Investing In Bitcoin:
The Economic Catastrophe Waiting To Happen
Bitcoin has been declared dead more than 400 times by pundits and critics. And yet, it’s so NOT dead. And while there has been a lot of speculation about the various things that could allegedly kill Bitcoin, today’s guest brings up a scenario that we found interesting. Might we be able to change his mind? Author Stephen Leeb joins us for one of the most intriguing conversations we’ve had in some time.
Does China have its sights set on taking down Bitcoin? Let’s ask the tough questions and examine the potential answers whether or not we like them.
Hosts @ Bad Crypto Podcast
Stephen, we are anxious for you to tell us why investing in Bitcoin is a horrible idea. How do you foresee China’s Rise and what’s happening in the world today?
Dr. Stephen Leeb, Ph.D.
It’s deadly serious what’s going on in the world today. We have two real existential problems. Our civilization is going to rise or fall depending on our ability to solve these two issues.
The Global Differential Factor
The first existential problem the world must contend with is the ability to accommodate the growth of emerging economies in the developing world. This constitutes an economy where average income is less than $10k per capita (also referred to GDP per capita). In the developed world, median incomes are typically $45k per capita. In the United States the average income is $60k per capita. To make my point clear, the global economy has a 5:1 differential between the developed world and the developing world. The problem is that 85% of the world is currently developing.
This is why China plays such a major role in global economics. With a population of 1.4 billion- they’ve made a progressive leap to the top tier of the developing world. This means that on a per capita basis, the typical citizen in China has nowhere near the earning potential of a typical citizen in the developed world. Currently there’s roughly 1 billion people living in the developed world versus 7 billion people living in the developing world. The growth required to transition the entire developing world into fully developed economies is astronomical. There simply isn’t enough commodities and natural resources in the world to accommodate that kind of growth factor.
Over the past few decades, China has managed to exponentially develop their own economy along with other economies in the East. China’s not an altruistic economy that wants to establish trade with other countries solely for their own benefit. They’re creating opportunistic trading partners via the BRI Belt and Road Initiative which is going to create massive amounts of infrastructure. In turn, China and all the countries involved with BRI will require tremendous amounts of cheap energy and natural resources to achieve this initiative.
The Bull Market In Commodities
We witnessed the beginning of the bull market in commodities during the first generation of this century. It was a generation in which gold was the top performing asset. Additionally, many other commodities rallied in tandem to outperform the S&P 500; such as copper, silver and iron ore.
Hosts @ Bad Crypto Podcast
What timeframe was this exactly?
Dr. Stephen Leeb, Ph.D.
The first twenty years of this century from 2000 – 2020. During this timeframe a number of commodities outperformed the S&P 500 (dividends included). While this was a peculiar event, add the fact that gold outperformed the S&P 500 by about 200 percentage points. If you were an investor, you made five fold on gold and three fold on the S&P 500.
For my clients, I outperform the market. Looking back in hindsight, twenty years ago I could have advised an investor to buy gold bullion because they would have made a better return on their investment than anything else. I wasn’t that foresightful obviously but that investment strategy would have worked in spades. The nuances displayed in the financial markets over the past twenty years suggest that investment trends are shifting. If gold was the only commodity affected by this whole gamut- it might be considered a fluke. However when iron ore and copper are outperforming the S&P 500 it’s another thing altogether. To date, the market had the strongest move in the midst of this pandemic economy and the boldest move in commodities (by some measures) in nearly a century. A whole mix of commodities from corn to scrap iron and copper has gone up nearly 50% in the past 12 months. Historically, you would have to go back to the pre-twentieth century in order to find market conditions where commodities were advancing so strongly. In fact, commodity stocks have actually been the leaders in this bull market.
Hosts @ Bad Crypto Podcast
Can I interject and ask a dumb question, Stephen? What percentage of that is the economy versus the inflation of the U.S. dollar becoming more ‘worth-less’ overtime. The FED has printed more money in the last 10 years than ever before, of course inflation is going to go up.
Dr. Stephen Leeb, Ph.D.
You’re absolutely right and that’s a great question but you’re talking about relative gains in price. In other words, material stocks actually outperformed tech stocks. They were the best performing stocks since the market bottom and the FED started printing money. A large portion of that money went into commodity stocks. The material index of the broad-based Russell 3000, which includes every stock, has gone up by about 160% since the market bottom. That’s twice the gain in the S&P 500. When the FED is printing infinite amounts of (fiat currency) paper money, the cost of everything uptrends. Commodity stocks have gone up more than anything else and that’s extremely unusual. It suggests that commodity scarcity is coming down the pipeline. When 85% of the world economies are developing- you’re going to have commodity scarcities. Look at the enormous demand for copper, even in the midst of a pandemic. The spot price of this vital industrial metal recently hit an all-time high.
Climate Change Hypothesis
The second existential problem the world must contend with is climate change. I’ve formulated my own opinion on this topic, taking into consideration its relevance to current geopolitics. The Earth is indeed getting warmer but to what degree? Scientists have these very complex “so-called” sophisticated models that tell us the climate is going to continue warming, resulting in all sorts of havoc. I could perhaps argue against it, however, I see what I see. The economy right now is warming and to associate it with CO2, these greenhouse gases make some sense. It passes the common sense test and it does suggest that it’s a reasonable hypothesis. Even if it wasn’t reasonable, it’s still a given that the developing part of the world is going to need massive amounts of commodities.
Under the circumstance that the world needs more energy, we can translate that into how much energy is needed to produce it. When building an immense amount of infrastructure, vast amounts of energy are required. Likewise, it’s essential to create sources of generating renewable energies because they are going to play a very significant role in the future. There’s simply not enough storage of fossil fuels in the ground to accommodate the amount of development the world anticipates. This will result in a tremendous call on commodities and we cannot afford to waste that opportunity. This is why I think that China and gold are the catalysts in this scenario. Gold will be needed to replace the dollar (in some sense) and China will be driving the developing world.
“The commodity bull market will be like the first generation but on steroids over the next 20 years”
Hosts @ Bad Crypto Podcast
Okay, so you make a really good case for why commodities are uptrending and the advantages of investing in precious metals. When you talk about the best investments over time- if you would have bought Bitcoin just under a year ago- you’re up 680% today. Over that period of time it’s a much stronger investment. However, I believe you would like to make the case that it’s actually a bad long-term investment (as are likely all cryptos) and this ties into China.
Dr. Stephen Leeb, Ph.D.
There’s a couple of reasons and essentially they do lead into China. The first issue, cryptocurrencies are very energy intensive, especially Bitcoin. And they’re only getting more energy intensive, same goes for the entire tech industry. Current estimates are that technology will consume about 20% of all electricity by 2030 and continue to grow from there. Those are estimates but I tend to believe it. Bitcoin mining requires tremendous amounts of computing power. Right now, there’s a general chip shortage in Nvidia chips, the gaming chips and also the superfast chips that have found a role in artificial intelligence. Why? Quite a lot of those superfast chips are going to Bitcoin miners in China. I’m not saying that Bitcoin is singularly responsible for energy shortages but it’s highly accountable. Bitcoin miners are estimated to be using the equivalent amount of energy per year as the entire country of Switzerland. It wouldn’t surprise me if Bitcoin got up to $100k and it’s certainly possible. However it could end in a total catastrophe.
As a prime example, Bitcoin in relation to the entire crypto market is capitalized at about $2 trillion. That’s a lot of money in crypto, no matter what way you look at it. Recently we observed an epic financial catastrophe unfold when a $20 billion dollar hedge fund went belly up, sending reverberations through major banking institutions. That $20 billion dollar hedge fund compared to a $2 trillion dollar Bitcoin market cap is going to have massive reverberations throughout the entire global economy if it goes belly up. And that’s why investing in Bitcoin is a horrible idea.
Stay Tuned For Part II of the Bad Crypto Podcast Interview!
