New Cycle? Four Future Possibilities of Bitcoin, Part 2

In Part 2, we continue to observe public information to draw four possible future scenarios (three scenarios will be explained in Part 2), of which we will analyze its impact on the price of Bitcoin. We then go one step further to discuss how it will affect cryptocurrencies on the whole.

Four Future Possibilities

In Part 1, we explored the first possible scenario: “New Helicopter Money”. Continuation in descending order of probability:

2. Internal Rebalancing in the U.S. Economy

The imbalance within the U.S. is mainly manifested in large technology groups. Their corresponding obligations are not aligned with the amount of money they made. New York University Professor Scott Galloway's article "Silicon Valley’s Tax-Avoiding, Job-Killing, Soul-Sucking Machine” pointed that out before Trump cut taxes (that is from 2007 to 2015), the average tax rate of the S&P 500 companies was 27%; while that of the four major technology companies was: 17% for Apple, 16% for Google, 13% for Amazon and 4% for Facebook. [caption id="attachment_16215" align="aligncenter" width="1054"] Article Image by Andrew Rae, Classic Esquire[/caption] Compared with its peers, Amazon has paid $1.4 billion in income tax since 2008, while Walmart – Amazon's subversive rival, has paid $64 billion. According to statistics, half of the surpluses in tax avoidance of U.S. technology companies and multinational enterprises in the past decade have been used for business expansion, such as R&D expenditure and acquisitions, which are supported by the government. The remaining money is used for market capitalization management and capital arbitrage, which is embodied in a complex set of financial magic, with the steps as follows:

1. Multinational companies get overseas tax-free cash through operations;
2. Since the balance sheet is in good condition, the company issues low interest bonds in the U.S.;
3. After bond issuance, the company obtains onshore cash in the U.S.;
4. The company issues part of this cash as dividends or repurchases its stocks. As the stock price denominated in USD rises, senior executives get tens of millions of USD as their salary is pegged to the stock price;
5. The company does not use the overseas tax-free cash. Instead, it chose to invest in the national debt of other countries to obtain the interest margin.

The beneficiary of the entire process is the company's shareholders, executives and financial intermediaries participating in the whole process. Other than the loss in government taxes, the ordinary employees of the firms also loses out. They do not hold shares and therefore, are unable to gain from the rise in stock prices. Employees’ wages will also be reduced in order to improve the performance of the company so as to increase the stock price. The interests and competitiveness of small and medium-sized enterprises will also be negatively affected because they can only attract customers through the issuance of higher interest bonds. Hence, in order to smoothen the fund raising process by small and medium-sized enterprises, Wall Street has developed a new instrument – collateralized loan obligations (CLOs), which is a financing tool similar to the collateralized debt obligations (CDO) in the 2008 financial crisis. It packs small and medium-sized enterprise bonds and those of high-quality technology companies together. [caption id="attachment_16216" align="aligncenter" width="796"] Wisburg Research Institute, rated using Standard & Poor’s standards[/caption] Of course, at present, CLO will not be exposed to risk immediately. On one hand, the main new buyers of CLO are the Bank of Japan and asset management companies, which are not enough to impact the banking system of the U.S.. On the other hand, with the reduction of interest rate by the Fed, one can still borrow the new to repay the old in the future. But on the whole, the competitiveness of small and medium-sized enterprises are still impacted. To this end, Republicans and radical Democrats are considering anti-monopoly measures to suppress and spin off large technology enterprises. Traditionally, large-scale technology enterprises and multinational companies in the Silicon Valley are the bases and financiers of the Democratic Party. Therefore, Republicans are politically willing to earn protection fees from technology companies in order to subsidize manufacturing and energy companies. [caption id="attachment_16217" align="aligncenter" width="1024"] Taming the Tech Titans, The Economist[/caption] Hence, whether it's the hotly contested Facebook privacy issue in the past two years, or Peter Thiel (the first famous investor in Silicon Valley to support Trump) who publicly claims Google's treason; Trump aimed at the semiconductor industry chain to launch the China-US trade tension, which is a signal to suppress large-scale technology enterprises. Since the general election of the Democratic Party in 2016, the Two Houses of Congress and the Supreme Court have retreated. In order to regain power, some internal radical forces have begun to take action, achieving results, which led to gradual improvements. Similar events happened within the Republican Party, namely "Tea Party", a radical group initiated in 2009 when the Democratic Party was in power. Finally, in 2016, it joined Trump and helped the Republican Party come back to power. At present, the radical force of the Democratic Party is called "Justice Democrats / JD”, represented by Sanders and Warren, and the active force is Alexandria Ocasio Cortez (AOC), an internet star. Sanders mainly propose heavy taxes on the wealthy and huge firms, while Warren asserts breaking up of technology giants in the name of anti-monopoly. Warren specially authored the article “Here’s how we can break up Big Tech”: 

3. Transfer of International Expenditure Obligations

To discuss this topic, we need to first understand two concepts: Triffin Dilemma and Current Account. Triffin Dilemma: if the USD is the core international currency, then due to trade and settlements, USD must be in large circulation overseas, causing the U.S. to be in a long-term deficit. Current Account: an item in the Balance of Payments of each country reflects the country’s import and export, services trade and other related data of a country. Therefore, the combination of the two suggests that the Current Account of the U.S. should be in deficit for a long time, as it is in reality. Which countries in the world are in surplus, and which are in deficit (i.e. similar to the U.S.)? Please take a look at the figure below: We can see from the figure that China, Germany, Japan and some European developed countries have long been in a surplus state. Besides the U.S., other countries in deficit include Middle East oil-rich countries and emerging market countries. Trump hopes to bring back the U.S. manufacturing industry and to reduce U.S. trade deficit. This means that China, Germany and Japan will have to bear more responsibility for import and expenditure in the future. Japan is the least hopeful, because the national debt is huge – more than 2 times the GDP of the country. China's central government debt is very low, and it is gradually implementing the Belt and Road Initiative, further opening its economy. However, this process will not be very fast because the pressures of invisible debts such as local debt and future pension and medical insurance are very high. The biggest hope lies in Germany and some developed European countries. Evidence can also be found by looking at the public policies of European countries:

1. The EU will set up a 100 billion "European Future Fund", which will make equity investment in "European enterprises with strategic importance".
2. The possibility of a “hard” Brexit is gradually increasing. At the same time, Germany's economic data continues to be depressing this year, so it is necessary to reverse expectations through fiscal stimulus, and unite more closely with other European countries;
3. At the beginning of 2019, the Federal Minister for Economic Affairs and Energy of Germany launched a “Nationale Industri Strategie 2030”, which was described as "economic nationalism" by the media. The plan basically includes allowing the government to buy stocks, extensively supporting industries of great economic significance, and establishing German enterprises as "national leading enterprises", etc.

However, the above envision of the transfer of International Expenditure Obligation is not at mutual agreements and will not be completed soon. This is because it has shaken the absolute dominant position of the Dollar in the world, and there will be a lot of strategic interaction in the future.

4. None of the Above Envisions are Successful

The failure of the three major envisions refer to:

• The Fed continues to maintain "independence", and hesitates to cut interest rates and cooperation with the Ministry of Finance;
• The two U.S. political parties continue to carry out internal struggle rather than implement policies, whether it is the large-scale tax cut by the Republican Party or the anti-monopoly proposed by the Democratic Party;
• The transfer of international expenditure obligations face obstacles, and the EU’s moves slowly;

The result is expected to be in two directions: intensified geopolitical conflicts and a recurrence of the financial crisis. If it is a financial crisis similar to 2008, U.S. debt will be sought after again. [caption id="attachment_16221" align="aligncenter" width="1140"] Bailing Out of 2008, Miami Herald[/caption]

How Will it Affect Cryptocurrencies?

When these four situations happen and progress, what impact will they cause on the prices of Bitcoin and other cryptocurrencies? It should be noted that the above hypothetical situations are not mutually exclusive. They may progress at the same time or alternatively. We believe the future market has the following possibilities:

Measure	Bitcoin	Altcoins
“New Helicopter Money”	During the process of interest rate reduction to 0, market funds will be concentrated in Bitcoin; OTC funds will not enter the market	In the short and medium term, it will continue to be pressured; Under low interest rate, the entrepreneurial atmosphere recovers, and high-quality new projects will attract the attention of OTC funds
Internal Rebalancing in the U.S. Economy	Break up of Large Technology Enterprises: Long Bitcoin; a large amount of OTC funds will enter the market;   Tax Increase: Long Bitcoin, OTC funds will enter the market;   Tax Cuts: no impact	Break up of Large Technology Enterprises: because of the spill-over effect of Bitcoin’s bull market, long Altcoins; Developers who are disappointed with the government will move into the cryptocurrency industry, which will benefit new projects in the future; Tax Increase: long coins with anonymity, short other Altcoins; Tax Cuts: no impact
Transfer of International Expenditure Obligations	If the EU dominates, the position of the U.S. Dollar will decline, short Bitcoin	A number of new technology projects will be generated with the financial support of European technology reserves; long future Altcoins that benefited.
All Expectations Fail	Financial crisis or geopolitical conflict is likely to lead to a large amount of shorting arbitrage for Bitcoin, the return of market funds to U.S. bonds, and a high likelihood of Bitcoin entering the bear market	Altcoins continue to stay low; its prices is likely to continue declining due to Bitcoin’s bear market

  What are your views?   What’s Next? The following article will a debate on the life and death of the cryptocurrency industry by the X-Order Team. Stay tuned! Connect with us on our Linkedin!