While we are not currently short of catalysts by any stretch, it might be cryptocurrencies that push us over the edge into open brawling. There is no phenomenon like it. Some crypto was no doubt created by geniuses (whatever you think of Bitcoin, the concept is pretty incredible), some was created as a pure mocking joke (Dogecoin from Musk) and some is just created by and for flat out idiots (Hawk Tuah coin, Fartcoin, ten thousand others).
The polarity of opinions is incredible, with hyper intelligence on either side. Some of the very smartest people mock crypto mercilessly (the otherwise ultra-rational and now gone Charlie Munger once referred to crypto as ‘rat poison’, later upping the ante considerably: “Suppose you could make a lot of money trading freshly harvested baby brains. You wouldn’t trade them, would you? It’s too awful a concept. To me, Bitcoin is almost as bad. … I regard the thing as a combination of dementia and immorality. And I think the people pushing it are a disgrace.”), while other smartest-people-I’ve-ever-encountered consider crypto a Godsend for an entire slice of (non-criminal) humanity that has no access to a sound local banking system (several billion people) and a brilliant innovation.
Some people just jump camps. Trump mocked crypto a few years ago, and now wants to make the US the “crypto capital of the universe” or some such hyperbole, and just the other day announced creation of a Crypto Strategic Reserve (in a sign of the extent of current policy chaos, Trump’s initial announcement via social media forgot to include the two most predominant cryptocurrencies – Bitcoin and Ethereum – that would be “the heart of the reserve.”).
What on earth is going on?
Well. Take a deep breath. Consider this fascinating angle that just might make a lot of sense.
For full disclosure, this scenario is nothing my mind could piece together, ever. It originated with (I think) a very bright guy named Luke Gromen, one of those people that grasp macro issues before anyone else.
Mr. Gromen spoke on a podcast of hearing Donald Trump proclaim that “Bitcoin is the new oil.” Now, Donald Trump says a lot of wild things, and some filtering is good for the sanity. After a few exposures, one develops a sort of Trump Translator that shaves down some of these hyperbolical mountains and so forth.
But this one is different. “Bitcoin is the new oil.” It stops you in your tracks. It’s something else. Not dumb, not hyperbole, not bombast.
Technically of course it’s not true either, in any practical physical sense. As Peter Zeihan says, oil is civilization. It just is. Hate it all you want, but you really shouldn’t, because it is the building block of everything in our material existence that isn’t made of stone, wood, or plant matter (and all of these are brought into your world via oil in one form or another, with modern abundant food supplies actually being the poster child for hydrocarbon value-add).
Bitcoin is an imaginary phenomenon dreamed up 15 years ago by some anonymous person or persons, a new medium of exchange that only ever touches reality in one critical juncture point: it requires vast and ever growing quantities of energy. So how could anyone even utter that phrase? “Bitcoin is the new oil.”
That question vexed the very intelligent Mr. Gromen, who mulled it over until he made a fascinating realization.
As with Trump himself, put aside any negativity you feel towards crypto for a second (this is also a key to sanity in the modern age, btw; don’t judge, analyze; don’t ‘wish it weren’t so’, work with the hand that is dealt). Don’t take the sentence literally; that is, this isn’t a statement that BTC can approximate the functionality of oil. Think of it like: Can BTC accomplish a very specific task that oil also did?
Here is Gromen’s thesis. Back in 1973, the price of oil tripled in a relatively short time. This spike had massive repercussions because oil is everything, and when the cost of the economic lifeblood triples, it’s going to have a big impact.
The benefit to the US of having oil prices spike was that, because oil largely trades in US dollars, the global value of USD-denominated trade rose massively through the oil trade alone. When the price of oil spikes in USD, the demand for USD increases, and that means it is easier for the US to borrow money without causing a spike in interest rates. Many large scale investors that need to buy USD via trades just park their USD in government debt because there is so much of it, it is very liquid, and easy to enter/exit huge positions. This demand for US debt then pushes up the debt price, and pushes down the interest rate. Voila. (Note that the much-watched federal reserve activity sets interest rates in the short run (“OMG they reduced interest rates by half a point!” was heard everywhere a month or two ago, but it is market demand for debt that sets rates further out on the time horizon.)
Today, the US is becoming famous in every corner of the world for the stupefying debt numbers it is posting, with the total increasing by a trillion dollars every quarter or so. The US can’t handle higher interest rates, or they will gobble up too much of US government revenues. The question becomes…who will buy all that debt in order to keep interest rates reasonable?
Here’s the interesting part about crypto and in particular BTC. Most investors don’t want to wade into the muck of opening a BTC trading account, I’ve looked at them; they are alien and, particularly with the dizzying array of moronic cryptocoins available, most investors don’t want to go near it. In fact most investors are scared of even buying stocks themselves, which is why ETFs are so popular.
So bigger institutions are offering investors a way to buy into BTC by way of what is known as “stablecoin”. Stablecoin is a term for cryptocurrency investments that are pegged to a currency, or commodity, or financial instrument. (via Investopedia). This tie to more stable instruments, such as the USD, make the value more stable and the whole thing more palatable to a wider spectrum of investors.
One of the largest stablecoins is Tether, which is backed by US dollar reserves and denominated at parity to the USD. Again per Investopedia, “As of late June 2024, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $112 billion.”
Now, consider that Tether is a large investor in BTC. As of Feb 29, 2024, Tether held 66,465 BTC. As of Oct 28, 2024, Tether held 82,454 BTC. That might not sound like a lot, but hey at $100k per? That October balance is worth over $8 billion.
Now we come full circle. IF stablecoins are the preferred investor route for the part of the world that tends to have the biggest bags of money, then stablecoins will increase the demand for USD, which will increase the demand for US debt, which will help push interest rates down as the USD “collapses in value” relative to BTC – that is, as BTC’s price spirals in USD terms.
Digital assets could, in other words, help the US get out of it’s insane debt problem by making the debt more affordable, and by freeing up money the US government would otherwise have to spend on interest payments if interest rates rise too high (the US now spends more on interest than it does on defense, and if interest rates spiked that problem would get much worse and something would have to give, somewhere).
Now, if this theory holds, it means that Trump’s vision for BTC is four chess moves ahead of where most people think he is (and I know it is dangerous to acknowledge this sort of thing on Tariff Implementation Week, when Canadians are donning the colanders-on-heads to go to war). Which could be a very good thing. I don’t care about how anyone feels about the guy, if this strategy is what is meant by “Bitcoin is the new oil” then whoever came up with it is a pretty savvy market strategist, because this is a truly creative way to get out of what seems to be an insurmountable debt problem, and it would explain Trump’s enthusiasm for crypto all of a sudden.
As a Canadian, I watch such strategizing and problem-solving with some chagrin, when I look at who is wearing the gloves in our corner. But anyway.
The success of the US is critical to the world. It remains the economic lynchpin upon which western civilization trades and functions. A world without it would swiftly come under the heel of the Russia/China axis, and we ought to think long and hard about whether we want to risk going there.
But the US has some very big structural problems centering on its debt load, its inescapable obligations to its citizens (social safety net programs), its military requirements, and many other claims to the government’s revenue stream. It is a tricky situation.
If Bitcoin, or crypto in general, or stablecoin, or I suppose even Fartcoin, helps them out of that predicament, it will be fascinating to watch. In the meantime, it is beyond fascinating to watch the reaction to any crypto news at all. If the political world seems paralyzed, it is nothing compared to the crypto world. A few weeks ago, Seeking Alpha, in their “Wall Street Breakfast” daily email, had a section called “Reaction to the Spectacular Rise of Bitcoin”, with reaction from notable commentators or investment houses. Here is the key note of each of the reactions, in sequence:
“Bitcoin is a decentralized and inflation-resistant asset that might retain value better than USD in some cases…”
“We personally are of the opinion that Bitcoin or cryptocurrencies in general are most likely to be assigned to the ‘greater fool theory’. “
“MicroStrategy’s success [buying vast quantities of Bitcoin] is providing a tantalizing blueprint for other corporations…in order ot protect and even grow their treasury reserves in an era of monetary uncertainty.”
“We are in the midst of one of those periodic eruptions of irrationality that brings forth all manner of con men, flimflam artists, and fraudsters…”
“The enthusiasm surrounding Dogecoin, a meme-based cryptocurrency with little intrinsic value, exemplifies this speculative excess.”
“This is a great entry point.”
Anyway, while the crypto combatants throw haymakers at each others’ heads, the rest of us can look beyond and ask: Interesting theory, but does it make any sense?
And the answer is: Oh wake up, it’s 2025, nothing makes sense. It could be true. But at the same time, we’re in a completely different world than 1973 – back then, the world’s geopolitical framework was somewhat defined by the US global economic Godzilla thumping around the world bellowing “MORE OIL NOW”. These days, the US is much less reliant on global oil suppliers with the American oil supply renaissance.
Time will tell.
Looks like the energy world is shaping up according as expected, as outlined in The End of Fossil Fuel Insanity – the energy story for those that don’t live it, and want to find out. And laugh. Available at Amazon.ca, Indigo.ca, or Amazon.com.
Read more insightful analysis from Terry Etam here, or email Terry here.