It’s been well documented that we are in the midst of worsening inflation pressures and damaging growth prospects.

This is what many call a stagflationary shock, essentially making things worse on all economic fronts at once.

I do believe if we don’t get a decisive change of events in terms of the macro picture in the medium term, this could be negative for the prospects of Bitcoin appreciation for the rest of 2022.

Bitcoin performs best when inflation is moderate yet rising and growth is humming along.

The expanding pie means there is more capital to allocate towards more speculative investments which this European war has proven Bitcoin is.

When the threat of nuclear war presents itself, investors flee speculative assets like growth tech and reign back risk to choose assets such as gold, US dollar, and other hard commodities.

It’s really a shame because we were right on course for a splendid pandemic recovery and all major Western economies were experiencing boomflation — strong growth with high inflation.

Unfortunately, removing the growth part of the equation out of the mix, will the incremental investor want to dive into Bitcoin or allocate their assets to a different sector?

Most likely no.

Unless Bitcoin strengthens itself and presents itself as more appetizing during cataclysmic times, its hard to see investors betting the ranch in Bitcoin right now.

Much of the consensus before the military conflict was that investors were greenlighting 5% of their portfolio into crypto and other alternative investments.

A stagflation scenario would put a serious wrench in that consensus.

The near-term winner has certainly been hard commodities like precious metals evident by nickels' 90% spike in one day.

Even more problematic, stagflation isn’t the kind of economic disruption that can be fixed with a cheeky use of fiscal or monetary policy.

It's all pain with no upside, and what investor likes that?

The invasion sent commodity prices surging and global stock markets and bond yields plunging.

The median American in this environment is going to be more worried about paying more for gas or their spaghetti than investing in Bitcoin.

But financial market prices don't tell the full story. They remain highly volatile, as geopolitics has scared a lot of investors from the markets altogether which is another worry for not only Bitcoin but which is why we are seeing massive selloffs in the overall market.

In times of absolute strain, there is no incremental investor demand for speculative assets and people with money are more likely to buy a 5-bedroom house to bunker down and ride this thing out.

Higher energy prices — already evident in commodity markets — directly feed into higher inflation, but the risks are more sprawling and hard-to-calculate than that implies.

The concept of higher energy prices also will cause the costs of mining Bitcoin to skyrocket because mining is extremely energy-intensive.

This energy spike will be terrible for Bitcoin mining companies who are reliant on the world’s energy markets for their source of energy.

They have no way to circumvent this as their biggest input is energy.

Let’s not assume everyone stops mining, but let’s say the largest miners who have dedicated warehouses full of miners stop mining.

This would cause the network to come to a screeching halt, no blocks would be found until the block difficulty readjusts.

This happens every 2 weeks. Bitcoin’s mining algorithm is about guessing random numbers and hoping you get lucky. The mining difficulty indicates the threshold of a valid magic number. Any number less than the given difficulty is a valid block. Any number larger than the given difficulty is considered an invalid block by Bitcoin’s mining algorithm.

If all large miners were to stop mining, the mining difficulty would decrease (the magic number that determines block validity would actually increase), which means miners can now find a number larger than when large miners were mining and have the block be valid.

Essentially, this is negative for the development of Bitcoin because we would start to see the Bitcoin infrastructure erode.

This is at a time when investors are already questioning the use case of it during the threat of nuclear war or a 3^rd world war.

Bitcoin needs all the help it can get and stagflation and miners dropping like flies triggering a collapse of infrastructure won’t help convince the incremental investors that Bitcoin is the place to put real money.

Sell the rallies if we get one.

Mad Hedge Bitcoin Letter
February 24, 2022
Fiat Lux