Over the previous three months, Bitcoin has seen one of its most violent corrections in its 13-year history. Although, this recent crash is nothing out of the ordinary for Bitcoin. Bitcoin has experienced eight corrections, all larger than 60% in size, during its 13-year lifespan. Each one being a tremendous buying opportunity for those who understand this emergent technology.
However, this most recent drawdown is fundamentally different to prior Bitcoin corrections. When you look closer, Bitcoin is being caught in the crosswinds of a global liquidity crisis that’s currently disrupting the entire legacy financial world. Central banks all around the world are being forced to aggressively tighten their monetary policies, in response to the emergence of the highest levels of inflation we’ve seen in over 50 years.
The majority of central banks globally are raising interest rates, in attempts to slow down this out-of-control inflation that they originally caused. One of the most hawkish central banks in the G7 developed countries is the United States Federal Reserve.
Bonds & Stocks
The first quarter of 2022 marked the first-time in the past 50 years that both bonds and stocks lost more than 10%.
Bonds are supposed to be considered the safe haven asset in “risk-off” environments, but not in 2022. The global “safe haven” asset, the 10-year treasury bond, has had its worst annual performance since 1788! On the other hand, technology stocks have been affected the most by this global liquidity crisis, with some “blue chip” companies down 70% over the past 3 months!
The world operates on a fractional reserve, inflationary monetary system. This system requires ever growing amounts of credit, growth and rising prices to remain functional. The world runs on US dollars, and tightening monetary policy leads to investors clinging onto their precious USD, preparing for an economic slowdown.
This leads to decreased lending and credit creation, as capital simply flows to where it’s perceived to be safest, which for today, is still the US Dollar.
This “risk off” behaviour strengthens the global reserve currency, which is the US Dollar. We can see this visually by looking at the chart of the DXY, which measures the relative strength of the USD against a basket of other major fiat currencies.
This rising strength of the DXY, means any US Dollar denominated debt, becomes harder to service. Every time over the previous 50 years that the US Dollar has had a major bull market, a wave of currency crises and debt defaults have followed.
This is because the world runs on dollars, and most countries around the world have enormous US Dollar denominated debts. Lots of this USD denominated debt mentioned above, has actually been created by banks outside of the US. This is where the term Eurodollars comes from, which simply means offshore US Dollars.
The key takeaway you need to understand here is that the Eurodollar market is rumoured to be in the 10’s, and even hundreds of trillions of dollars in size, and thus must be considered when analysing the global debt markets.
The Dollar Milkshake
Eurodollars display that there is more debt OUTSIDE the US than there is inside the US. Everyone, both US citizens and foreigners want US dollars to pay their debt. When Dollars stop flowing in times of a recession or “risk off” environment, the US Dollar strengthens, and these US Dollar debts become more expensive to service.
This then leads to countries around the world drawing down their treasury reserves, and then printing their own currency, to source US Dollars on the global forex markets to pay their USD debts. It is this feedback loop and structural imbalance in our monetary system, that Brent Johnson has built his entire “Dollar Milkshake Theory” thesis around.
Brent Johnson created and popularised this thought provoking “Dollar Milkshake Theory” which he believes articulates how the endgame of this 80 year long term debt cycle will unravel. He believes that the US Dollar will be the proverbial straw that sucks up all of the liquidity, or milkshake, that’s been created by central banks all around the world since the 2008 “printathon” began.
This 2020s US Dollar bull run is wreaking havoc on the world’s largest and safest currencies! The Yen and the Euro are 2 of the largest and normally considered ‘’safest’’ alternatives to the US dollar. However both the Yen and Euro have lost over 20% of their value against the Dollar in the past 12 months, as they both sink to fresh 20 year lows.
So, when does this US Dollar wrecking ball slow down, and when will financial markets find a bottom?
All of this turmoil in financial markets, only highlights the long-term use case for Bitcoin as a replacement for this fundamentally flawed and broken fiat legacy system.
The USD denominated price of Bitcoin over the past 12 months is noise. The rapidly deteriorating legacy financial system, combined with the continued global adoption of Bitcoin is the signal we should all be paying attention to.
You should have the ability to choose your own path when it comes to personal finances and store your hard earned savings in a monetary protocol immune from manipulation and debasement. Not the government’s fiat.