BitMEX CEO: Bitcoin hashrate may drop by 30% to 35% after halving, target price at $20,000 by the end of the year

Note: The original author is BitMEX CEO Arthur Hayes, who assessed the impact of the COVID-19 pandemic on the global economy and financial markets, and predicted that after the Bitcoin halving, the computing power of the entire network will drop by about 30%-35%, while his expectation for the Bitcoin price by the end of 2020 is still $20,000.

Inflation is coming

Summary: We assess the impact of the COVID-19 pandemic on the economy and financial markets. This event will mark a major economic regime change, from monetary policy to central bank-funded fiscal expansion. Ultimately, there will be a clear winner in this new regime: inflation. The economic situation may look like the 1970s, and financial markets will have a hard time tolerating such regime change and inflation. In this environment, Bitcoin can have the greatest opportunities in its life cycle.

(Image modified from HBO's Game of Thrones: "Winter is Coming – House Stark)

Central Bank Digital Currency

Summary: We analyze the idea of ​​central bank digital currencies (CBDCs). We divide the concept into two distinct ideas: i) banning physical cash, and ii) allowing retail customers to deposit money directly with the central bank. We conclude that, while the two policies are complementary in some respects, they produce very different economic consequences. The former would promote credit expansion, while the latter would lead to credit contraction. Due to the deflationary nature of allowing the public to hold electronic deposits with their central banks, we believe that financial regulators are unlikely to allow these CBDC initiatives to succeed in any meaningful way.

Who is funding Bitcoin development?

Summary: We compiled a list of the main organizations and individuals funding open-source Bitcoin and Lightning Network development. Based on the data we collected, Blockstream and Lightning Labs are the largest contributors to open-source development in the space, while Chaincode Labs is currently the largest contributor to development in terms of contributions to Bitcoin Core. We concluded that the situation is healthier than it has been in the past in terms of funding availability, transparency, and the degree of distribution among funding supporters.

Mining Incentives: The Impact of Halving

Summary: We evaluate the impact that the block reward halving event, which is happening in a few weeks, will have on the Bitcoin mining industry. Assuming a constant Bitcoin price and excluding the impact of transaction fees, mining revenue should drop by about 50%. However, this may not be the case for network hashrate. The drop in network hashrate depends not only on the drop in block rewards, but also on the interaction between the difficulty adjustment mechanism and the mining structure. Based on the current industry structure, and assuming a constant Bitcoin price, we predict that the halving could result in a 30%-35% drop in Bitcoin network hashrate.

Shazaam! You snap your fingers, the coronavirus is gone, you can exit lockdown and get on with your life. How do you feel? Are you as optimistic as you were in January? Do you trust the government to tell you the truth in a timely manner, or will they just churn out statistics when it suits them? Will you trust the media to speak truth to power? Will you frantically wash your hands every hour, or will you haphazardly touch your eyes, nose and mouth?

Assuming that once we get out of this, and you can honestly say that everything is back to how it was in early January of this year, we will likely experience a V-shaped economic recovery. But, as I believe, if your worldview has fundamentally changed, then the assumptions that underpin your life have also changed dramatically. When we consider the most important price, the price of money, and its nature, it becomes critical to predict the collective assumptions that we believe in.

Money, real money divorced from industrial usefulness, is nothing more than a fiction that allows us to efficiently exchange labor and capital to produce real goods and services. Without this fiction… the conveniences of modern society would cease to exist. There are three popular monetary fictions whose relationship to each other will completely change after COVID.

Government fiat currency, aka the US dollar = fantasy + violence

We know the dollar is valuable because owed contracts and taxes will be collected at the barrel of a gun if necessary. The dollar's value is derived from the firm belief that the United States can pay off its debts by raising taxes.

Gold = imaginary thing + material scarcity

Gold has no widespread industrial uses, it is just that it is shiny, physically scarce, malleable, and has attracted human attention for thousands of years, and therefore, it has value.

Bitcoin = Hypothesis + Cryptographic Scarcity

The reason why Bitcoin is valuable is that its open source code is run by many people, who ensure that the total amount of Bitcoin is only capped at 21 million BTC, so it is valuable.

After the senseless destruction of human life in World War II, the victors gathered at the Bretton Woods Conference and established the modern financial system based on the US dollar. And today, we are still ruled by the US dollar.

Until 1971, the value of the dollar was tied to gold, at $35 an ounce, and Tricky Dick (Nixon) wanted to go to war while handing out gifts at home. "Free Shit, Vote for Me!" was the best way to win any election. But, he couldn't stand gold, so he broke off the relationship. From that point on, the value of the dollar was completely dependent on trust.

Fast forward to January 2020, and the United States has the most liquid financial market in the world, fully open to all capital. All major commodities and trade are denominated in US dollars. Therefore, if you are a country or company doing international business, you must use these US dollars.

When the beat is strong, it's great for everyone. The Fed has a global obligation to keep a good, cheap supply of dollars. That's why they have swap lines with major central banks. The world is short of dollars, and only academic-looking Fed governors can provide them.

Countries and corporations can easily earn dollars by selling gadgets to wealthy Americans. 70% of US GDP is driven by consumption, it makes the world go round, hundreds of millions of farmers are lifted out of abject poverty so they can produce cheap iPhones, AirJordans or F150s, all so that the parent company "USA" can enjoy record profit margins.

Europeans aren't far behind in consumption, and Europe and the US combined represent the global demand for goods. Without them, who would buy this shit at the crazy markups?

After a 100-year hiatus, Deng Xiaoping's southern tour unleashed China's power on the world. Having gained considerable wealth from the transfer of manufacturing from the West to the East, they began to power the luxury goods, tourism and education sectors.

Sorry, I'm not a modern-day Thoreau, and I certainly don't live by a pond. To put it simply: what China is selling, Americans and Europeans are exchanging for dollars.

Oh, the coronavirus... China stopped producing things to fight the virus, which meant no dollar income, and then the Americans and Europeans took advantage of it and closed their channels, meaning no more demand.

Once China "opens" for business again and starts making stuff, there will be no orders from the West because they are all at home watching PornHub or ordering from GrubHub. If they don't want to die, they will worry about when the next paycheck will come to pay for expensive medical care. The moral of the story is that China can't make dollars.

They are not alone, no major manufacturing or service center earns dollars, but they need dollars to pay for raw materials and to service dollar debts. It would be outrageous if their central bank could print dollars, but, my goodness, they can't.

A mini currency collapse occurred in late March, and the Fed responded by offering swap lines to more central banks, but excluded China. That relieved a little bit of pressure, but look at the CDX EM HY CDS spread, it looks like a West Hollywood bouffant.

Conventional wisdom is that the Fed can keep printing money until the dollar becomes cheap enough. But US banks tend to hoard dollars and refuse to lend them out. There are all sorts of regulatory reasons why they can't do that, and why they would want to take a chance during a global depression. To be safe, it's better to make sure your balance sheet is rock solid.

Simply put, the Federal Reserve can print as many dollars as it wants, but the companies and countries that need them most cannot get them, and one of the most important countries is China.

And no country other than the United States can choose to devalue its currency to the extent necessary to generate a certain level of economic activity. Remember, all raw commodities are priced in dollars, and if you print too much money and fail to monetize government debt, inflation will be rampant. At this point, the Jacobins will flood the streets, and you'd better not show off your wealth in front of them.

That sums up how I see the next decade. I have no idea when exactly, but a strong dollar will break the back of the global economy and force a reboot. The question is, what will the new system look like?

You can get a peek into my soul through my portfolio:

1. Buy USDCNH 2-year call option with target price of 8.00

2. Buy USDKRW 1-year call option, target price 1600

3. Long CDX EM CDSI Sprd (I haven't opened a position yet, but I'm waiting for the market to rebound)

Central banks will devalue hard digital assets. I don’t know what digital assets are, but they may be related to Bitcoin.

The era of the US dollar is over, and it's time to find a new spiritual pillar.

So do you believe in physical or cryptographic scarcity?

Traditionally, when the dollar strengthens, investors expect gold or Bitcoin prices to weaken, but trust in the dollar eventually fades. Gold is the best choice historically, and it is widely owned by central banks. The best way to devalue a currency is to let the price of gold reach extremely high levels. This happened during the oil crisis in the 1970s, when the Federal Reserve raised interest rates to a level where it became stupid to own gold when you could get a 20% return on your investment in U.S. government bonds.

And this time, the Fed can’t raise rates. That would destroy the finances of the US government, which has to provide benefits to everyone. American voters will not tolerate another bailout specifically for financial services. They will be paid to sit home, watch NetFlix (aka “Tiger King”), and avoid launching a modern-day whiskey riot with assault rifles.

So with the Bretton Woods system broken, there is no alternative asset to lure people away from gold. The stock market in the land of the free will become a political tool. The U.S. Treasury, backed by the Fed, will buy all government and corporate debt. They will buy stocks, they will buy consumer loans. You might think that if the government buys an index, stocks would be a good place to be. But let's think back to the Nikkei in 1989. The Bank of Japan currently owns over 30% of the Japanese stock market, and the Nikkei is still 50% below its peak. I'm just trying to illustrate this with the Bank of Japan's balance sheet...

The once mighty US stock market will become a corral for zombie mega-corporations that are inextricably tied to the US taxpayer. This wouldn’t be so bad if inflation was contained. However, as the world recovers, we have an unlimited supply of fiat chasing a limited supply of real goods. Small and medium-sized enterprises make up 60%-80% of most countries, and these companies pay a high price to get credit, even if they can, due to their small size and limited connections. Even with all the well-intentioned government SME loan programs, a large portion of SMEs will no longer exist when they can actually get funding. Because complex systems cannot recover in a linear fashion.

So unlimited fiscal and monetary aid will chase nonexistent supply, which will lead to inflation. Global stock markets will also become a political tool rather than an efficient allocator of capital. This will send the wrong signals and produce the wrong products. Can those who follow fashion tolerate a $40 toast that is crushed?

Gold, the best inflation hedge human civilization has ever seen, is about to be repriced. If you believe in illusion + physical scarcity, that it is the only thing you have worth having, how high can it fly? It depends on the ratio of total credit to base money, which can serve as a guide to where gold may go in the future.

Another possible outcome is the creation of a digital financial system that is not dominated by the US dollar.

“If they dare to stand before the citizens and defend the [dollar] standard as a good thing, we will fight them with all our might, with the productive masses of the world at our back. With the interests of business, the interests of labor, and the whole working people behind us, we will say to them, do not press this crown of thorns on the brow of labor, you shall not crucify humanity on the cross of the dollar.”

— If Satoshi Nakamoto gave a speech at the 2020 Democratic National Convention

Will a group of central banks use a form of digital cryptocurrency to reset the monetary base? Maybe. Will a basket of digital fiat currencies emerge to allow central banks to hold sufficient amounts of gold? Maybe.

All I know is that Bitcoin is the hardest digital currency, bar none. All forms of trust have evaporated. To address the destruction of demand and supply, governments will embark on the largest fiscal stimulus the world has ever seen. It will not be paid for through tax receipts, nor will it be paid for by printing presses because 30% of the population is unemployed. More importantly, in order to get money directly to the people, governments will have to digitize their currencies. This will educate the populace to use digital currencies. Once they understand legal digital currencies, they will seek out hard versions to avoid the ravages of inflation.

Related:

In a global margin call storm, the market will find leverage and punish it, and all liquid assets will be sold to finance illiquid assets.

In this storm, correlation = 1.

The reason every asset class is taking a hit is because weak-hand investors use leverage to enhance their short-volatility strategies.

BitMEX open interest was cut in half, and leveraged traders suffered liquidations. Like every other asset class, leverage was penalized. However, Bitcoin still outperformed the S&P 500 in Q1 on a relative basis, and its correlation with the SPX reached a local high.

Leverage was partially wiped out when the market fell, BitMEX XBTUSD open interest is slowly rebuilding, and as traders find support and inflation expectations adjust, the search for a hedge against inflation will begin in earnest.

This is the first act of global rebalancing. The price distortions brought about by leverage will be exploited. Whether you win or lose, the consequences will be at your own risk.

Bitcoin will be owned by the unleveraged, and will it go back to $3,000? Absolutely possible, and with the S&P 500 testing 2,000 again, expect all asset classes to vomit again. However, my price forecast for Bitcoin by the end of 2020 is still $20,000.

Everyone knows that this transition is imminent, which is why central bankers and politicians are throwing all their tools at this problem. I will reiterate that this is about inflation, as more fiat money will chase a unit for a reduced supply of real goods and labor. There are only two things worth owning during the transition to the new system, and that is gold and Bitcoin.

If you think I’m full of shit or that I’m a complete doomsayer, remember your perspectives before and after COVID. Is your mental model still stuck in January 2020?

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