Arthur Hayes, co-founder of cryptocurrency exchange BitMEX, recently provided a comprehensive analysis in his latest book essay“Zoom Out,” drawing compelling parallels between the economic shocks of the 1930s and 1970s and today’s financial landscape, with particular attention to the implications for the Bitcoin and cryptocurrency bull market. His in-depth analysis suggests that historical economic patterns, if properly understood, can provide a blueprint for understanding a potential Bitcoin and cryptocurrency bull market revival.

Understanding Financial Cycles

Hayes begins his analysis by examining the major economic cycles from the Great Depression through the mid-20th century boom to the stagnation of the 1970s. He classifies these transformations into what he calls “local” and “global” cycles, which are crucial to understanding the broader macroeconomic forces at play.

Local cycles are characterized by an intense focus on the national level, where economic protectionism and financial repression are common. These cycles often result from government responses to major economic crises that prioritize national recovery over global cooperation, typically leading to inflationary effects due to devaluation of fiat currencies and increased government spending.

Global cycles, in turn, are characterized by periods of economic liberalization during which global trade and investment are encouraged, often leading to deflationary pressures due to increased competition and efficiency in global markets.

Hayes takes a close look at how each cycle impacts asset classes, noting that non-fiat assets like gold have historically performed well during local cycles due to their nature as a hedge against inflation and currency devaluations.

Hayes draws a direct parallel between the rise of Bitcoin in 2009 and the economic environment of the 1930s. Just as the economic crises of the early 20th century led to transformative monetary policy, the 2008 financial crash and subsequent quantitative easing set the stage for the introduction of Bitcoin.

Why the Bitcoin Bull Market Will Resume

Hayes argues that bitcoin’s emergence during what he identifies as a renewed local cycle, characterized by a global recession and significant central bank interventions, mirrors earlier periods when time-honored financial systems were in trouble and alternative assets such as gold were gaining ground.

Drawing an analogy between gold in the 1930s and Bitcoin today, Hayes explains how gold served as a sheltered haven during times of economic uncertainty and runaway inflation. He posits that Bitcoin, with its decentralized and state-agnostic nature, is ideally suited to fulfill a similar purpose in today’s volatile economic climate.

“Bitcoin operates outside of traditional state systems, and its value proposition becomes especially apparent in times of inflation and financial repression,” Hayes notes. This feature of Bitcoin, he argues, makes it an crucial asset for those looking to preserve wealth in the face of currency devaluation and fiscal instability.

Hayes points to the significant escalate in the U.S. budget deficit, which is expected to reach $1.915 trillion in fiscal year 2024, as a contemporary rate that parallels the fiscal expansion of previous local cycles. This deficit, significantly higher than in previous years and marking the highest level outside of the COVID-19 era, is attributed to increased government spending similar to historical periods of government economic stimulus.

Hayes uses these fiscal indicators to suggest that just as previous local cycles led to rising valuations of non-sovereign assets, current fiscal and monetary policies will likely escalate the attractiveness and value of bitcoin.

“Why am I so sure that Bitcoin will regain its charm? Why am I so sure that we are in the midst of a new mega-local, inflationary nation-state cycle?” Hayes asks rhetorically in his essay. He believes that the same dynamics that drove the value of assets like gold during previous economic shocks are now driving Bitcoin higher.

He concludes: “I believe fiscal and monetary conditions are loose and will remain loose, and therefore hodling cryptocurrencies is the best way to preserve wealth. I am certain that today will rhyme with the 1930s to the 1970s, and that means that given that I can still freely switch from fiat money to cryptocurrencies, I should do so because depreciation is coming through the expansion and centralization of credit allocation through the banking system.”

At the time of going to press, the BTC price was $62,649.

Featured Image from YouTube / What Bitcoin Did, Chart from TradingView.com