Balaji and Medlock bet on whether the price of Bitcoin will rise to $1 million? Hyperinflation is coming? Let's talk about Bitcoin. Under what circumstances will it rise to $1 million within 90 days? What is hyperinflation? Will Bitcoin reach $1 million?
Limited to personal knowledge, please feel free to point out any errors and discuss.
I believe that many people are currently paying attention to the million-dollar bet between Balaji and Medlock. The reason behind this is as follows: Balaji, the former CTO of Coinbase, a well-known Silicon Valley investor, a core fan of Bitcoin, and the proposer of the concept of a network state, retweeted a tweet from Jack Dorsey, the co-founder of Twitter, which said, "Hyperinflation is happening, and it will change everything." Balaji commented that Jack is right, and hyperinflation is coming. He also mentioned buying Bitcoin and withdrawing it from exchanges.
After that, a person named James Medlock challenged him, betting $1 million that the United States will not experience hyperinflation. Balaji then accepted the challenge. If the price of Bitcoin exceeds $1 million within 90 days, Balaji will win the bet. This seemingly "impossible thing" has become a hot topic in the entire market. So, under what circumstances will Bitcoin exceed $1 million?
Balaji believes that one of the biggest possibilities for Bitcoin to exceed $1 million is the occurrence of a severe financial crisis, where the US dollar experiences hyperinflation, leading to a significant devaluation of the dollar and a surge in prices. This dilutes the purchasing power of everyone's dollars and causes Bitcoin to exceed $1 million when priced in dollars. The current situation in the United States also aligns with various information provided by Balaji.
I believe everyone is also aware of the recent series of bank collapses in Silicon Valley, which has sparked panic about the risks of centralized financial systems. If we look back at the 2008 financial crisis, the Federal Reserve implemented a series of bailout and quantitative easing programs. However, these measures did not fundamentally solve the underlying problems of the financial system, such as excessive leverage, opaque financial instruments, and regulatory deficiencies. They only temporarily pushed the problems into the future.
When we look back at the phrase in the Bitcoin genesis block by Satoshi Nakamoto, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," in the context of the 2008 financial crisis, many governments and central banks implemented massive bailout plans in an attempt to stabilize the financial markets. However, this ultimately led to even bigger problems in the future, indicating Satoshi Nakamoto's lack of trust in the existing financial system.
Recently, the spreading panic and actions taken by the United States, such as Warren Buffett discussing how to deal with a banking crisis with the Biden team, have caused more people to distrust the centralized financial system. This has sparked a wave of hype and discussions about whether Bitcoin is a risky asset or a safe haven asset.
It is this widespread panic and concerns about hyperinflation that have made Balaji's bet the focus of attention. In my opinion, this entire event is actually a marketing event by Balaji, using market sentiment to promote the narrative around Bitcoin. It only cost $1 million to drive the sentiment of buying Bitcoin in the market, and I believe Balaji's profits from the increase in Bitcoin's value will far exceed $1 million. Why do I say this?
This brings us to the question of what hyperinflation is. Simply put, it is a significant devaluation of currency purchasing power. The most typical example is Zimbabwe. In 2008, Zimbabwe officially announced an estimated inflation rate of over 11,200,000%. During this period, the Zimbabwean government issued the world's largest denomination of currency, the 100 trillion Zimbabwean dollar, which couldn't even buy a roll of toilet paper.
In addition to small countries like Zimbabwe, there have also been cases of major countries experiencing high inflation due to the collapse of their currency systems. For example, the Russian ruble crisis in 1998. In simple terms, the Russian government, under a series of unfavorable factors, was unable to repay its debts, leading to a significant devaluation of the ruble and an economic crisis. The ruble depreciated significantly, reportedly even more than 100 times (I couldn't find specific data, though).
We know that the Federal Reserve chose to raise interest rates and reduce its balance sheet to combat inflation caused by the massive stimulus during the pandemic. But do you know how much money they printed? If we look at the Federal Reserve's balance sheet, we will find that the amount of money printed by the Federal Reserve during the pandemic in 2020 exceeded the total amount of currency in circulation in human history! The increase in money supply during the 2008 financial crisis through stimulus measures seems insignificant compared to this!
So the concern about hyperinflation is not unfounded. Just like Jack Ma mentioned in his speech at the Bund Financial Summit, the massive stimulus by the Federal Reserve during the pandemic will have far-reaching effects in the future. We also cannot know what hidden risks exist in the current financial system. The future of the global monetary system is uncertain.
However, regarding whether Bitcoin will reach $1 million within 90 days, my opinion is that it is 99.99% unlikely (leaving a 0.01% chance of being proven wrong). Why do I say this?
If we use the high inflation during the Russian ruble crisis to predict a systemic crisis in the US financial system leading to a significant devaluation of the US dollar, it would be a mistake. The US dollar is the most special currency in the world because the United States has dollar hegemony. If the ruble has problems, it is Russia's problem. But if the US dollar has problems, it becomes a problem for the whole world because the US can shift inflation to the entire world.
We can assume that if the US dollar system faces the risk of hyperinflation in the next 90 days, the whole world will need to take action to save the US dollar. Just like the Plaza Accord signed by the five major industrialized countries (the United States, Japan, Germany, France, and the United Kingdom) in 1985, the goal was to lower the value of the US dollar through coordinated efforts by governments.
At that time, the background was that in 1971, the United States abandoned the fixed exchange rate between the dollar and gold under the Bretton Woods system, causing the exchange rate of the dollar against other currencies to float. In the following period, the exchange rate of the dollar against other major currencies fluctuated greatly. The Federal Reserve implemented a series of tightening monetary policies, but the US trade deficit continued to expand, putting pressure on the domestic economy. The high exchange rate hindered US exports, while imported goods became relatively cheaper. This led to a continuous expansion of the US trade deficit and significant pressure on the US manufacturing industry.
To solve this problem, the US government sought to reach an agreement with other major economies to adjust the exchange rate of the dollar. At that time, these five countries mainly intervened in the foreign exchange market through their central banks. Specifically, these central banks used their own currencies to buy dollars, increasing the supply of dollars. When the supply of dollars increased, its value would decrease, thereby lowering the exchange rate of the dollar. This is a typical case of the world coming together to "clean up" after the United States.
The Plaza Accord also had some unexpected consequences, such as the Japanese asset bubble and the impact on the European monetary system by Germany. Therefore, the US dollar, as the world's major reserve currency, holds a special position in the international monetary system. The fluctuation of the US dollar's exchange rate not only affects the US economy but also has a significant impact on other countries and the entire world's economic order.
In summary, Balaji's bet seems more like a marketing event that uses market sentiment to hype the narrative around Bitcoin. It is highly unlikely that Bitcoin will exceed $1 million within the next 90 days because the United States has dollar hegemony. Even if there are risks, the US will share the burden with the whole world. However, the recent series of collapses in centralized financial systems also means that we cannot fully trust the existing centralized financial system to safeguard our assets.
This is also one of the reasons why Bitcoin was created. In this world full of lies and deception, if we cannot trust the existing centralized financial system, we can trust the blockchain system. Holding Bitcoin may be a hedge against this chaotic world. In the upcoming financial crisis, we may witness the important role that Bitcoin plays. However, I do not hope to see the day when Bitcoin reaches $1 million because we do not know what the world order will be like at that time.