$1M Bitcoin, Hyperinflation, and Dedollarization Oh My Part 1: Balaji’s Big Claims

$1M Bitcoin, Hyperinflation, and Dedollarization Oh My Part 1: Balaji’s Big Claims

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May 8, 2023
In Part 0, I introduced this series, where I’m seeking to outline and assess ominous claims about the financial health of the United States. I also introduced some economic concepts that will be fundamental to understanding much of what is to follow. Check it out if you haven’t already!

Who Says the US Economy is in Trouble?

This post will focus on Balaji Srinivasan’s claims, which introduced many people to the potential issues facing the US economy. I’ll outline his infamous Bitsignal Tweet, his $1M Bitcoin bet (which he’s decided to resolve early), his warning about what the world could look like following USD hyperinflation, and the steps he recommends taking to be prepared. In later posts, I’ll assess the accuracy of his predictions so far and share counterarguments to his claims.

The BitSignal

Balaji tweeted the BitSignal on March 16. He made five claims against the strength of the dollar and encouraged his following to alert the rest of the world by buying Bitcoin, simultaneously driving up demand (price) for Bitcoin and lowering demand (price) for USD. He offered his followers one thousand $1,000 prizes for the best charts, stats, and memes that strengthen his message. He was clearly trying to grab attention with the huge reward. Skeptics claim that his primary motivation was to drive up the price of Bitcoin in order to profit on his large holding. He claimed that the prize was just a function of his conviction regarding the seriousness of the situation. I can’t know his motivation, but I can appreciate his well cited claims.

Claim #1: The Banks are Insolvent

Balaji’s foundational argument is that the unprecedented interest rate increase in 2022 caused significant depreciation of long-term bonds, which translated to massive losses for banks. Banks had resorted to buying long duration bonds to eke out a profit during the extended pandemic period of near-zero interest rates. To make matters worse, bank deposits skyrocketed during this time because of the stimulus checks Americans received, so banks stuffed money into bonds much faster than normal. These bonds don’t lose value if held to maturity, as they will still be redeemable for their strike value, but if the banks are forced to liquidate them to repay depositors, the bonds must be sold at (discounted) market rates. These are described as “unrealized losses”, which are assets valued less than the purchase price that haven’t been sold yet.
⬆️ This is the most important section to understand in the entire series. If it didn’t make sense, reread it or reach out with your questions.

Claim #2: Regulators Knew Banks Were Insolvent, But Didn’t Notify Depositors

Balaji cites the Federal Reserve Bank of Kansas City expressing concern in September 2022 and the FDIC doing the same in November. He demonizes these regulators as being “captured” by the banks, rather than serving the depositors that fund them.
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Claim #3: The Federal Reserve is Lying About Printing Money

He cites a March 12 Federal Reserve article that announces the rollout of the Bank Term Funding Program (BTFP). This article claims that $25B will be made available, but that “the Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds”. Next, he links a March 16 Bloomberg article that clarifies that the projected print cap is as much as $2T, eighty times bigger than the claim made only four days prior.

Claim #4: Hyperinflation is More Common and Faster Acting Than we Understand

He cites a table of history’s hyperinflation events, which are far more frequent than I realized. He also emphasizes that in a digital era, bank runs and other driving factors of hyperinflation can happen even more quickly.

Claim #5: The US Government is Trying to Block People From Withdrawing Money to Other Assets

This is Balaji’s weakest argument. He cites no sources, and simply argues that Signature and Silvergate were killed “because they banked crypto”. He doesn’t address non-crypto alternatives to USD.

The Bet

On March 17, Balaji accepted a bet that Bitcoin would go to $1M within the next 90 days. He cited how “horribly” the dollar has performed against Bitcoin in its history. There’s significant speculation as to Balaji’s true beliefs regarding the bet. Some claim he believed he’d win, while others say that it was just further marketing for his point. I believe the latter, that it was an additional way for him to get eyeballs on his claims. You may see this as selfish or altruistic of him depending on your belief about his motivation to expose the flaws in the banking system. I think Balaji believes that hyperinflation will happen very quickly at some point in the next years, but not specifically the next 90 days. This bet was his attempt to highlight that hyperinflation is subject to a tipping point, it’ll come slowly, then all at once.
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On May 2, Balaji threw up the white flag, settling the bet early. He did this to minimize the damage of being “wrong” and keep control over the narrative. He continues to warn that doom is impending for the US economy, and highlighted several other causes in an article about the fiat crisis. He called out the banking crisis, the unprecedented money printing, the commercial real estate crisis, and the national debt. He shared a mental model for the timeline of this crisis that was much more valuable than the arbitrary 90 days. He provided percentages for the likelihood that the crisis would happen in a matter of months, years, decades, or centuries. He argued that years was significantly more likely than decades or longer, but that the implicit belief of US citizens is centuries.

What Happens if There’s a Fiat Crisis?

Balaji’s (alleged) goal in bringing attention to the impending financial crisis is to help people be prepared. As discussed above, there is historical precedent for hyperinflation, so we have a taste of what that could look like. First, the price of necessities will skyrocket and/or price controls will be imposed and there will be massive shortages. This case is even more complex because of the potential for a flight to alternative (crypto)currencies. Balaji expects fiat-only zones, Bitcoin-only zones, and hybrids. He emphasizes serious consideration for the jurisdiction that you live in and/or own property in due to the potential for these zones. His recommended course of action is to keep the cash on hand you need to live and put the rest of your money in Bitcoin, which he believes to be a superior inflation hedge to gold and real estate because it’s intangible and undetectable.

What’s Next?

While I agree with Balaji that the US economy is in trouble, I don’t necessarily advocate for dumping your entire life’s savings straight into Bitcoin. Many of Balaji’s arguments are strong, but there are many smart people vehemently opposed to his mission. In Part 2, I’ll outline the timeline of events that lead to Balaji’s claims, as well as what’s happened since. There will be at least two more posts after that, one where I break down counterarguments to his claims and another where I explain how I see the whole situation and reveal the actions I’m taking in response.