The Great Reset and the Rise of Bitcoin
If you haven't watched the whole documentary, watch it here:
We've all heard of our economic cycles and how, according to most modern economy books, it is normal to have a period of very quick growth and expansion, followed by a period of contraction and economical crisis.
As described in 1946 by Arthur F. Burns (Former Counselor to the President of the United States) and Wesley C. Mitchell (American economist):
"Business cycles are a type of fluctuation found in the aggregate economic activity of nations… A cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions… This sequence of changes is recurrent but not periodic."
History, though, shows us that before the 20th century, financial crisis arrived because of external events, the most popular being war. There had been only one financial crisis not attributable to external events and this was the Panic of 1825. Where around 70 banks went bankrupt due to risky investments, and because of this man, Gregor McGregor, that had pulled big investments into colonizing a country that didn't exist: Poyais.
We are now over 100 years after leaving the gold standard, and it is a fairly accepted fact that our economy works in cycles, based on a period of inflation, followed by a period of deflation. The fact this only started 100 years ago should tell you that our monetary system has flaws, all while being the reason for the un-matched growth we had as a species in the 20th century.
This inflation is due to our reliance on debt and credit. According to modern monetary theory, debt is the driver of economic growth, not productivity. Ray Dalio explains it in his video How the Economic Machine Works
And as stated by Dylan LeClair in his great article The Conclusion of the Long Term Debt Cycle and The Rise of Bitcoin:
"Although productivity is the most important aspect of an economic system over the long term, not productivity but the forces of debt are the main driving forces in volatile economic swings."
Coming back to the cycles, Ray Dalio describes the long term and the short term debt cycle, and how they relate to human productivity.
This short term debt cycle can be observed by looking at different metrics, including the debt to income ratios and interest rates set by the central bank. Yes, the central bank essentially sets the rules that allow our economy to expand into unreasonable debt, and later decides when it can break down. This is the so-called boom and bust cycle, the most recent ones being the global financial crisis of 2008 and the dot-com bubble of the year 2000.
The long term debt cycle is made of multiple short term cycles. While our economy goes up and down during each of these cycles, it does bring growth in the long run. And with each cycle, our economy continues accumulating debt, indefenitely, because we prefer borrowing than repaying debt. There reaches a moment, when there is more debt to pay than income. Historically, this is when the long term debt cycles shifts. People stop spending and start repaying debt, and instead of growing, we go down. We see recessions, increased government support, devaluation of currencies, social unrest, and so on . There comes a time, when our economy has sufficiently deleveraged, and the economy starts growing again, following the short term debt cycle again.
During these deleveraging events, 3 strategies are adopted by central banks:
First, lower interest rates. This increases the value of assets, makes it easier to get credits. This is the first strategy used. Today, these interest rates have already dropped drastically for the main economies. And have turned negative in many. If interest rates drop to zero, then there is no logical financial incentive to lend money. It can continue for a while, until it doesn't.
Second, there is quantitative easing, also called money printing. It allows the central bank to buy debt securities and financial assets. It places cash in the hand of investors, but doesn't help citizens. Asset prices sky-rocket, usually creating inflation. Which makes asset holders, that tend to be the wealthy, richer, and the poor poorer, as their savings lose value. This is the case today, with real estate sky-rocketing globally and other raw materials sky-rocketing too.
Third and last is increased welfare spending or other instruments such as stimulus payments. This comes slowly and accelerates later. This strategy puts money directly in the hands of citizens to help in this wealth gap, usually needed to avoid social unrest. This way the rich get richer while the poor don't complain. We can see how social welfare expenses as percentage of GDP have increased through the years.
Although the numbers we have are only until the year 2016, there is a clear uptrend that started, for most countries, after the crisis of 1929. More recently, we know social spending has increased due to the COVID crisis, so we can only presume that the chart now looks more like this:
We are seeing another measure increasing quickly, the monetary supply. Monetary supply is the total amount of one currency that is currently available in the economy. The more a government creates new money, the more the supply increases.
This money supply is directly correlated to the devaluation of our currencies. Many like to inverse these charts in order to show this devaluation. Because the more a currency is produced, the less it is scarce, therefore the more it loses value.
We have all heard stories from our elders saying "money had a different value back then", and have seen archive images illustrating this. The increase in money supply is the reason why this happens. In 2020 alone, the money supply had a big jump. This is the money that was printed in order to finance the war against COVID. In the US alone, since the beginning of 2020, we have seen an increase of over 30% in the amount of US dollars in circulation. Although this isn't felt instantly in the economy, the long term effects will be felt by the population that have zero allocation in assets such as real estate, stocks, etc. The long term consequences of this are very wide. To illustrate, take technology. By definition, technology should drop in price because it becomes more efficient and easier to produce. Yet, due to inflation, prices are not going down, essentially making it harder to develop new technologies. Governments use many reasons, including climate change as an excuse to print trillions, and as a reason for price increases, but down the road, this printing can lead to adverse results because of the effects this new monetary supply can have on the development of the right technologies that could help us transition to a more renewable energy consuming world. Central banks will have a different message. This is in order to avoid the spread of panic concerning the financial markets and their currencies, which could lead people to rush to banks to withdraw their money. This, obviously, would be unsustainable for the economy. A nation in which faith in a currency is lost will see recessions and will take decades to recover. Instead, central banks use the Consumer Price Index, also called CPI. The CPI is a flawed indicator, yet is the most commonly accepted indicator to measure inflation and its effects on prices. The CPI follows the price of a basket of products that are consumed by people. This, in essence, is the way an indicator like this one should work. But the CPI is flawed because of the way this basket of products is selected. It is selected based on what people choose to buy. So every year, new products will be added to this basket, while others will be removed. But what they choose to buy depends on the price of the product. If inflation goes up, people will change their basket of products in order to accommodate for the price increase. This essentially makes it a new basket of products. The CPI will not track the price of the previous basket of products, it will track the price of the new basket of products, after the consumer decision has been made in response to price increases. Saifedean Ammous illustrates this properly in The Fiat Standard: "Imagine you earn $10 a day and spend them all on eating a delicious ribeye steak that gives you all the nutrients you need for the day. In this simple consumer basket of goods, the CPI is $10. Now imagine one day hyperinflation strikes the economy and the price of your ribeye increases to $100 while your daily wage remains $10. What happens to the price of your basket of goods? It cannot rise tenfold because you cannot afford the $100 ribeye. Instead you make do with the chemical shitstorm that is a soy-burger for $10. The CPI, magically, shows zero inflation." Remember that governments will never show us the true inflation numbers, and they will not attribute it to the increase in our monetary supply because of their management. If people actually understood this, they would never be re-elected. We've talked about debt so much, it is time to look at these numbers too:
We can see the sharp increase of the global debt even in just the most recent years. This debt represents 356% of our global GDP. 356%. We have 3.5 times more debt, than actual created value. Now, this debt bubble could be stopped, or at least be slowed down, if the central banks were to increase interest rates, making it more expensive to borrow, giving a breather to the entire system. Today, it's likely too late. The US Central Bank, the FED attempted this in 2018, because they believed the economy looked to have recovered from the global financial crisis of 2007.
Interest rates increased gradually in 2018, from 1.5% to 2.5%. After the 3rd increase of the year, we saw 2 months of decline in the markets.
The S&P 500 dropped 20% and the NASDAQ dropped 23.5%. The FED had to calm down the markets by the end of 2018, admitting their approach was wrong, which led to a rally back up. Later in 2019, the FED had to revert the changes in interest rates. Now, 2 years later, these interest rates are at 0.25%.
So, what now? As Dylan Leclair says:
"There is mathematically no way out of the current economic environment. The only path forward that policy makers know is more of what caused the problems in the first place"
In reality, the only thing that the central banks can do is print more money, and cover for all this debt that is never being paid back. They will work with governments to continue increasing taxes, welfare spending and devaluating currencies. This isn't to say that these people are ill intended, they use the tools that are available to them, and have simply reached a point where their backs are against the wall and they are forced to abuse these tools. And they are looking for solutions to take the entire economy out of this situation, although, these solutions are not necessarily in the best interest of citizens and their personal freedom. It isn't without reason that the World Economic Forum's new initiative is called "The Great Reset", name that inspired this documentary.
Part of their plan is the creation of central bank digital currencies, CBDCs. This would allow central banks to have a new monetary system, that they can detach from the current one, allowing people to transition into this new debt-free system, and slowly deleveraging and dropping the debt from the previous one, without adding risk to their currencies.
Adoption will come for these CBDCs, in fact, it will be forced adoption. The government will start supporting citizens in need by only giving them stimulus payments through a wallet controlled directly by the central bank. The central bank will essentially be able to eliminate commercial banks, that are currently the middle man between the central bank and the citizens.
For governments, it will simplify many things: If they decide to change interest rates, they will be able to act on it directly, rather than wait the several months needed for commercial banks to implement this in their systems. They will also be able to control directly the interest rates based on a person's profile or a business' profile and will be able to set expiry dates on people's money, forcing them to spend and not allowing them to save.
The control CBDCs provide to Central Banks on our monetary system is why they are interested in them. But CBDCs are not an invention from the central banks
CBDCs are inspired by digital currencies, also called cryptocurrencies. And governments plan on using the same technology, called blockchain.
Blockchain was first invented with the creation of Bitcoin, and has proven to be a secure form of data management, while being robust to any changes to the protocol. Its way of working is simple: if Lucy, using her bitcoin address, makes a transaction to John, a hash of this transaction is created and added to a block. This block contains all of the transactions that happen within around 10 minutes. All the transactions within this block need to be verified, and it will be done automatically by the computers that are connected to the network specifically for this purpose. They are called miners. Miners work to verify the block. This is done by using the history of all the previous blocks, that will confirm whether Lucy actually has the Bitcoin that can be sent to John or not.
The first miner to complete the block verification will append the verified block to the previous one, continuing the chain of blocks. For this work and energy used, the miner will be rewarded in Bitcoin, directly added to his wallet. The reward comes from two sources: transaction fees that are paid by users using the network to send Bitcoin, in this case, Lucy. And for what is called the block reward, which is a reward given to miners of newly created Bitcoin. This is the only way new Bitcoins can be added to the network. Unlike fiat currencies such as USD and EUR where a button can be clicked to increase the monetary supply. Every 4 years, as part of what is called the Bitcoin halving event, the amount of new Bitcoins produced is automatically divided by 2. As of May 2020, this reward is of 6.254 Bitcoin per block. The fact there are less and less Bitcoin produced is an additional incentive for the price to increase, as it becomes scarcer with time and miners need to keep their business profitable and cover for operational expenses, therefore will only sell the new Bitcoin they mined above a certain price.
In the Bitcoin protocol, changes can be made in 2 ways. There is a simple way: called a hard fork. Where someone essentially makes a copy of Bitcoin, makes changes to the protocol and releases it to the world. Miners need to connect to this new network and choose to use this new network over the original Bitcoin network. This was done by projects such as Bitcoin Cash and Bitcoin Satoshi Vision that were trying to solve what the founders thought to be "problems" in the Bitcoin network.
Since their launch, these projects have failed compared to Bitcoin, losing value against the first cryptocurrency, because the people that are positioned in Bitcoin didn't want to transition. This reluctance was mostly due to one reason: decentralization. Decentralization in Bitcoin is the fact that noone controls the network. It is an open, secure network, controlled and improved by every participant. In projects like Bitcoin Cash, the number of participants being much lower than in Bitcoin lowered the security. Bitcoin Satoshi Vision is a great example as it was the victim of a 51% attack in 2021.
The second method to make changes is called a soft fork. In a soft fork, changes are made to the protocol, and need to be accepted by the majority of miners. To do so, miners simply decide whether they want to upgrade to the new protocol and update their machines. And eventually, if approved by the majority of miners, at a predetermined block number, the changes will be made official and this is how miners will verify blocks from that point on. Unlike many other protocols, every change that is made to the Bitcoin network needs to be backwards compatible. This means that if someone holds bitcoin, their Bitcoin will still be valid after the changes. Other networks may be easier to change, but won't be backwards compatible and will often require holders of the coin to transfer their coins to platforms that will accept the changes before a certain date or risk losing everything.
The fact Bitcoin is so difficult to change is one of the reasons that make it a great asset for the long run. Buyers know what they are buying and they know that the asset will remain the same. No other asset in the world provides this level of security. Other cryptocurrencies have been created, but were created by a group of people that still control the network and will make changes to profit themselves.
Ethereum for example, the second biggest cryptocurrency by market cap, is still controlled by the same team that created it. These people control the network and promote the network in order to bring unexperienced and non-technical investors that don't understand what a lack of decentralization means for the future of cryptocurrencies. The Ethereum network aims to change the way the protocol works. These changes will allow miners to mine only if they have locked 32 ether beforehand. Anyone can mine Bitcoin, but to mine Ethereum, you will soon need to be part of the few in the world that can afford to buy 32 ether. This will make Ethereum just as good a currency as a fiat currency, because the decisions of a few will impact the masses.
These same people will say that Bitcoin lags behind other cryptocurrencies. They will argue that Bitcoin is too slow, transactions are too expensive and that it cannot scale to be used as a global currency. They will also leverage the reasons used by governments or mainstream media such as the energy consumption of the Bitcoin network. Their goal behind this is to use the name of Bitcoin as a promotional tool to highlight the so-called benefits of their projects. This is due to a lack of understanding of what can be done with Bitcoin.
A second layer to the Bitcoin network, called the Lightning Network, is growing very quickly and is, as of now, Bitcoin's best scaling option. It allows to make transactions off the Bitcoin blockchain, using a secondary peer-to-peer network. When a user puts his Bitcoin on the lightning network, he can open up payment channels with people, for example a coffee shop to order coffee. After the channel is open, this user gets access to all of the payment channels this coffee shop has, and beyond. It allows to perform transactions with anyone that is tapped onto the network. What's more, because this doesn't happen directly on Bitcoin's main blockchain, all the transactions can be settled instantly, and for almost zero fees. Only once users decide to close their payment channels and take their Bitcoin back from the Lightning Network onto the main Bitcoin blockchain, will a transaction be made. Bitcoin's first layer is then used as a reconciliation tool for all these smaller transactions.
In a future where Bitcoin is used daily, you can think of the Lightning Network as the network used for day to day expenses and to perform free, instant international transfers, while the Bitcoin network is the settlement layer that could be used for bigger transfers that need to be recorded publicly, such as settlements between commercial banks or even central banks and governments.
Bitcoin's main layer is also described as being very energy consuming. And it is a fact that at its highest, in May 2021, the Bitcoin network was using as much energy as what the entire country of Sweden uses.
Although this seems like a lot, we need to break down what this energy is, where it comes from, and how this trend is evolving, including where the big miners are transferring to in order to lower their costs and environmental impact.
First of all, it is important to understand how a miner business is setup. These miners are businesses, the more important ones today being international companies listed on stock exchanges. Setting up a mining business requires the purchase of hardware, the ASIC computers needed to tap into the Bitcoin network and start mining, as well as real estate, to store all of the miners. Wherever miners are around the world, the prices for these two elements will often be similar. Of course, better deals can be negotiated, but given the price of electrical components and supply chain costs, this isn't where miners will often gain an edge over their competition. What matters most to miners is energy.
The cost this energy represents for companies is the only thing that allows them to have a competitive advantage over their competition. They need to drop this cost in order to make the most from their miners. It is in many ways the most competitive business that exists today, because this is the single most important factor for their profitability. Cheap energy can be found from 2 sources: green energy and wasted energy.
The energy we produce is always in excess. We never consume 100% of the energy produced by power plants, because it would put communities at risk of having blackouts. In the US, it is estimated that 5 to 6% of the energy produced is lost when it is in transit. Which is around 211 TWh. This amount alone is close to double what Bitcoin was consuming at its all time high (5% of the 4225 TWh/year used in the US = 211.25 TWh/year of lost energy vs Bitcoin's 133 TWh/year).
Nowadays, governments are pushing for the adoption of solar and wind power and decide to crackdown on nuclear. Unfortunately, although on paper this sounds positive, there are adverse effects to this. With our current technologies, the energy produced cannot be stocked, therefore the energy from solar and wind can only be produced when it is sunny or windy. This makes it very unreliable and requires backup power plants to be present and active on a daily basis to cover for this lack of energy.
This really is an adverse effect, because Germany for example, the biggest adopter of solar and wind in Europe, is now back to producing the same amount of Co2 levels as it was producing 20 years ago. Green policies around the world have stopped the adoption of nuclear power plants and have indirectly forced the world to consume more natural gas than it used to. Natural gas comes with its own set of problems.
Just like other energy sources, natural gas is produced more than it is consumed, which leads to flaring. Flaring is simply the excess gas that is extracted that needs to be burned. It is a standard and necessary habit in the industry. In 2019, it is estimated 150 billion cubic meters of natural gas was flared in the world. This is the same amount as Japan and Korea imported that same year. All gone, in the air, producing approximately 300 million tonnes of Co2, the same as the total annual emissions of Italy.
In order to lower their cost in energy, Bitcoin miners are directly connecting to these sources of energy that, until now, were inaccessible. Because bitcoin miners can be placed anywhere in the world, without the need of being close to communities, they are already tapping directly into this energy because of the attractive prices they can negotiate with the producers, using energy that would otherwise be flared, or would be lost due to transit. They also have access to more distant natural sources of energy that cannot be used by communities. This is the case of hydro power plants, geothermal energy and even new ideas that are being developed, like getting energy from volcanoes.
The more time passes, and the more these businesses grow, the more they will transition to these sources of energy in order to increase their profits. Other businesses are working on inovating our energy production to service miners, allowing them to have clean and cheap energy. The long term positive effects the adoption of Bitcoin could have on our energy production is largely underestimated and even silenced by governments and other mainstream medias.
Bitcoin was created by a person or a group of people under the alias Satoshi Nakamoto. They wrote the whitepaper, built the network, released it and exchanged in discussions on many forums before one day, disappearing. A genius unknown person put together technologies and encryption protocols in a new way, forming the ultimate currency, and then did the most noble and important step of all: disappeared. One day, he stopped writing on forums and he stopped making changes to the network. It was taken over by the community and until this day, still is. Anyone can participate in improving the network, whether it is through translations, code reviews or by building applications that add functionality to Bitcoin. But only the Bitcoin Core team can actually make changes to the Bitcoin network.
This is why Bitcoin is said to have been created by the people for the people.
Bitcoin is said to be the hardest money in the world, because the rules are set when it comes to the maximum supply and how this supply is distributed and emitted. We have seen earlier that a certain number of Bitcoin is produced with each block, well, there is a maximum amount of Bitcoins that will ever be mined. It is estimated that around the year 2140, all 21 million Bitcoins will have been mined.
There will never be more than 21 million Bitcoins. We know this because it is programmed, and that changes to this maximum can only be done if the majority of miners were to accept this change. Since these miners are spread all around the world, are anonymous and do not coordonate their actions, their incentives won't align and this change will never happen. This 21 million Bitcoin maximum makes it the scarcest asset on earth.
In times of uncertainty, whether geopolitical or financial, this is the type of assets that investors turn to. Historically, it has been gold. Gold has been great to hold value in time because it is durable and scarce but the problem with gold has always been that it is hard to move in space. People can sell all their belongings, buy gold and leave their country. But the simple fact they are transporting gold will be a problem. Governments can find it, stop them, fine them and arrest them for trying to exit with all their wealth. Gold is physical, it has always been controlled by governments and the price has been manipulated.
To this day, gold can only be traded on the markets during weekdays, because some people have decided this. With Bitcoin, no-one can make such decisions, inidividual exchanges could, but would be losing against their competition. Governments have no way of knowing whether people own any. It is the safest way to hold wealth, that is native to the internet, therefore is available always, everywhere. No asset in history has ever been this easy to acquire, allowing anyone with an internet connection to tap into the network, anonymously, and be able to access their assets the same way, regardless of their geographic location, again, anonymously.
This is scary to governments. They understand that if people step away from fiat currencies, new debt, that is necessary to generate inflation and to devaluate currencies, won't be created following the same rules. This puts their and their elite friend's entire status quo at risk.
So, naturally, governments are already taking some steps to push forward their digital currencies before citizens have the chance to adopt other digital currencies like Bitcoin. This is the case for China in 2021. In order to make sure their citizens don't adopt Bitcoin and understand its benefits before their digital Yuan is fully released and adoption has started, China has blocked any Bitcoin mining in the country and has blocked all crypto trading platforms from operating. Other countries are also starting to take action against cryptocurrencies. The UK has banned ads promoting bitcoin and has forced banks to block transfers to cryptocurrency platforms, using the argument that crypto assets are a big financial risk for people. Since when can't people decide for themselves what they do with their hard earned money?
The reason they want to ban Bitcoin is because they know the power that it has, and they know that it would take this power away from governments. As long as governments control the money, they can make decisions that citizens don’t agree with, or don't realize will have an impact on them, whether direct or indirect. As long as governments control the money, they can continue their monopoly on violence.
Bitcoin was created 12 years ago, after the global financial crisis, as a solution to the financial problems that exist in our economy and to eliminate entirely the abuse people can have on our monetary system. Saifedean Ammous says it:
"It's important to understand that the fiat system was not a carefully, consciously, or deliberately designed financial operating system like bitcoin; rather, it evolved through a complex process of compromise between political constraints and expedience."
Bitcoin is a real asset and it is here to say. And its maximum cap of 21 million makes it the scarcest asset on earth, and ultimately, the most attractive asset. Money managers now invest in it and praise it, countries are adopting Bitcoin and commercial banks as well as payment systems are not integrating Bitcoin wallets.
Due to Central Bank Digital Currencies elimitating the middle-man that are commercial banks between central banks and citizens, and this new decentralized and uncontrolled system eliminating the need people have for banks, they will have to adapt. Banks will need to adopt this new technology and offer new financial services around it if they want to remain relevant to their clients.
Today, the financial markets are at all time high valuations, this is a bubble that will eventually burst. This money, once it exits the markets, as it tends to do when there is a financial crisis, will need to be held somewhere. It won't be cash, for all the reasons we gave in the earlier parts of this article, and it won't be bonds due to the lack of trust in governments. It will likely be directed to Gold or other hard assets like Bitcoin.
The trend in the recent years is that gold has not increased in value and a lot of gold investors are transitioning to investing in Bitcoin because it follows the same hard asset rules, but with greater impact and growth potential.
No other asset like this one has existed before, that marries our technological progress with our financial systems. It is time for people to have a currency that is as open and anonymous as the internet. With Bitcoin, the control of money is taken away from governments and given back to the people. This removes huge power from the governments and their leaders that have had countless issues with corruption, abuse of power, or limiting our freedom.
We've seen that our financial system needs a reset, and the only solution governments have is to print trillions more, devaluating our currencies in the process. Along the way, they will continue to make people more dependent on governments because welfare spending has to increase to cover their irresponsible money management.
This provides goverments with a snowball effect loop of inflation, leading to a poorer population, leading to more welfare spending, leading to increased government control.
Bitcoin is the way out of their controlled system that favors only the wealthy and the elite. It is also the first time, due to the incentives these people have for Bitcoin to never succeed as a currency, that average people can front run them and grow their personal wealth first, before these people, that consider themselves the elite, have a chance to do so. Bitcoin is slowly taking over the world and will absorb a large amount of the money currently stuck in our legacy financial system. Do you really want to be left behind with them?