The End Game (of the Long Term Debt Cycle)

The Rake Review: April 2021

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.

The DIP:

I've had to rewrite the newsletter 3 times now. When I started, Bitcoin was falling rapidly from its $65,000 high and there was talk about whether $65,000 would be the peak of 2021. Then we hit a bottom and markets stabilised. We then saw a sizeable recovery and got right back on track for the 2021 Bitcoin Bull-run.

With hindsight, it was fairly obvious we were not seeing the end of the Bull-run. Futures still showed contango, meaning expectations were for Bitcoin and other crypto assets to go higher. Funding rates for perpetual futures went lower meaning it was longs that got liquidated. If you don't know what any of that means don't worry, I'm just saying that markets suggested this was a temporary dip, and we would go higher. We bottomed around $47,000 USD and now sit around $53,000 USD. You'd have done well buying that dip.

Negative news that may have led to the dip around Biden's Tax increases, discussed later in the newsletter, and issues with exchanges in Turkey, as well as the threat of more regulation in the USA were quickly replaced by more positive news around Germany allowing funds to invest directly in Bitcoin from 1st July, VISA and Mastercard getting even more involved in crypto payments and Tesla confirming they made a profit from Bitcoin in the quarter and Elon confirming the strength and liquidity in Bitcoin markets.

The End Game

We have had many conversations with people lately that centre around the current economic climate and how it relates to social unrest and the economic cycle. The conversation is important and I will summarise here.

"The world has gone mad"

If you have uttered those words lately you are probably right. When everything you've come to know in the social sphere has been turned upside down and the world seems to follow an ever changing set of new rules you'd be hard pressed not to think "the world has gone mad". Today I read an article entitled "Disabled car parks "discriminatory to able-bodied people", man in wheelchair told". If you think that this is satire you are mistaken, although to be fair, it's near impossible to tell the difference these days. I don't usually write about politics in this forum but the point of this is that we are at a social cross-roads which also coincides unsurprisingly with an economic cross roads.

The Long Term Debt Cycle:

Our video of the month below explains the long term debt cycle which is far longer (70 years) than the debt cycle we are more familiar with of circa 5-8 years. We believe that we are at the end of the long-term debt cycle with interest rates hitting zero globally. What does this mean and what is the end game? What happens now? We have seen a huge amount of money printing by governments/central banks around the world. Governments have realised that if they try to raise interest rates the economy crashes and they have been doing everything possible to avoid recessions of any kind. This is why we haven't had one globally since 2008 and in Australia since 2000. The downside of expansionary government policy, money printing and low interest rates is that Debt has ballooned. We've heard about personal and mortgage debt which has hit record levels here but government debt is also skyrocketing not helped by corona related spending. Debt to GDP ratio worldwide is over 400%. Even in the US (richest nation ever known according to US politicians), government debt to GDP is over 130% meaning we are unlikely to ever see it repaid.

What are the governments options if they can't repay debt?

1. Kick the can further down the road
2. Austerity (Lower spending)
3. Default on debts
4. Debt Jubilee
5. Monetary Reset
6. War

Governments have chosen option 1 all day-every day so far. That's because its the easiest option. Presidential terms of 4 years mean you can be the good guy today and print more money and make it the next presidents problem to repay our debt. But we are at a stage where kicking the can down the road may no longer be possible. Austerity is impossible, as soon as spending is pulled we will go into a deep recession/depression. Defaulting or calling a global debt jubilee is possible. It's one reason that it's a good idea topping up your bank loans right now. You may never have to pay it back. A monetary reset is more likely. A new USD? or a Bitcoin standard? Either way the "old" USD will become worthless. At that point Bitcoin will be worth millions of "old" USD but it's irrelevant. War is the scary option that I'd like to avoid but it does allow for a full global reset of everything. Scared? That's not my aim but it's always worth being prepared.

We are at the precipice of a new era. How can I be prepared?

Any of the options available to governments above can be somewhat mitigated by holding "hard" assets. Hard assets are assets that can't be easily created. Housing, Materials, Gold and most importantly Bitcoin. Bitcoin has a finite supply unlike USD that can be printed en masse.

So be prepared and have an end game. Hold hard Assets and you will have options in whatever happens next

Let's get into the report:

[

](https://www.youtube.com/watch?v=PHe0bXAIuk0)

This month's Video

Ray Dalio does a great job explaining the long term debt cycle and how it differs from the shorter 5-8 year cycles that we are familiar with.

Markets

Bitcoin is currently trading around $53,000USD after posting an ATH of almost $65,000 USD earlier in the month. Binance has entrenched its #3 position but the big mover is DOGE making it into the top 8. It's all time high this month briefly made it the #5 biggest currency in the world.

* Top 8 Coins by Market Cap thanks to Coin Gecko

In the NEWS

Recep Erdogan's economic management has led to a massive depreciation of the Lira. Against the AUD the Turkish Lira has fallen to 15c while multiple reserve bank governors have been dismissed. Turkey has tried to regulate Bitcoin payments leading to a local panic which has seen two of Turkey's exchanges fail. Now the current reserve bank governor has come out to say that trading and holding Bitcoin is still ok and the country is trying to regulate Crypto not ban it. Now it seems Turkey may even become a Bitcoin custodian meaning exchanges will be forced to store their cold wallets with the central bank. This is a fascinating development because it will mean a sovereign nation holds Bitcoin. How long before others try to do the same?

2. The Great State of Louisiana gets on the Bitcoin Bandwagon

Will Louisiana become the next Wyoming and become a crypto safe haven. The state of Wyoming has already benefited from opening up to crypto businesses with the likes of Kraken applying for a banking licence in that jurisdiction. Now the house of representatives in Louisiana has heard the following statement read in parliament buy the speaker:

3. Biden Capital Gains Tax Proposal

A new proposal to increase tax takings on the capital gains tax in the US has sent investors into a spin. Its one reason given for markets hitting a dip earlier this month. Investors that are in significant positive positions (anyone that's invested in Bitcoin) have been given an incentive to sell now before any increase in CGT is passed. That would lock in gains at a low CGT. As the article in the link suggests not all Democrats are supportive and there is still a chance this will change significantly before being voted on.

Bitcoin Dashboard

This month we again focus on just one part of the Dashboard: Transactions

There have been over 600 Million individual BTC transactions all fully settled and public. None of those have been subject to a merchant chargeback. Once you have the funds - no one can take them from you.

The current rate is 3.3 transactions per second meaning over 8 Million have been completed over the last month. That may seem like a lot to some of you, but others will point out correctly that its significantly less than what VISA and Mastercard processes. VISA process around 1700 transactions per second.

Does this matter? Not really. They are not comparable. To me, Bitcoin is not about buying coffee. It's not an everyday small transaction currency. Bitcoin is about store of value. It's also about being able to move Millions with a safe easy transaction and you don't need to do that every day.

Also, there are side-chains to do transactions on such as Liquid and Lightning. These carry a huge transaction load and only write back to the main chain when starting or closing a Lightning node.

Also, exchange transactions where one person buys and another sells are not counted because they are paper transactions that the exchange tracks without writing to the blockchain.

Stock to Flow Valuation:

Current Long-Term Stock to Flow (S2F) Price: $48,540 USD vs Current Price - $51,000 USD. Market price is now higher than the historical trend suggesting that Bitcoin is overvalued today. However, the S2F model also shows an increasing price every day for the next year to $103,000 USD. According to the efficient markets hypothesis, a rational investor would buy today and wait for the $103,000 USD price to materialise if you trusted the model. That’s why we rate Bitcoin as a BUY

Monthly Memes

*Excuse the language but that's the quote. This guy wasn't happy earning a couple of Bitcoin a week in 2010 mining from his own PC. If only he realised what the future value of Bitcoin would be. Are we underestimating Bitcoin's value in 2030?

Until next month, Happy Investing!

Stormrake Team

custody@stormrake.com

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