【Full Translation of BitMEX Review】Hyperinflation is imminent, presenting the biggest opportunity in Bitcoin's brief history.

The latest blog released by the renowned Bitcoin futures contract exchange BitMEX comments on the current economic policies and predicts that this will be the biggest opportunity point in Bitcoin's brief history.

Abstract:

We assess the impact of the coronavirus on the economy and financial markets. From virus policies to fiscal expansion funded by central banks in response to the virus outbreak, significant changes in the economic system will be highlighted. Ultimately, there will be a clear winner in this new system: inflation. The current economic situation may resemble that of the 1970s, with unstable expectations for inflation. Regime changes and inflation will be hard for financial markets to tolerate. In this environment, the greatest opportunity for Bitcoin may lie in the short term.

Financial Market Collapse Triggered by Coronavirus

The stock market collapse caused by the coronavirus in 2020 has now become one of the major stock disasters in history, alongside others such as:

• Global Financial Crisis (2008)
• Dot-com Bubble (2000)
• Asian Crisis (1997)
• Black Wednesday (1992)
• Japanese Asset Bubble (1991)
• Black Monday (1987)
• Oil Crisis (1973)
• Wall Street Crash (1929)

On March 17, 2020, the Volatility Index (VIX) hit a high of 84.83, just slightly below the peak of 89.53 reached during the 2008 Global Financial Crisis. As of the writing of this article, the S&P 500 index has dropped by over 30% from peak to trough in 2020, with the Dow Jones Industrial Average marking its largest single-day decline since Black Monday in 1987.

From a financial perspective, the coronavirus crisis of 2020 is bound to be written into history. Asset managers who have leveraged more than ever before are in crisis, scrambling to secure the U.S. dollar, leading to a spiral decline in almost all asset prices, from stocks to commodities, from non-government bonds to cryptocurrencies.

Central banks and governments have been responding rapidly. In the U.S., the Federal Reserve has lowered interest rates to near zero (0% to 0.25%), announced the purchase of at least $500 billion in U.S. Treasuries and $200 billion in mortgage-backed securities, and reduced reserve requirements for commercial banks to zero. More measures may still be on the horizon. However, it is becoming increasingly clear that central bank governors are now gambling their last cards. Monetary policy alone is no longer enough.

Central Banks Have Reached Their Limits

The notion that central banks have reached their limits is not outdated. In fact, it has become a consensus even among central bank governors. You can choose which arguments you prefer (or multiple selections):

• Interest rates are already at the lower bound. The lower bound is 0% because if we go lower, the public will simply hoard physical cash.
• Buying more government bonds can only help commercial banks in a liquidity crisis. Now, the monetary policy transmission mechanism to the real economy has been disrupted.
• We have reached the "reversal rate," where further rate cuts have a net negative impact on commercial banks due to reduced net interest margins. Therefore, lower rates will lead to economic weakness. Note: When central banks lower rates to a certain level, it can harm bank profits, reduce banks' willingness to lend, and thus damage the real economy.
• We have reached the limit of central bank expansionary monetary policy, and any further extreme measures will send negative signals to consumers and generate net negative benefits for the real economy.

The above arguments are becoming increasingly prominent. The message from central banks themselves is now very clear: It is time for fiscal stimulus measures (source: FT)

Are We on the Right Path?

Perhaps the more crucial issue is whether central banks around the world have been on the right path from the start. The handling of the dot-com bubble in 2000 involved lowering rates from 6.5% to 1%, and then in the 2008 financial crisis, rates were lowered from 5.25% to 0.25%.

Fed Rates

Fed policy is based on models that assume monetary policy does not affect the economic structure but only eases the flow of money within the financial system. However, we believe that policy has become extremely extreme, changing the economic structure. The Fed policy has become the primary driver of changing the economic structure. Reacting to worsening situations only ensures they will worsen further. These rate policies may foster a series of financial crises, each crisis being "resolved" by lowering rates, sowing the seeds for the next crisis.

Regardless of one's views on monetary policy, it is undeniable that the current system cannot bear another crisis. It is time for a change.

Changes in the Economic System

Governments around the world will face massive fiscal deficits, not only due to higher spending demands but also as part of a deliberate strategy to stimulate the economy.

The newly generated large deficits will be directly funded by central banks buying government bonds for relief injections, and they come in many forms:

• People's Quantitative Easing
• The People's Bailout
• Modern Monetary Theory
• Universal Basic Income
• Helicopter Money
• Fiscal Transfers
• Green New Deal
• Handout Schemes (Hong Kong and U.S.)
• Coronavirus Salary Subsidies

Such requests are coming from central banks, and governments are likely to be more than willing to oblige. While some of this fiscal policy is driven by a lack of monetary traction, governments are unlikely to resist its occurrence. Governments will also face tremendous pressure from the people. Initially, the focus may be on mitigating the impact of the coronavirus.

Providing funds for people to purchase essential goods amid income loss due to economic stagnation and compensating businesses for losses due to policies to prevent virus spread will be the initial focus. However, the expenditure won't be driven solely by the virus. Populism driven by income growth and wealth inequality will also force governments to increase spending.

As the economic slowdown triggered by the novel coronavirus unfolds, we are undoubtedly moving swiftly into this trend, and it is significant. It is a policy shift, a change in the economic system, and it will have consequences.

Impact of Inflation

Under the implementation of monetary policy, central banks usually worry about the consequences of their actions, fearing they may be seen as benefiting specific individuals, thus outcomes remain uncertain. However, in this new era of fiscal expansion, inflation will be a clear winner. Inflation will not only arrive, but it will be shocking. Such inflation had been erased from our collective memory. Inflation rates have been low and stable for over 30 years, and political figures and the public have not been aware of this risk. We cannot predict how and when inflation will appear, but at some point, it will come as a shock. It will be a shock not only to the economy but also to culture.

We believe the best analogy is the 1970s when inflation rates fluctuated significantly, reaching highs of 15%.

U.S. Consumer Price Inflation (YoY Change)

The market cannot tolerate change. Inflation will not only impact our politics, economy, and culture but will also affect financial markets. With the "central bank put" protecting financial markets, they have become very accustomed to the current system. The shifts driven by fiscal expansion and unstable inflation expectations will be intriguing. The turbulent times have arrived.

Note: Central bank put refers to the central bank sending a strong signal to promote the economy and demand through policies.

Bitcoin's Greatest Test

In this economic environment where inflation expectations are high, gold seems poised to shine. But what about Bitcoin? As investors scramble for the dollar in the collapse caused by the 2020 novel coronavirus, Bitcoin has dropped by nearly 53% (bottomed out). In many ways, this was inevitable. Where Bitcoin's price may shine is after the economic crisis leads to inflation turmoil. We believe that in this changing economic system without clear anchors for the economy and financial markets in a loose state, with no measurable target for inflation, this may be the greatest opportunity seen in Bitcoin's brief existence.