27 October 2021: As inflation continues to rise all over the world, could we really be in for a hyperinflation scenario? Twitter's Jack Dorsey thinks so. This week's market update will provide context to Jack Dorsey's warning and bring the latest news pertaining US banks potentially holding cryptocurrency assets.
Cryptocurrency Market Falls - El Salvador Buys the Dip
Despite growing concerns over hyperinflation (which will be discussed in further detail) and rising defaults in China, the cryptocurrency market is still sitting largely near all time highs. Interestingly enough, the president of El Salvador has announced that his country has in fact added to their balance sheets another 420 BTC.
This comes on the heels of a recent announcement by the US FDIC chairman that they are now investigating the appropriate steps towards allowing major US banks to hold cryptocurrency assets like Bitcoin. Growing in popularity and often cited as a formidable hedge against inflation, Bitcoin and other cryptocurrency assets look poised to continue to experience adoption.
Key Takeaways
- Adoption to spread in US to bigger institutions
- Fears of hyperinflation rise
- Cryptocurrency market down 6% despite positive news
Deeper Look at Potential US Adoption
Regulators are now exploring ways in which traditional US banks could hold Bitcoin on their balance sheets. Additionally, Bitcoin would be made available to clients for trading or collateral. This is a game changer for cryptocurrencies. The FDIC chair made an interesting comment on the matter, stating the following in an interview with Reuters:
"I think that we need to allow banks in this space, while appropriately managing and mitigating risk," McWilliams said. "If we don't bring this activity inside the banks, it is going to develop outside of the banks...The federal regulators won't be able to regulate it."
This was bound to happen eventually. It has become obvious to many outside the cryptocurrency landscape that assets like Bitcoin are not going away. Further adoption by US institutitions could provide the foothold for mainstream populations to dive into the cryptocurrency space at an unprecendented rate.
This is especially interesting coming after a now widely shared tweet from Jack Dorsey on potentially coming hyperinflation.
Jack Dorsey Warns of Hyperinflation
On October 22, Jack Dorsey - the CEO of Twitter - released this tweet:
This prompted responses from a large number of individuals spanning from economists to investors and everyone in between. The majority of responses were immediately dismissive of such a possibility. Consider this comment from economist David Rosenburg:
“To say that they’re [inflation headwinds] not going to be resolved at some point, I think is actually absolving yourself of being respectful of what history tells you."
Here is the problem. History cannot dictate the future of the world's present situation. Never before in history have we seen multiple governments around the world printing and borrowing money at the rate we have seen following the onset of the pandemic. The US has printed trillions and trillions of dollars with potentially even more spending on the way.
While some central banks around the world have indeed begun to raise rates, inflation is still set to rise for years. Additionally, here in the US the Fed is essentially trapped. Rosenburg argues that the bigger threat is a deflationary crisis.
This is true only if the Federal Reserve does indeed raise rates to combat inflation and substantially so.
If they do not or react to slowly, inflation can spike in a hyperinflation event rather quickly. At this point, we are looking at two potentially disasterous outcomes depending on the direction of central banks moving forward:
- A deflationary crash of essentially every economic asset class with the raising of rates
- A hyperinflationary event that becomes irreversible in FIAT currencies, most notably the USD
What to Consider Here:
From RekTimes perspective, Rosenburg is correct that is previous situations this would provide grounds for central banks to combat inflation. The problem is, this problem is already so far along combined with massive supply chain issues that some argue the Fed already cannot stop it. Additionally, both central banks and governments have absolutely no incentive right now to trigger a massive deflationary crash.
Inflation takes years to show itself in the broader economy at levels that would prompt panic. This is something to keep a close eye on as, if rates are raised and liquidity dries up, assets all over the world could crash - include cryptocurrencies.
Summary
No one can tell you precisely what is on the horizon in the coming months or years. What we do know is that major pressures on the global economy, including inflation, are not going away. Depending on governmental and central bank reactions will determine whether the global economy experiences a deflationary or inflationary crisis.
We strongly recommend to simply prepare for all outcomes to the best of your ability. Include hedges against inflation in your portfolios, stock necessary supplies, but also be vigilant and prepare for a deflationary crisis. RekTimes is expecting a bullish rise in cryptocurrencies markets at least until December barring a major shift in central bank policy in the next few weeks.
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