Could Bitcoin reach $1 million this Year?

Are we living through events that will catapult Bitcoin into the new international reserve currency? You need to remember that Bitcoin was born out of the 2008 financial crisis. The trail of messages Satoshi Nakamoto left prior to their sudden disappearance has led many to believe that Bitcoin was a response to the events of 2007-2008. On the message board for the P2P Foundation, an organization focused on peer-to-peer technology, Satoshi Nakamoto wrote a memorable post introducing Bitcoin in February 2009.

In it, they showed their uneasiness at placing trust in fractional reserve banking:

“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy and not let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Satoshi Nakamoto launched Bitcoin’s Genesis Block at 18:15:05 UTC on Jan. 3, 2009. The moment would become a keystone of Bitcoin history. The most famous feature of the block was the message Satoshi Nakamoto left in its coinbase parameter, which read as follows:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

Fourteen years after the birth of Bitcoin, we are facing yet another banking crisis. The rapid and alarming collapse of three American banks — Silicon Valley, Silvergate and Signature — within a week has rocked public confidence and sparked significant anxiety about the reliability of the US banking system and the possibility of a broader crisis in the financial sector. Banks are insolvent - they have been so for some time. As soon as the Federal Reserve abolished all reserve requirements for US banks during the pandemic, the US banking system became untethered. It meant that banks no longer needed to hold reserves against their lendings. In return, the Federal Reserve forced banks to buy US treasuries and then the Fed proceeded to hike interest rates from zero to almost 5 percent causing massive mark-to-market losses on the treasury bonds that the banks were forced to buy.

This means that if depositors come for their money, the banks have insufficient funds to make those depositors whole. You will notice that the losses in treasury bonds are mark-to-market losses. They are not write-offs. If banks are given enough time for treasury bonds to mature, those mark-to-market losses will disappear. However, short-term panic in the market means that banks do not have this luxury of time. The banks knew about this situation all through 2022 when rates were being hiked. All the bankers were hoping there would not be a run on their banks and were praying they would be able to weather this storm of mark-to-market losses brought on by higher interest rates. To be fair, the Federal Reserve did publish these mark-to-market losses on its website, but in such an opaque fashion that you needed to be a forensic accountant to know what they were talking about. The bottom line is that they did not come out and make a statement in simple language stating the banks were in difficulty, and you can fully understand why, because that would have caused unbridled chaos and panic, and this brings us back to an age-old question: what is more important, truth or trust? Do we need to know the truth, or would we rather trust the authorities to make the correct decisions under the circumstances and look after our best interests?

In order to answer this question, you need to ask an additional question: what is the most important asset of any bank? It is trust. When you deposit your money in a bank, you trust they will look after it for you. Can banks be trusted? One clear message that banks have been communicating to us is that the answer is NO. It is not only the US banks that are getting into trouble. One of the most established Swiss banks needed to be rescued in March - Credit Suisse. It was founded in 1856 and played an important role in the economic development of Switzerland, helping the country develop its currency system, funding entrepreneurs, and investing in the country's railway infrastructure at the time. Add to this the fact that the Swiss banking system has always been known for trust and reliability. You would be hard-pressed to find a more reliable bank than Credit Suisse. However, in the past 10 years, the bank has been rocked by numerous scandals. In 2013 it was fined 83 million euros for forex manipulation. The following year it pleaded guilty to conspiring with Americans to file false tax returns and paid $2.6 billion. In 2018, the bank paid $500 million by enabling loans likely to be embezzled by Mozambiquan government officials. In 2019, the CEO hired private investigators to spy on a senior employee who had left the bank to see if he was wooing Credit Suisse clients. One of the private investigators later killed himself. In 2022, it was announced that Credit Suisse would be tried in the first criminal trial of a major bank in Switzerland for allowing a Bulgaria cocaine trafficking gang to launder millions of euros. In that same year, details of 30,000 customers holding over 100 billion Swiss Francs in accounts at the bank had been leaked to a newspaper. It was revealed that amongst those with accounts at the bank were a human trafficker, a torturer, drug traffickers, and a Vatican-run account that allegedly invested 350 million euros fraudulently in London property. The company stock price in 2007 was $75. At the time of writing this blog, it was less than a dollar. It was acquired by another Swiss Bank (UBS) for under $4 billion having been valued at close to $300 billion at its peak.

Banks globally have failed to honour the trust that we have put in them. They have repeatedly put self-interest ahead of the interest of their small clients and depositors. They have broken the law for their large wealthy clients and the small man has been left counting the cost. Banks are the reason why there is no financial inclusion - they enslave their average client with products that lead to over-indebtedness to such an extent they never experience financial freedom. They cherry-pick their clients and only select those they can milk. Each customer is seen as a source of revenue. They fail to see them as long-term business partners with whom they can grow their businesses in a mutually beneficial manner. To add insult to injury, these banks are unable to guarantee all their depositors access to their funds on account of the fractional reserve banking system. Banks should be run on the basis of full reserves. This is also known as 100% reserve banking, narrow banking, or the sovereign money system. The way it works is simple - banks are not able to lend demand deposits, they are only able to lend time deposits.

Demand deposits can be withdrawn without any notice. A time deposit is one with a defined maturity such as 6 months. Under a system of 100% reserve banking, banks can only lend out time deposits for the length of the deposit. If you invest in a 6-month time deposit, the bank is able to lend your money out for a maximum of 6 months.

Full reserve banking has been proposed in the past, most notably in 1935 y a group of economists, including Irving Fisher, under what became known as the Chicago plan and in response to the Great Depression. There is no country in the world that requires full reserve banking, although Iceland has considered it. In a 2018 ballot referendum, Switzerland voted 3:1 against the Sovereign Money Initiative which had full reserve banking as a prominent component of its proposed reform of the Swiss monetary system.

Milton Friedman once advocated for full reserve banking on checking accounts. Austrian School economist Murray Rothbard has written that reserves of less than 100% constitute fraud on the part of the banks and should be illegal, and that full reserve banking would eliminate the risk of bank runs.

The truth is that most people do not understand how banks are run. They are under the misguided impression that they are run on the basis of 100% reserves and that the money in their checking account is safely tucked away in a vault and can always be accessed. In reality, banks are the biggest money creators on the planet. Rather than simply borrowing money from savers to make loans towards investments and production, and holding money as a stable liability, banks in reality create money through credit for the purpose of acquiring existing assets. This turns banking into a casino because created money finds its way into stocks and bonds and not into the real economy. This is great when money is cheap, but hazardous when money gets expensive as we are currently experiencing. It is in these conditions that the weaknesses in fractional reserve banking are highlighted.

So what does this mean for Bitcoin? The loss of faith in the banking system is good for Bitcoin because it provides people with an alternative. During the last financial crisis, Bitcoin did not exist. It was borne out of the crisis. When the first Bitcoin block was mined in 2009, it gave us a glimpse of a future world where we could survive without banks. Satoshi Nakamoto was concerned by a world that could be brought to its knees by corrupt, greedy, and dishonest bankers. Many people are oblivious to how close we came to the abyss in September 2008. When Lehman Brothers failed, the global banking system almost froze. At the time, Lehmans was a single A-rated bank, and one of the largest investment banks in the world. When this bank failed, one had to question the health of every other bank. When banks lose confidence in each other, and the world loses confidence in banks, it creates a bank run. Given that all banks in the world work on the system of fractional reserves, if everyone called on their money on all banks (which is close to where we got), then all banks go bust, and life as we know it comes to an end. Without banks, bread companies are unable to buy flour, farmers cannot buy feed for their cattle or fertilizer for their crops. Banks are an essential cog in the food supply chain. If you remove them, the shelves of the supermarket run empty and everyone dies.

Now we are in 2023. Banks are under strain, but on this occasion, there is an alternative, which could explain some of the recent strength in Bitcoin. Silicon Valley Bank went bust on March 10th. On that date, Bitcoin was trading at $20,207. At the time of writing this blog (Thursday March 23rd), Bitcoin was trading a little shy of $28,000 which is a gain of 37 percent. This process performance also needs to be seen in the light of what happened the day before writing this blog. The Fed interest rate decision and a meeting took place in which the Fed hiked interest rates by 25 basis points and indicated that inflation was still a risk. The only plausible explanation for this strength is linked to bank weakness. Investors are concerned about the safety of their assets deposited in traditional banks and are opting for a flight to safety in Bitcoin.

Venture capitalist Balaji Srinivasan believes that this banking crisis is going to trigger hyperinflation. He referenced recent government and Federal Reserve bailouts of Silicon Valley Bank and Signature Bank, and pointed out that Federal Reserve Bank of Minneapolis President Neel Kashkari is on the record as saying "there is an infinite amount of cash at the Federal Reserve". Balaji explained in December last year that Bitcoin is a "hedge against hyperinflation, monetary debasement, bank freezes, and wealth seizure. It has already proven itself in that role in places like Venezuela, Lebanon and Nigeria. He even made a bold bet initiated by James Medlock who announced on Twitter - I will bet anyone $1 million that the US does not enter hyperinflation. Balaji responded: I will take that bet. You buy 1 BTC. I will send $1 million USD. This is ~40:1 odds as 1 BTC is worth ~$26k. The term is 90 days. All we need is a mutually agreed custodian who will still be there to settle this in the event of a digital dollar devaluation.

In a follow-up tweet, Srinivasan detailed: “I am moving $2M into USDC for the bet. I will do it with Medlock and one other person, sufficient to prove the point … Everyone else should just go buy bitcoin, as it’ll be much cheaper for you than locking one up for 90 days.”

Several people have offered to help Medlock put up the 1 bitcoin for the bet. Medlock subsequently tweeted: “Balajis ready to do this?”

Srinivasan responded: “Yes. Just moving money for the bet. We can do it via smart contract, but for simplicity old-fashioned escrow may work,” Srinivasan replied. “The escrow person would need one BTC address and one ETH address (for the USDC). The assets would sit on chain for 90 days.” He clarified:

If BTC < $1M in 90 days after escrow, then you win and get both the 1 BTC and the $1M USDC. If BTC > $1M USD in 90 days after escrow, then I win and get both the 1 BTC and the (now worthless) $1M USDC.

Medlock replied: “Sir, I believe we have ourselves a deal.” The CEO of crypto exchange Binance, Changpeng Zhao (CZ), joined the conversation, offering to be the escrow for the bet. At the time of writing, BTC is trading at $27,208.

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