2022 – Bitcoin and Global Risk
By analysing global risk and the geopolitical landscape in 2022, we provide insight into Bitcoin’s development. As the year begins, global stability is fragile and intertwined risks exist in every region of the world. Bitcoin, in our opinion, is the best store of value, especially in times of economic and geopolitical instability. The transition to a monetary system based on Bitcoin would also mitigate the risks created by a broken global monetary order and lead to a more stable and peaceful community of nations.
In 2020 and 2021, the world’s central banks tried to combat the economic effects of the pandemic by using all the policy tools at their disposal. They recklessly injected enormous quantities of liquidity into the world’s economies by lowering interest rates, initiating massive quantitative easing programmes and reducing, or even removing, the reserve requirements of commercial banks. These measures created very predictable, and very damaging, inflationary and hyper-inflationary pressures.
One of the many sectors affected by inflation was the energy sector. The price of oil jumped over 60% last year, going from ~$53 a barrel, in January 2021, to ~$86, in January 2022. Many predictions now see oil reaching $100 a barrel in the very near future. The price of natural gas, for its part, increased over 66% and coal was up a whopping 160%. In some countries, these rising prices have already led to violence.
On 1 January, the Kazakh government announced it would abolish price caps on the energy sector. This led to the instant doubling of the price of liquified natural gas (LNG). LNG is used as a cheap fuel alternative for the most economically deprived. The dramatic price increase triggered a wave of violent protests underpinned by wider discontents regarding economic inequality and corruption. Protests spread across the country, which led to the burning down of government buildings, tearing down of statues and occupation of airports. The clashes forced the country’s police forces to use live rounds, stun grenades and tear gas, which led to police defections, an estimated 10,000 detained and over 200 dead.
In addition to fomenting social unrest, rising energy costs affect the global balance of power. Energy-producing nations gain leverage over energy-consuming ones. This is part of the impetus behind Russia’s renewed hostility against Ukraine. Rumours regarding Ukraine’s membership of NATO led Russia to deploy 120,000 troops on the northern and eastern borders of Ukraine and issue a stern ultimatum regarding the security arrangements of Western powers.
As the situation with Ukraine escalated, Russia’s attention momentarily shifted eastwards due to the problems in Kazakhstan. The disorder forced Russia, through the Collective Security Treaty Organisation (CSTO), the post-Soviet equivalent to NATO, to intervene. Despite their eventual withdrawal, Russia blamed foreign intervention for the trouble and further hardened their tone, with regards to Ukraine, during diplomatic talks in Geneva. The risk of war with Ukraine thus remains very high and appears to be increasing. Renewed rumours of a Russian crypto ban make sense in this context, as the Russian government would be trying to prevent all avenues of a capital flight in the event of war and severe economic sanctions.
As the inaugural geopolitical event of 2022, the situation in Kazakhstan is important for a number of reasons:
- It shows the real-world impacts of inflation, as people took to the streets to protest the impossible living conditions created by it. This violent social unrest may spread to many other places around the world.
- Spiking energy prices have emboldened Russia and may embolden other energy-producing nations.
- Kazakhstan is home to 40% of the world’s uranium reserves and 3% of the world’s oil.
- It has further entrenched Russia against Western powers thus increasing the chance of conflict in Ukraine.
- The situation may spill over to other regions including Belarus and Russia itself. Just as the colour revolutions spread across the former Soviet Union in the early 21st century, successful uprisings could spread again.
- Russia may use the same excuse it used to enter Kazakhstan, to enter other regions including Ukraine. Namely, the re-establishment of order.
We believe Bitcoin is the best store of value in times of rising geopolitical risk and inflationary chaos. In addition, a monetary system based on Bitcoin would tackle the root problem of the issues described above. Extreme inflation would be nullified by the establishment of a system based on sound money. A reduction in inflation would reduce the potential for extreme income inequality. These dynamics would lead to a far lower probability of incurring social unrest. A deflationary system based on Bitcoin would also mitigate the sudden geopolitical power imbalances caused by the empowerment of energy-producing nations.
The situation in Kazakhstan also affected its burgeoning Bitcoin mining industry. It had greatly benefitted from the Chinese mining ban and, at its height, accounted for up to 8% of the country’s energy. The latest bout of violence and the surge in energy prices, however, has severely endangered its prospects there. As testament to the robustness and dispersion of the Bitcoin network though, the hash rate has reached new heights. The Bitcoin network is clearly immune to localised problems and remains unstoppable.
Beyond Eastern Europe and Central Asia, there are numerous geostrategic tensions, which may erupt into open conflict in 2022. A number of factors may push nations to pursue their foreign policy goals more aggressively this year. These include the need to distract from internal problems such as inflation, taking advantage of a perceived international vacuum of power left by the US withdrawal from Afghanistan, the US’s reticence to enter an armed conflict ahead of its midterm elections and the empowerment of commodity-producing nations.
Under similar pretence to Russia entering Kazakhstan, China may finally invade Taiwan, as it has aspired to do since 1949. In October 2021, President Xi Jinping publicly stated that the “historical task of the complete reunification of the motherland must be fulfilled, and will definitely be fulfilled”. Force was not ruled out and 2021 witnessed a record number of Chinese aerial incursions into Taiwan’s air defence zone. As China intensified its sabre-rattling, Taiwan, for its part, increased spending on military equipment.
China, like Russia, will have to determine the probability of US military intervention in a midterm-election year and the impact of potential economic sanctions. Beyond electoral constraints, the US will have to consider the consequences of inaction with regards to its strategic interests in the western Pacific. The other major strategic dimension to a potential conflict in the region is that Taiwan is the largest producer of computer chips in the world. A supply shock created by a military conflict would make chip prices spike and a successful invasion would put China in control of yet another strategically important global industry.
North Korea will probably continue flexing its ballistic capabilities, as it has already done four times in the first half of January. This renewed ballistic threat may amplify throughout the year and bring the Korean peninsula dangerously close to war. The perception of the US being on a foreign-policy back foot, coupled with internal economic disaster, will embolden North Korea. A conflict between the North and South would drag in a number of international players and could involve the deployment of nuclear weapons.
Sensing renewed strength in this geopolitical context, the Iranian government has already taken an uncompromising stance regarding US overtures for a new nuclear deal and has accelerated its enrichment efforts. This has, and will, in all likelihood, push Israel to take action. Both sides will likely sharpen their tone in 2022, thereby increasing the chances of an overt conflict. In case of conflict, Iran could resort to a closure of the Straits of Hormuz, which would cause oil prices to reach new heights, economies to grind to a halt and financial markets to collapse.
The US’s hasty withdrawal from Afghanistan has also increased the risk of international terrorism. This may lead the US or another country to re-intervene, which would lead to further decades of violence in Afghanistan and could spill over into neighbouring Pakistan and Iran. The threat of rising violence and terrorism also persists in the Sahel, which is reaching its tenth year of conflict. Attacks have increased in the region and expanded their reach. A coup took place in Mali in May 2021, one was attempted in Niger and another took place in Burkina Faso in January 2022. Whereas the conflict has not grabbed many international headlines, it is estimated that over three million individuals have been displaced. The situation threatens to further spiral out of control and spill over into other regions.
As the price of gold has become unresponsive to global events, we believe that Bitcoin will keep gaining market share as the world’s preferred safe-haven store of value and will increasingly become the preferred hedge against global instability, inflation and geopolitical risk. The presence of heightened geopolitical risk will thus naturally drive increasing adoption of Bitcoin, as people will look for the best ways to preserve their wealth. The gradual transition to a system based on Bitcoin, furthermore, can mitigate the source of many of these potential conflicts. A deflationary system based on Bitcoin, would mitigate the impacts of a Taiwanese chip shortage and an oil supply shock. The reduction of extreme price movements in the energy sector would also take leverage away from governments with hostile intentions and encourage diplomacy on a global scale.
There are major macroeconomic risks in 2022. The pandemic has led to an economic slowdown, which governments have made worse with reckless monetary responses. The effect of both the slowdown and monetary policies are still in their infancy. Inflation is just beginning to ravage many parts of the world and almost all industries. The latest US data revealed inflation at a 40-year high of 7% per annum. Gasoline prices were up almost 50%, used cars and trucks over 37% and energy almost 30%. The UK, for its part, released the highest inflation numbers in 3 decades. Many of the most economically vulnerable are struggling to keep up with skyrocketing prices. The first reflex of many governments is to try and cap these rising prices. As a result, many energy firms are already collapsing under the impossible constraints of rising commodity prices coupled with government-mandated price caps. The economic situation will be made even worse by further government intervention.
In a desperate bid to control the inflation they created, central banks around the world have begun a process of monetary contraction. The contraction will be as predictably disruptive as reckless expansion. The Federal Reserve has already announced its intentions to raise interest rates and slow down quantitative easing measures. The expectation is that they will implement these policies more aggressively than they have announced, as inflation is far worse and more widespread than they anticipated. This makes the likelihood of a crash in the financial markets very high. The early signs of this crash were already visible in the first weeks of January and may only be a prelude of things to come. A financial crash may lead to a renewed economic slowdown, as fear will lead to reduced lending and investment. The chances for stagflation (a period of inflation and economic stagnation) are thus increasing. Interest rate hikes during a potential recession will worsen the situation even more and trap the Federal Reserve in a vicious cycle of its own doing.
To offset the effects of an economic slowdown, legislatures will then consider taxation and expenditure measures. The risk is that overtaxation will further slow down the economy and extravagant expenditure will further destabilise public finances. Emerging markets, such as Argentina, will be at particular risk of fiscal collapse, as they will not have pockets deep enough to weather the costs of an economic downturn. This may engender a domino effect of sovereign debt crises and market collapses.
Turkey is already on the brink of a total economic collapse, as the government has mishandled and worsened the country’s existing problems. The inexplicable lowering of interest rates, within a context of high inflation, has only accelerated inflationary pressures, handicapped the Turkish lira and prevented high levels of unemployment from falling. A looming election in 2023 means these reckless policies may continue and expand. Turkey risks entering a hyper-inflationary state with potentially catastrophic consequences for the region. Lebanon is also in the grips of a monetary collapse, as inflation has reached annual levels of over 170%, the population has been locked out of its banks and the local currency has become worthless.
In China, the Evergrande saga is not over and the property market is still at high risk of collapsing. Debt continues to be at unsustainable levels and the country’s major property companies are at continuing risk of default. A debt and property crisis in China would spill over to global markets and create even more instability. As a result of this risk and a broader slowdown, China has been one of the only countries to lower key policy rates in this period. The need for a firm grip over monetary policy may explain the country’s Bitcoin “ban” in 2021. They could not risk capital flight into Bitcoin.
2022 is rife with major macroeconomic risks. We believe the case for Bitcoin will become increasingly clear to more and more people this year. Major economic mismanagement by governments and central banks will push people towards the superior monetary alternative, which is Bitcoin. We are already observing this trend in Argentina, Turkey and Lebanon and expect this to spread and accelerate. Economic downturn and instability will thus naturally push people towards Bitcoin, which we believe will increasingly take gold’s place as the world’s preferred safe-haven store of value.
A widespread economic crisis also reduces the probability that governments will aggressively regulate crypto. It would make little sense to impair a new and thriving industry in the middle of a severe economic slowdown. Thus, despite aggressive talk by certain officials in the EU, regulatory agencies in the US and talks of a White House executive order, the dark clouds of economic uncertainty are unlikely to make crypto regulation a priority or even a desired outcome. This dynamic, when combined with increasing grassroots adoption, could make the sector grow even faster, which would make it harder for governments to try and control. It would not be surprising to see regulatory efforts take a back seat, as legislatures and regulatory agencies deal with the fallout from their central banks’ monetary policies. What is more likely to happen is an accelerated push towards central bank digital currencies (CBDCs), as governments will use them to exert more control over monetary policy. CBDCs are, of course, the opposite to Bitcoin as they lead to further centralization of the global monetary order.
The systemic adoption of Bitcoin would also resolve the root problem of most, if not all, of the issues discussed above. The US’s reckless monetary expansion and contraction would have been prevented, China’s debt problem would have been avoided, as deflation discourages debt, and Turkey’s inexplicable and destructive economic measures would never have taken place. By addressing the cause of these problems, Bitcoin would also quell the resulting social unrest and prevent reckless military expeditions, intended to distract from internal economic mismanagement. A monetary system based on Bitcoin initiates a virtuous economic cycle that brings about positive consequences for humanity.
Alongside the continued risk of the coronavirus pandemic, is the risk that governments pursue zero-covid policies with goals that are impossible to reach. Continuing to impose restrictive measures imperils economic recovery while continuing to infringe on personal liberties. Pursuance of zero-covid targets also results in a severe shortage of labour, which slows down economic recovery and exacerbates supply bottlenecks. Worsening economic conditions and continued restrictions would lead to more social unrest and violence across the world.
Policies to completely eradicate the virus would also result in a further narrowing of the public discourse, as governments, the media and social media would only promote messages that encourage restrictive public health measures. Such a convergence of the public narrative could prove counterproductive and only serve to increase general skepticism regarding the independence of the press. This skepticism would complement increasing skepticism regarding governments’ ability to handle the economy, as described above, and feed into the public’s continued aversion to foreign military interventions. We believe this general loss of trust, regarding the existing system, will drive an increasing number of people towards Bitcoin. This will bring the tipping point towards a Bitcoin-based system ever closer.
Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.