The Delta Variant & Bitcoin’s Looming Opportunity

Bitcoin is at a pivotal moment in its evolution as an asset class, and where it goes from here could make all the difference for what a future investment portfolio looks like.

Later, they sent some of the Pharisees and Herodians to catch Jesus in His words.

“Teacher,” they said, “we know that You are honest and seek favor from no one. Indeed, You are impartial and teach the way of God in accordance with the truth. Is it lawful to pay taxes to Caesar or not? Should we pay them or not?”

But Jesus saw through their hypocrisy and said, “Why are you testing Me? Bring Me a denarius to inspect.”

So they brought it, and He asked them, “Whose image is this? And whose inscription?”

“Caesar’s,” they answered.

Then Jesus told them, “Give to Caesar what is Caesar’s, and to God what is God’s.”

— The Gospel according to St. Matthew, Chapter 22:15–22

There are two things about life that are certain — death and taxes. And while there’s little doubt that the state requires taxes to be paid in the currency of the sovereign, it has long been assumed that what we as economic persons pay to each other should be what we pay to the state.

One of the biggest criticisms leveled at Bitcoin and other cryptocurrencies has been that it can never be used to pay taxes, but why would anyone want to pay taxes anyway?

To be sure, the concept of taxation has been around since as far back as humans organized into societies.

Because there are public goods for which no one can be deprived the enjoyment of, for instance street lighting and sidewalks, the instrument of the state was seen as a necessary evil to help administer to the niceties of civilized living.

And for the longest time, taxed citizens, whilst using any means and measures at their disposal to reduce the taxes paid to the state, have also acknowledged that at its core, some tax is unavoidable, except maybe if you’re Jeff Bezos.

But what do taxed citizens pay their states with? The very currency that these state issues.

Show Hand

Before the pandemic, one could argue that the global financial system reflected a delicate balance between the ability of the sovereign to print as much money as was wanted, with the limitation that they couldn’t print so much as to debase it.

But when the Covid-19 pandemic ravaged every nation, dumbfounding all to its devastation, central banks and governments had little (if any) choice but to lavish their subjects with stimulus programs that could arrest the rut as, economies quickly tumbled towards recession.

Because few would have dared to accurately forecast what lay ahead, a host of old assets — U.S. Treasuries and gold, as well as some new ones — Bitcoin — thrived amidst the uncertainty.

Fast forward to July 2021, and the outlook seems vastly different from a year ago, yet at the same time, strangely familiar.

In many richer countries, there have been no takers for vaccines while other (typically poorer) nations have been struggling to obtain the vital vaccines that could see them emerge from the coronavirus quagmire.

As economies start to emerge from the pandemic and recovery appears imminent, central bankers and their governments are locked in a debate as to how to turn off the liquidity taps that have been flooding their economies.

Except that turning off the liquidity taps now may be premature.

Countries which had pursued aggressive inoculation strategies such as the United States are seeing those early gains peter out thanks to a resistant bloc of antivaxxers.

The delta variant of the coronavirus has also proved to be far more virulent and many countries that had opened up are now heading back into lockdown, even though vaccination rates are up.

Against this backdrop, the relentless march of global equities belies turbulence bubbling just beneath the surface.

Recovery Goes Splat

Euphoria from vaccine rollouts this year has been subsiding, replaced by creeping concerns about the durability of the economic recovery.

U.S. second quarter GDP growth is appearing to flag, rising to 6.5% compared to 6.3% for the first quarter, and well below economist estimates of 8.5% as American businesses held back on investment.

The reflation trade, long seen as the bellwether of economic expectations, has all but dissipated.

Coronavirus outbreaks are returning to cruise ships even as passengers are not.

Investors have started to hedge that risk in a variety of ways, buying bearish put options (the right to sell) that would pay off if stocks fall.

The so-called “put-call ratio” which measures the number of put contracts purchased compared with the number of call options bought on a given day, recently hit its highest level in almost three months.

And the real yield on the benchmark 10-year U.S. Treasury note, which strips out the effect of inflation, has turned negative.

All of which are seen by some bears as signs of a cooling economic recovery.

Inflate This

Against this backdrop, the specter of inflation is rising, driven in part by pent-up demand, but also because the liquidity taps never had a chance to be tightened, let alone closed.

And while the greenback has enjoyed a resurgence, if Treasury yields continue to languish, it’s only a matter of time before the dollar slides back towards debasement.

Now that inflation is no longer a threat on the horizon, but on the doorstep of every major global economy, the assurance by central banks that rate hikes lie somewhere in the distant future has crystalized — the delta variant may hamstring their ability to hike rates altogether.

And the timing could not be worse.

The world looks headed dangerously towards stagflation — low growth amidst high inflation — and at a time when it’s no longer clear if further fiscal and monetary stimulus could help to lift the economy.

Secular trends like the digitalization of many aspects of society are having a profound effect on consumption patterns, many of which will ultimately prove durable.

Pent-up demand for things like dining out, live entertainment and travel provided a momentary lift, but the delta variant has thrown a spanner in the works.

And after splurging on cars, furniture and home improvements, there’s less need for consumers to repeat those purchases.

Which is why gold and Treasuries are making a comeback and interestingly, Bitcoin as well.

Not Dead Yet

Despite the Chinese purge of Bitcoin miners, regulators tightening the noose around the world’s largest cryptocurrency exchange by volume and lawmakers globally calling for cryptocurrency regulation, Bitcoin remains resilient.

As an unconstrained asset that is literally backed by nothing, the persistence of the world’s largest cryptocurrency by market cap is testimony to its resilience in the face of myriad challenges.

To be sure, ample liquidity has seen stocks followed by bonds rally, and cryptocurrencies could simply be enjoying a rotational play as other assets become overvalued.

But Bitcoin and its ilk are more than just an attempt to supplement the fiat machinery that has come to define modern life, they represent programmable money that could potentially be of value to economic persons inter se.

Whilst it is true that Bitcoin can’t be used (outside of perhaps Ecuador) to pay taxes, we can use it to pay each other.

And as central banks and governments continue to print money that we have to find means of obtaining to pay them, taxed citizens will start to question “wither for?”

Ultimately, the value of any medium of exchange is what someone else will give in return for it.

The fiat regime is not likely to pass anytime soon, because taxed citizens will still need to render to Caesar what belongs to Caesar.

But so long as Caesar keeps rendering, that which is rendered becomes increasingly less valuable.

The question that taxed citizens should be asking isn’t what ought to be rendered to Caesar, but rather, what should we render to each other?

But the world is at a turning point for what

• limit to how much central banks can cut rates
• fiscal policy amidst high inflation and economic uncertainty