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Bitcoin, inflation, and the big macro picture

Commentaries & Views

The global macro situation is more dynamic than I've ever seen it.

Russia's invasion of Ukraine is clearly a humanitarian disaster. We hope for the best for Ukraine, but as investors we must explore the potentially massive financial implications.

There are a huge number of factors at play, so let's focus on a few key ones.

First, it is critical to recognize that Ukraine and Russia combine to account for 25% of global grain exports. That's 102 million tons per year. Chart viaBloomberg:

Ukraine alone accounts for roughly 50% of global sunflower oil exports. Unsurprisingly, since Russia invaded grain and cooking oil prices have spiked higher. Wheat prices rose to a 14-year high, and hit thedaily up limit 3 days in a row.

The fertilizer situation is of particular concern. Russia is the world'slargest exporter of fertilizer products with a 12.7% share, and itsuspended exports of most fertilizers for two months in early February.

China makes up another 12% of fertilizer exports, and hasalso put severe export restrictions in place until June 2022.

Modern agriculture relies heavily on phosphate, potash, and nitrogen fertilizers. Supply may be about to drop precipitously. The fertilizer must find a way to keep flowing.

The energy picture is potentially most concerning. Russia only accounts for a tiny sliver of U.S. energy imports, but Europe is heavily reliant on cheap Russian gas and oil.

On March 3, 2022,Reuters reported that roughly 40% of EU gas imports come from Russia. In that article Reuters explains some potentially disruptive news: the Yamal natural gas pipeline has apparently stopped. Yamal accounts for roughly 15% of supply to Turkey and Europe.

The flow of energy to Europe is one of Russia's most powerful levers, and the country seems likely to weaponize it.

Russia shut off its airspace to U.S., EU, and allied jets early during the invasion. The Western allies replied in kind.

One result is that a flight from London to Tokyo, which used to take 11 hours, now takes 17 hours in the air, plus an additional stop. The amount of airspace we're talking about here is large. Here's a graphic fromThe Independent.

Unfortunately, inflation seems almost certain to worsen over the short-term.

And dismally, we must consider the possibility that inflation is just getting started. If central banks are forced to crank up the printers to deal with financial fallout, that will likely fuel the flames.

There is hope that diplomatic agreements can be made to avoid the potentially crippling effects of these measures. It is worth noting that U.S. and EU sanctions targeting Russian banksexcluded the ones that Europe uses to pay for energy. So, it's possible that energy and commodities continue flowing out of Russia.

However, we must also take into account that at the moment, Yamal pipeline gas is not flowing. This is a potentially worrying sign. Russia seems likely to continue using access to its energy as a weapon, and any analysis needs to take this possibility into account.

Powerful Western Levers

The U.S. and allies are using incredibly powerful financial levers to punish Russia's aggression. I highly recommend reading this piece inFortune to understand the magnitude of what is occurring.

"On Monday, the U.S., Japan, and the European Unionbarred Russia's central bank from tapping into the billions of foreign reserves Moscow had been saving up in their banks. "

Cutting off a central bank from a portion of its reserves is somewhat of an extreme move. And it appears to be having the desired effect, with the Russian Rublecollapsing 30% since the beginning of the conflict.

The largest Russian ETF, RSX, is down from a 52 week high of $32 to less than $6 as I write this on March 3rd, 2022. Most U.S. brokerages appear to have cut off buying and selling of Russian equities. For its part, Russia has banned selling by foreign investors, and also restricted short-selling domestically, in attempts to stem the collapse.

Financial Chaos Likely

There's no other way to put it. Russia and the U.S. are engaged in a direct financial war, and real combat by proxy.

These events have the potential to rattle global financial markets beyond Russia.

For example, weeks ago, I was pretty sure the Fed wasn't going to normalize interest rates. I feel stronger about that opinion now (read more inThe Fed vs. Bitcoin). I find it hard to imagine the Fed withdrawing support during this potentially chaotic time. They may attempt to raise rates, but I don't expect markets would like it much.

In fact, central banks all over the world may be forced to fire up new QE operations to stave off a debt spiral. And that would be despite spiking inflationary risk.

China is a very important wildcard to monitor. I don't have the expertise to guess what they'll do, but I am learning as much as I can about their options. If this financial war drags on, it seems likely that they may purchase Russian commodities at a discount, where possible.

One big question is, what would China buy those Russian assets with? Dollar? Yuan? Rubles? Gold? A new central bank digital currency (CBDC)? We don't know, but the implications could be significant.

Since the 1970s the vast majority of oil and commodity sales in the world have been conducted in dollars. Over the longer-term, this situation has the potential to reshape a sizable chunk of the global financial system.

And it's clear to me that Bitcoin could play an increasingly important role going forward.

BTC = Sovereign Money

On February 28, 2022, Bitcoin suddenly spiked from around $39,000 to $43,500 in an 11-hour period. At that time the market was beginning to digest potential implications of war in Ukraine.

Was this the long-awaited "safe haven bid"? Perhaps. This period continues to remind me of 2013 when banks in Cyprus used customer deposits to bail themselves out (much more about this in our previous newsletterBitcoin: Echoes of 2013).

Eight years ago the Cyprus situation awoke a small number of people to the importance of a decentralized currency.

There's a possibility that if global inflation and financial chaos continue, we're about to see something much larger occur. Bitcoin adoption on an unprecedented scale seems increasingly possible.

I asked Frank Holmes for his read on the situation, and he said the following:

"The world is beginning to understand why Bitcoin matters. It's not a toy, it's a tool for financial freedom.

In Ukraine, per capita use of Bitcoin is among the highest in the world. And because of BTC, some Ukrainians were surely able to escape with at least some of their wealth on a flash drive, or stored securely in their mind as a seed phrase.

Over the coming years, we think the role of Bitcoin as decentralized money will continue to grow. And we may see the same dynamic play out with ETH."

-Frank Holmes, HIVE Blockchain Technologies Executive Chairman

Frank also mentioned the fact that more than $42 million in Bitcoin and Ethereumdonations has been raised to support Ukraine so far. Funds came from more than 46,000 addresses.

Crypto is putting its utility and importance on display to the world. Situations like this show why decentralized, apolitical money matters.

In many ways, the future seems bright for Bitcoin. But of course, over the longer term we must also consider the ever-present regulatory risk to Bitcoin and the larger crypto world. It is possible that regulatory risk may rise along with price. As the perceived threat grows, so may the regulatory pressure.

But for the near future, it seems like there are far more pressing matters to attend to.
I'm going to end with a quote from Galaxy Digital's Mike Novogratz, viaBloomberg. It sums up the size of the stakes here.

"That's why Bitcoin was created, because people don't trust governments. This is a big deal -- in a lot of ways, this is starting the acceleration of de-dollarization of the world."

We will continue to monitor this situation closely and keep everyone updated as it evolves. Expect a lot of macro analysis in the coming weeks and months.

In closing, we wish the people of Ukraine the best and hold out hope for a positive outcome. Their courage is on full display to the world.


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