The Great Depression created a huge downturn in the economy and caught many investors off guard in 2008. The preceding years were so prosperous that many made the mistake of thinking this would go on forever. Interestingly, the Bitcoin white paper was published in 2008 and the Bitcoin blockchain was launched shortly afterwards.
Those who believed in Bitcoin from the very beginning could make almost unbelievable returns, with the price rising from about $0.01 in 2010 to almost $20,000 in December 2017. Some other cryptocurrencies followed a similar wonderful pattern.
Shifts Towards Digital and Crypto
If you can determine which concept and pattern shifts are about to happen, you can profit greatly as could be seen in the example above. What can we expect over the next couple of years? And how can you prepare yourself for these inevitable changes?
Three steps can be helpful:
- Identify the current pattern.
- Examine if it is sustainable.
- If this pattern is not sustainable, try to see how the change will come out.
What is quite apparent is the general shift from physical towards digital, wherever it is possible. Music in digital formats, books in digital formats, photos in digital formats, all in all, it seems that the users generally prefer things in digital formats: Movies, education, messages, reports, contracts, archives, games, entertainment, and the list could go on.
Why would you send money from your bank if you can make the payment comfortably and instantly from your smartphone? At the same time, more people are noticing the shift towards Bitcoin and other cryptocurrencies and are starting to use them.
Who Became Rich From Bitcoin?
What can we learn from those who analyzed Bitcoin as a quality asset at the very outset and took advantage of what Bitcoin has to offer?
To answer this, we must first consider what the main forces for our current pattern have been. Since 2009 two terms come to mind:
- Low interest rates.
- Quantitative easing.
Low Interest Rates
Interest rates define how cheap it is for individuals and companies to borrow money in an economy. Let’s say a company borrows 1 million USD at a 1% interest rate over 1 year; they would be expected to repay 10,000 USD in interest. If, however, they borrowed 1 million USD at a 10% interest rate, they would be expected to repay 100,000 USD in interest. When interest rates are low, the difference for the company is 90,000 USD extra in their pockets in this example. As a result, the company has more money to spend on growing their business. When companies can borrow money cheaply, i.e. when interest rates are low, this provides a stimulus effect on the economy. As a result, when economies are struggling, the governments generally lower interest rates, making money cheaper to borrow and hopefully growing the economy.
In 2009, economies worldwide were in a strong downward spiral; the governments globally stepped in and lowered interest rates to boost the struggling economies. Thus, very low interest rates are a clear sign of struggling economies.
Quantitative easing is a fancy way of saying that money is just “printed.” (Apparently using the term “printing money” doesn’t instill people with confidence.) Quantitative easing means that the central bank is creating new money out of thin air which is then used to purchase assets, typically government bonds from businesses.
As this occurs, there are two major effects:
- The price of government bonds is increased due to higher demand. As their prices rise, government bonds become less attractive investments.
- Businesses now have more money to spend. When they are deciding where to spend that money they consider purchasing government bonds which are typically the safest investment around, but the prices have already risen too much.
Instead, they might look to riskier investments that offer higher returns. The result of this increased stimulus for the economy is that this period is coming to an end. As interest rates are at global lows, many central banks can’t drop them further. In fact, some countries have already started experimenting with negative interest rates.
Effect of Negative Interest Rates
In the example we gave earlier, our business could borrow 1 million USD at a 1% interest rate. After a year the business will owe 10,000 USD in interest plus the initial 1 million USD.
But with a negative interest, the bank will charge you interest if you want to keep cash with them. As an example, let’s now switch to a negative 1 percent interest rate. If the business deposits 1 million USD with their bank, the bank will charge them the negative interest of -1.00% (i.e. 10,000 USD) for keeping their money in the bank! If we went back 20 years and told an economist the negative interest rates would become a reality, they would have likely laughed.
In 2019, several countries and entities tried negative interest rates on excess bank reserves in the financial system: Japan (-0.10%), Sweden (-0.30%), European Central Bank (-0.40%), Denmark (-0.70%), Switzerland (-0.80%).
Of course, negative interest rates could be seen as an indication of an unsustainable pattern.
Effect of Quantitative Easing
Quantitative easing or money printing has had a strong stimulative effect since 2009, however, it has had a diminishing effect over time. What happens next? The monetary policy generally shifts back and forth between two modes:
- Helping borrowers at the expense of lenders by keeping interest rates low.
- Helping lenders at the expense of borrowers by raising interest rates.
By asking who the central bank needs to help the most and what tools they have at their disposal, we can determine what forces are likely to drive the next pattern shift. It seems obvious that they have to help lenders. In normal economic times, this would mean lowering interest rates and employing increased quantitative easing. However, both of these have become less effective, offering diminished returns over time. This begs the question: What other policies are likely?
Value of Money
Some experts point out that the monetization of debt (leaving the system with an increased supply of money) and currency depreciation will eventually take place, which will reduce the value of money and real returns for lenders. If the value of fiat currencies is decreased and lending becomes less attractive, investors may start looking at other assets with a better performance.
Which Assets Will Perform Well?
In such a world, storing your money in cash and bonds might no longer be very wise. The important question then is: Which assets will perform well?
Again, the majority of traditional investments such as stocks, bonds and holding cash will probably have poor returns in the coming years. Thus, adding an asset that can serve as a hedge against traditional markets makes a lot of sense. Such a hedge is an investment that will move in the opposite direction to that of traditional markets, i.e. when these markets are dropping, such a hedge will grow in value.
Taking Advantage of the Shift Towards Digital
Traditionally, gold was taken as such a hedge, but with the current pattern shift towards “everything in digital format,” more and more people are also starting to think about Bitcoin, which some describe as “Digital Gold.”
The advantages of Bitcoin are attractive to many: Its supply is limited to 21 million units, only. It is a decentralized, peer-to-peer payment system, meaning you can send your payment directly without any intermediary. But probably the most important fact is that Bitcoin cannot be influenced or printed by governments.
A word of warning: While Bitcoin is viewed by some as a hedge against traditional markets, it is still a very new asset, therefore, Bitcoin isn’t yet accepted as a hedge by all.
To sum up, it is clear that many things in the current pattern are not sustainable. Thus, a major shift must be coming. What remains is to visualize how the shift might come out. The next step is to act accordingly.