Arthur Hayes, co-founder of cryptocurrency exchange BitMEX, recently offered a comprehensive analysis in his latest article. rehearsal“Zoom Out,” which draws compelling parallels between the economic upheavals of the 1930s-1970s and the current financial landscape, focusing specifically on the implications for the bitcoin and cryptocurrency rally. Its in-depth analysis suggests that historical economic patterns, when properly understood, can provide a blueprint for understanding the potential recovery of the bitcoin and cryptocurrency rally.
Understanding financial cycles
Hayes begins his analysis by exploring the major business cycles, from the Great Depression through the economic booms of the mid-20th century to the stagnation of the 1970s. He categorizes these transformations into what he calls “local” and “global” cycles, which are critical to understanding the broader macroeconomic forces at play.
Local cycles are characterized by an intense domestic focus, in which economic protectionism and financial repression prevail. These cycles typically arise from government responses to severe economic crises that prioritize national recovery over global cooperation, often leading to inflationary outcomes due to devaluation of fiat currencies and increased government spending.
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Global cycles, by contrast, are marked by periods of economic liberalization, in which global trade and investment are encouraged, often creating deflationary pressures due to increased competition and efficiency in global markets.
Hayes carefully examines the impact of each cycle on asset classes, noting that during local cycles, non-fiat assets such as gold have historically performed well due to their nature as hedges against inflation and currency devaluation.
Hayes draws a direct parallel between the creation of bitcoin in 2009 and the economic environment of the 1930s. Just as the economic crises of the early 20th century led to transformative monetary policies, the 2008 financial crisis and subsequent quantitative easing set the stage for the introduction of bitcoin.
Why bitcoin's bullish rally will resume
Hayes argues that bitcoin’s rise during what he identifies as a renewed local cycle, characterized by global recession and major central bank interventions, mirrors past periods when traditional financial systems were under pressure and alternative assets such as gold rose to prominence.
Expanding on the analogy between gold in the 1930s and bitcoin today, Hayes explains how gold served as a safe haven in times of economic uncertainty and rampant inflation. He posits that bitcoin, with its decentralized, state-independent nature, is well suited to serve a similar function in today’s volatile economic climate.
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“bitcoin operates outside of traditional state systems and its value proposition becomes particularly evident in times of inflation and financial repression,” Hayes notes. This characteristic of bitcoin, he argues, makes it an indispensable asset for those seeking to preserve wealth amid currency devaluation and fiscal instability.
Hayes points to the significant increase in the U.S. budget deficit, projected to reach $1.915 trillion in fiscal year 2024, as a modern indicator that parallels fiscal expansions in previous local cycles. This deficit, significantly higher than in previous years and marking the highest level outside of the COVID-19 era, is attributed to increased government spending similar to historic periods of government-induced economic stimulus.
Hayes uses these fiscal indicators to suggest that just as past local cycles led to higher valuations of non-state assets, current fiscal and monetary policies are likely to enhance the attractiveness and value of bitcoin.
“Why am I confident that bitcoin will regain its power? Why am I confident that we are in the midst of a new mega-local, nation-state-first inflationary cycle?” Hayes asks rhetorically in his essay. He believes the same dynamics that drove the value of assets like gold during past economic upheavals are now aligning to bolster bitcoin’s value.
He concludes: “I believe that fiscal and monetary conditions are loose and will remain loose, and therefore holding cryptocurrencies is the best way to preserve wealth. I am sure that today will rhyme with the 1930s to 1970s, and that means that since I can still freely move from fiat money to cryptocurrencies, I should do so because a devaluation is coming through the expansion and centralization of credit allocation through the banking system.”
At the time of writing, btc was trading at $62,649.
Featured image from YouTube / What bitcoin Did, chart from TradingView.com
