Bitflation

Biflation is a state of the economy, in which the processes of inflation and deflation occur simultaneously in different parts of the economy. The term was first coined in 2003 by Dr. F. Osborne Brown, a senior financial analyst at Phoenix Investment Group.

We'll address Bitflation in the context of one of cryptocurrency's early darlings, Bitcoin, how it is being misperceived as a real hedge against flationary risk, and identify what the alternative is.

MISGUIDED USES?

A US Treasury report has said that, in the last three years, ransomware operators using over 60 different variants have siphoned off $5.3 billion in Bitcoin payments.

Having been in the blockchain and crypto spaces for a while, and having specifically witnessed the “anti-fraud” and “anti-money laundering” (AML) efforts accompanying it, this is probably an understatement.

After all, the FBI is one of the largest BTC HODlers in the world.

That said, I don’t have a problem with Bitcoin. I love its invention. I am a huge advocate, and developer, of asset-backed cryptocurrencies (more on that in another post).

I have a problem with the way the market tends to use it, which translates overall to a problem with the continued financialization of inflation for inflation purposes, not actual inflation-hedging purposes.

The more obvious point is that Bitcoin’s price is inflated and it is thereby spent less. The less obvious point is that Bitcoin has no way of hiding or redistributing inflation evenly.

THE INFLATION REDISTRIBUTION PROBLEM

The irony in this, of course, is that Bitcoin’s underlying blockchain is supposed to be a record of account. And yet, it is pseudo anonymous, which means that out of the 60% of online identities that are actually synthetics or fakes, this poses a huge problem for financial transparency overall.

Mathematically, I’ve written about how to solve the Bitcoin problem. Like FIAT, it is designed to go to zero - even if it goes to a million per coin before it does.

Systemically, I would also assert that Bitcoin, the way it is used now, is about as bad for the crypto markets, as it is for inflation.

But let’s zoom out, and consider the bigger picture.

Inflation is no longer transitory, because it has nowhere else to go other than up in terms of prices on goods and services. Commodity indices are the tell all. Upon last check, the Bloomberg index was well above 67%. That is the real number to look at - not GDP, not CPI, not treasury yields with notes that have little if any purchasing power, let alone any intrinsic value.


If "debt monetization" is the remaining cattle call, then the Fed's goal is to hyperinflate the debt into oblivion. So, that would entail overfinancializing interest - in this case, zero to negatives. A bizarre exercise in futility.

It is also the case that with Bitcoin’s limited issuance scarcity, you have a situation in which heavily compounded interest sends BTC’s price to the moon… And then to zero.

In other words, the only difference between FIAT and Bitcoin’s speculative value is in how it can’t redistribute or hide inflation evenly.

THE FUNGIBLE HEDGE


As we all know, at least fundamentally, the only way to properly hedge against inflation is with fungible assets. And where are those currently? Mostly in a hyperinflated pricing loop.

Historically, a depreciating currency meant more purchasing power, at least for developing countries. That is no longer the case due to debt parity, global supply chain issues, and inverse yields in many treasury bonds.

More simply put, there is a lot less to purchase at relatively lost costs to market.


Never forget that hyperinflation and deflated currency are cousins. You can't reflate what you don't actually build or manage, and you can't redistribute what can't be invested in, thereby deflating the currency used to invest.

Both are requirements for middle market revitalization, and middle markets (small to medium-sized businesses) are what comprise a healthy economy. Right now, we need to replace over 60 million small businesses that have shuddered due to C-19. Supply chain decoupling was happening well before the "pandemic" - and now we have to consider what it is we are actually supplying.


We may very well be at the end of the line with central banking issuances, Weimar-style. The reverse repo thing formally known as "easing" now called "cloning" is an attempt to buy up any remaining assets (many distressed or overly valued) in the real economy. It's also not exactly legal, but that's another discussion for another time.


Now, we embark on a 10-year downslide, while traditional assets reflate, and new ones emerge.

This is where all the real opportunities live: In real asset-backed cryptocurrencies.

Are you ready?