Renowned investor Anthony Pompliano wrote a letter to investors on February 27th attributing the surge in Bitcoin to “resurging inflation.” This article is sourced from Anthony Pompliano’s article “Bitcoin Is Sounding The Alarm On Inflation,” compiled and written by Carbon Chain Value.
Summary:
Bitcoin broke through $64,000, but don’t celebrate yet? Matrixport founder: March is fragile, BTC may retrace 15% after halving.
Background:
Bitcoin undergoes a big washout! It momentarily fell below $59,000, dropping 8%, with over 180,000 people liquidating over $700 million.
This is a letter written by renowned investor Anthony Pompliano to investors on February 27th. In the letter, Pompliano attributes the surge in Bitcoin to “resurging inflation.” He states that savvy investors see inflation coming and start buying Bitcoin in large amounts, hoping to protect themselves before inflation hits.
He also presents his own thoughts on the “reflexivity” behind the surge in Bitcoin. The market begins to chase assets that are escaping from them. Smart investors initiated this trend, but followers pushed everything further and faster than imagined. Meanwhile, short sellers continue to bet on the current upward trend, resulting in liquidation. In a true bull market peak, leveraged longs will be annihilated. Currently, it is leveraged shorts that are being eliminated.
The investment theory of “reflexivity” was developed and extended by Soros. Simply put, it means that participants’ perceptions and the objects of their perceptions influence each other. Fundamentals influence perspectives, and perspectives, in turn, influence fundamentals. They are never in balance, constantly interacting and changing, leading to infinite variations.
American scholar John Train interpreted this in his book “The Money Masters.” The essence of reflexivity is that perceptions can change events, and events, in turn, change perceptions. This effect is often referred to as feedback. It’s like if you tie up a well-behaved dog and kick and scold it, the dog will become aggressive and bite you, resulting in more kicking and biting.
Pompliano’s perspective is sharper. Readers can try to slowly digest it. Previously, he sharply pointed out that the current consensus on Wall Street is that inflation has declined and the Federal Reserve is preparing to cut interest rates. Investors are ready to profit from rising asset prices. Central banks are preparing to wave the victory flag. The media continues to report on the elusive “soft landing.” So, what will happen if this consensus of the US economy’s “soft landing” is shattered? The answer is that rate cuts are unlikely.
The following is the full text of the letter for readers to enjoy.
Yesterday, Bitcoin skyrocketed. In the past 24 hours, it has risen over 11.5%. This performance is uncommon in the financial markets, especially without obvious catalysts such as earnings announcements or M&A activities.
Why did Bitcoin experience a rapid increase in value over the past few weeks?
The common answer is that the launch of Bitcoin spot ETFs has triggered massive demand for the asset. This answer is not wrong. Yesterday, ETF net inflows were $520 million.
As BitMEXResearch pointed out, when pricing the flow of funds in Bitcoin, the net inflow of Bitcoin was 9,510. From this perspective, the demand for Bitcoin is more than 10 times the daily production of the Bitcoin network.
If we evaluate this in the first few days of the ETF launch, this supply-demand imbalance is not surprising. However, now that 45 days have passed since the ETF launch, a 10-fold supply-demand imbalance is unbelievable.
The cumulative net inflow of ETFs has officially exceeded $6 billion. BlackRock’s fund leads with $7.2 billion in assets, and there are 5 ETFs with assets under management of at least $1 billion. From almost all indicators, the launch of Bitcoin spot ETFs is the greatest issuance in ETF history.
The simple answer is that institutions want to make money, and now they can buy the best-performing asset in the past 15 years, so they will buy as much as possible. This explanation has some validity, but I don’t think it tells the whole story.
In fact, most people overlook a hidden detail that may scare you.
What if people are buying Bitcoin because we are about to see a resurgence of inflation and investors are preparing their portfolios for the impact of inflation?
Let me explain.
First, let’s go back to 2020. The pandemic choked the economy. Government officials and central bankers implemented unprecedented monetary and fiscal stimulus measures. Trillions of dollars in liquidity flowed through the economy.
The national slogan was not to worry about inflation, later saying that “inflation is temporary.” But experienced investors were not fooled. Paul Tudor Jones and Stanley Druckenmiller said on CNBC, “Inflation is coming!” They both stated that they bought Bitcoin because they believed it would be the fastest horse in the race against inflation.
This was a correct prediction.
In the summer of 2020, the price of Bitcoin was around $8,000, with an inflation rate below 2%. By March 2021, less than a year later, the price of Bitcoin reached $64,000. There are many reasons for the 8-fold price increase, but the main reason is that the market has foresight.
Investors saw inflation approaching and started buying Bitcoin in large amounts, hoping to protect themselves before inflation hits. Remember, investors do not wait until inflation arrives to buy inflation hedging assets. They buy in anticipation.
There is ample evidence that current investors are doing the same thing again.
The Federal Reserve has been doing everything possible to lower inflation. The media celebrates the significant year-on-year decline in CPI. But this is not a true assessment of the situation.
According to WinfieldSmart, “Resurging inflation is the real risk at present. The ISM service prices have always been a leading and precise indicator of inflation. And they just surged.”
Most importantly, donnelly_brent pointed out that businesses are still seeking price increases. This is the ultimate measure of future inflation. If businesses continue to raise prices, it doesn’t matter what the Federal Reserve does.
Therefore, the risk of resurging inflation is increasing. Some investors are buying Bitcoin in anticipation of this situation. Through ETFs, this new investment tool, there is more capital available to invest in this asset than ever before.
With this influx of funds, many investors who were bearish on Bitcoin have been liquidated. Bitcoin analyst Checkmate explained what is different about this rebound compared to when Bitcoin reached $57,000 in 2021. This time, short sellers continue to bet on the current upward trend, resulting in liquidation. In a true bull market peak, leveraged longs will be annihilated. Currently, it is leveraged shorts that are being eliminated.
This is the best example of reflexivity. The market begins to chase assets that are escaping from them. Smart investors initiated this trend, but followers pushed everything further and faster than imagined.
According to WClementeIII, anyone who buys Bitcoin ETFs now has already gained at least 15% because the trading range is only 25% away from the price discovery. Anyone waiting to see if the ETF will have an impact will soon become momentum buyers. Then, buyers who break historical highs will follow. Reflexivity.
I fully agree.
Bitcoin ETFs have captured the attention of most people because capital inflows can be quantified. They have exceeded everyone’s expectations. It’s interesting to watch Wall Street push up the price of Bitcoin to make Bitcoin holders sell their holdings.
However, don’t believe the narrative that this surge is only related to the speculative interests of large capital allocators. There is a huge inflation risk lurking in the dark corners of the economy. Many investors have already experienced this story and won’t fall for it a second time.
Inflation. ETFs. Media attention. Liquidation of shorts. Reflexivity.
Satoshi Nakamoto couldn’t have said it better.
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