems such as economic collapse, corporate bankruptcy, and unemployment are powerless for the public. What the public can do is how to keep their assets from being wiped out in the crisis. This is possible for most people and is closely related to themselves.
As the most dazzling financial asset in the past ten years, Bitcoin has not experienced a financial crisis so far. No one can predict the performance of Bitcoin in the financial crisis. This article starts with the position of Bitcoin in the Exter model, and compares The analysis of bitcoin's possible development during and after the financial crisis is unique and inspiring.
So whether Bitcoin is a hope of survival in the financial crisis, or will it collapse like most assets, you may have a vague answer.
There is an old folk tale about a factory worker who was suspected of stealing. One night, the carts that workers leave the factory are covered with a cloth. The security guard lifted the cloth to check underneath, but found it empty and let the workers through. The next night, it was still like this. This situation continued until it was finally discovered that the worker had been stealing carts.
Fascinated by the possibility that workers might be removing valuables, the security guard never considered the vehicle he might use to transport them. The trolley is so conspicuous that it will not be suspected.
Our own financial system has its proverbial wheelbarrow: the dollar.
In every financial crisis, we do a post-mortem analysis of the quotes we made and the orders we filled. We question the Fed. We fire people who give the other side the green light. We help organizations out of trouble. We introduce new legal and financial protections. Simply put, we are trying to be better prepared for the next crash.
But what if the real problem is the nature of the dollar itself? This question led Satoshi Nakamoto to work on Bitcoin - which eventually came into existence after the 2008 financial crisis.
Because we have yet to see how a new digital asset fares in the global financial crisis, there are many theories surrounding Bitcoin's fate during the next crash. Of course, no one knows for sure, but history allows us to paint a plausible picture.
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1. The importance of the base of the pyramid
As described in the Bitcoin Standard Monthly Bulletin,The Exter pyramid was proposed by the late John Exter, vice chairman of the Federal Reserve Bank of New York, and it provides a model for organizing financial assets according to risk and their corresponding liquidity.
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Exter Pyramid
The bottom of the pyramid is gold, which does not generate returns, but is the safest asset because it is not a human responsibility. It's also the most liquid because it's a financial asset and has historically been accepted in the vast majority of places because it's an asset whose price isn't dependent on anyone fulfilling its obligations.
History shows that no matter how much new money is created, once the going gets tough, people fall back on familiar, liquid, impersonal, trustless gold.
Looking up along the Exter pyramid, the risk (and return) of the asset is increasing, while the liquidity of the asset is decreasing.
On top of gold is the dollar, which offers no returns and is highly liquid, but riskier than gold because its price depends on what the Fed does. Further up are government bonds, which are less liquid than paper money, but rewarding. On top of government bonds are commercial bank deposits, and on top of that are all kinds of financial assets that have increased risk and become less liquid because the risk greatly impairs their suitability as a liquid medium of exchange.
The Exter pyramid gets wider as it reaches the top. Riskier assets are usually somewhat collateralised, so supply can grow faster than those that require tangible backing. This was seen in the 2008 housing crisis, where false CDOs quickly exceeded the value of the mortgages backing them.
Although the pyramid is the most stable geometric structure, the inverted pyramid is only stable if there is more gold at the base.secondary title
2. The Currency Status of Bitcoin
An extreme example of the collapse of the Pyramid of Exter is shown in Venezuela:Inflationary monetary policies lead to a collapse in demand for monetary assets themselves, which leads to a shift in demand towards more liquid assets down the Exter pyramid such as the US dollar or gold, and most interestingly, more recently, increased demand for Bitcoin .
This attempt to move capital from "risky" investments to "safer" investments is known as asset safety transfers or liquidity transfers. People are less risk-averse and prefer to keep their wealth and make it liquid.
Uncertainty in the market naturally leads to a flight to safety as investors sell their risky assets in exchange for safe-haven assets like cash or gold.
A less extreme collapse of the Exter pyramid was the financial crisis in 2008. At that time, the assets at the top of the pyramid, including risky financial assets, experienced a liquidity collapse, while the bottom of the pyramid, such as the US dollar, gold and government bonds, due to Investors have seen it as a safe haven, and have seen gains in price.
So in terms of how its owners and their potential owners hold it,Bitcoin's fate in the financial crisis depends on its position in the Exter pyramid of the global economy.
If the majority of bitcoin holders were of the short-term speculative type, then bitcoin might be closer to the top of the Exter pyramid and could suffer the same results as those high-risk assets did in 2008,Because short-term speculators in Bitcoin must liquidate their positions to hold more liquid, less risky assets, such as the US dollar.
On the other hand, if the demand for Bitcoin is driven by its liquidity and availability for fast international payments, then Bitcoin can be considered closer to the bottom of the pyramid. In this case, you would expect demand for Bitcoin to rise during financial crises as people choose to sell less liquid assets in exchange for Bitcoin.
Although this may sound counterintuitive at first, remember thatBitcoin can be very useful in order to move assets quickly around the world, thus attracting demand for the asset during a crisis, even when short-term speculators exit the market.
Moreover, Bitcoin can already be understood as the golden position of the Exter pyramid in the field of cryptocurrencies. It is by far the most liquid digital currency, and in the midst of the financial crisis, as people seek to liquidate risky positions from the cryptocurrency space, bitcoin is the most popular for those who want to exit the riskiest market. The advantage of liquidity becomes their choice.
Only time and a full blown financial crisis will tell where Bitcoin fits in today's Exter pyramid, but there are some important economic factors to keep in mind in the long run.Even if Bitcoin falls in price during this financial crisis, it will likely continue to function and function as usual, which will help demonstrate its usability and value proposition as a neutral global settlement system.
Even as its price plummets, as a short-term speculative asset it will lead to a large drop in demand, but its demand as a global liquidity tool will continue to exist. Over time, this feature tends to push Bitcoin's role further down the Exter pyramid.
Perhaps even more important is another unique value proposition of Bitcoin highlighted in The Bitcoin Standard:Bitcoin is the first absolutely scarce liquid asset. Even if Bitcoin's price increase proves to be driven by short-term speculative demand, Bitcoin's supply remains scarce and the demand and price increase are completely ineffective against it.
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3. Currency Status of Bitcoin
For its first financial crisis, the judgment and actions of most Bitcoin holders will be difficult to guess, but the most important things to understand here are:As time passed and more financial crises occurred, Bitcoin distinguished itself from the other assets in the Exter pyramid in a very different way: it had a fixed supply.
Although Bitcoin is in the early stages of its first crisis, and the subjective opinions of various Bitcoin holders may determine the direction of change, the underlying economic characteristics of Bitcoin, as well as its sheer scarcity, are challenged with each additional recession. Make sure its supply increases minimally.
As Bitcoin's Stock-to-Flow ratio continues to decline significantly, this characteristic has also become more pronounced over time, making mining output a progressively smaller percentage of new supply, making Bitcoin more resilient. Full currency advantage.
If a new financial crisis is imminent, Bitcoin will be differentiated from other assets by the fact that its supply may not increase much. Alex Gurevich, former head of global macro at JPMorgan Chase & Co, explained this clearly in a blog post last year:
When Bitcoin first started trading, I was barely aware and didn't know much about its price. As a trader, I was intrigued by its straight-up price in 2013, followed by a bear market in 2014.
Notably, its decline was supported; it did not continue down to bear market lows. Instead, it stabilized, forming a solid double-bottom in 2015, and began to soar higher. This trading pattern is in line with the performance of precious metals, just compressed to a shorter time frame. For example, ...gold slowly stabilized its price after surging in 1980.
So far, this trading pattern has only manifested itself in Bitcoin's own bubble, but we haven't seen it in the context of the global financial crisis. It probably won't happen in the first crisis, because the supply growth rate is still not very low, and the number of holders is still small, so they are very price sensitive.
Whenever money flows into assets in the Exter Pyramid, a significant amount of supply is created. As people switch to the dollar, the Fed may resort to increasing supply. As people seek to use homes as a store of value, as developers build more, the supply of homes increases, ultimately driving down prices. When people opted for mortgage-backed securities, those securities themselves ballooned, as did the houses backing them, causing prices to fall.
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4. Consumer Behavior After the Crisis
In a study analyzing the main changes in purchasing behavior in times of economic crisis, consumers' performance in terms of self-reliance and control was investigated:
“Consumers [after the financial crisis] want to make a difference and know they can only rely on themselves. A recession is an opportunity to take a step back and do some serious thinking. ” to “Active Mindfulness.”
Despite their anxiety, people are changing the status quo and gaining more control over their lives now and in the future. The main way they do this is through their consumption choices. Their most powerful means of control is "active mindfulness."
Would anyone wonder if consumers would behave more self-reliant and self-controlled? During an economic crisis, the inability to withdraw money from banks on demand, combined with the lucid awareness that immutability as understood by our financial system violates its breakable nature, will only lead to a serious distrust of financial institutions. andThere is no clearer, smoother way to regain that control than by owning your own bitcoins and keys.
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5. The new base of the pyramid
For its first crisis, Bitcoin may drop in price, but no matter how much it drops, it may eventually stabilize around a certain price due to fewer and fewer newly mined quantities. This is an important difference between Bitcoin and other assets (except gold).
The expected stability could add to the credibility of Bitcoin as a means of hedging and store of value. Given that the Bitcoin network is here to stay, and will remain at a certain price, even a big dip before new users start to recognize its value proposition may only affect it temporarily.
This may not happen for the first or second economic crisis, but over time, when the growth rate of supply continues, and possibly after several financial crises have raised the awareness of Bitcoin as an alternative asset, Bitcoin Coins may develop in a similar fashion towards gold's place in the Exter pyramid.
Its widespread global distribution, along with its scarcity and volatility, will ultimately make it more interesting to hold as a long-term store of value rather than a short-term speculative bet.
Hypothetically, the Bitcoin-based Exter pyramid could be more stable than our traditional gold-based pyramid; it grows little beyond the creation of productive assets, and through small reserves, rehypothecation and maturity mismatches (maturity mismatching) controls little unsustainable expansion.
Disclaimer: This article is the author's independent point of view, and does not represent the position of the Blockchain Institute, nor does it constitute any investment opinion or suggestion.
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Translation: Chuan, special author of Blockchain Research Institute.
Disclaimer: This article is the author's independent point of view, and does not represent the position of the Blockchain Institute, nor does it constitute any investment opinion or suggestion.
Source: https://www.tokendaily.co/blog/what-happens-to-bitcoin-in-financial-crisis
