Renowned investor Anthony Pompliano wrote a letter to investors on February 27th attributing the surge in Bitcoin to the “return of inflation.” This article is a compilation and translation by Carbon Chain Value based on Anthony Pompliano’s article “Bitcoin Is Sounding The Alarm On Inflation.”
In the letter, Pompliano attributes the sharp rise in Bitcoin to the anticipation of inflation. He states that savvy investors are seeing the impending inflation and making large purchases of Bitcoin in order to protect themselves before it arrives.
Pompliano also introduces his own thoughts on the “reflexivity” behind the surge in Bitcoin. The market begins to chase after assets that are escaping from them. Smart investors initiate this trend, but followers push it even further and faster than previously imagined. Meanwhile, short sellers continue to bet on the current upward trend and end up being liquidated. At the peak of a true bull market, leveraged longs are eliminated. Currently, it is leveraged shorts that are being eliminated.
The investment theory of “reflexivity” was developed by George Soros. In simple terms, it means that the participants’ perceptions and the objects being perceived influence each other. Fundamental factors affect perspectives, and perspectives, in turn, affect fundamentals. They are never in balance, constantly interact and change, leading to an infinite cycle.
John Train, an American scholar, interpreted this principle in his book “The Master’s Investment Habits,” stating that the nature of reflexivity theory is that perception can change events, and events, in turn, change perception. 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, leading to more kicking, more biting, and so on.
Pompliano’s thinking is sharp, and readers may need time to digest it. Previously, he pointed out sharply that the current consensus on Wall Street is that inflation has decreased and the Federal Reserve is preparing to lower interest rates. Investors have prepared themselves to benefit from rising asset prices. Central banks are preparing to wave the victory flag. The media keeps reporting on the elusive “soft landing.” So, what will happen if this consensus on the “soft landing” of the US economy is broken? The answer is that there is no hope for interest rate cuts.
The following is the full text of the letter for readers to enjoy.
Yesterday, Bitcoin surged in a straight line, with a gain of over 11.5% in the past 24 hours. This kind of performance is not common in the financial market, especially without any notable catalysts such as earnings announcements or mergers and acquisitions.
Why has Bitcoin experienced a rapid increase in value in the past few weeks?
The common answer is that the launch of Bitcoin spot ETFs has sparked significant demand for the asset. This answer is not wrong. Yesterday, ETF net inflows reached $520 million.
As BitMEXResearch pointed out, when pricing Bitcoin in terms of capital flows, the net inflow of Bitcoin was 9,510. From this perspective, the demand for Bitcoin is more than ten times the daily production of the Bitcoin network.
If we evaluate this supply-demand imbalance in the first few days of the ETF launch, it wouldn’t be surprising. However, now that 45 days have passed since the launch of the ETF, the tenfold supply-demand imbalance is incredible.
The cumulative net inflow of ETFs has officially surpassed $6 billion. BlackRock’s funds lead with assets under management of $7.2 billion, and there are five ETFs with assets under management of at least $1 billion. From almost every indicator, the launch of Bitcoin spot ETFs is the greatest issuance in the history of ETFs.
The simple answer is that institutions want to make money, and now they can buy the best-performing asset of the past 15 years, so they will buy as much as possible. This reasoning makes sense, but I believe it is not the whole story.
In fact, most people overlook a hidden detail that could shock them. 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 flowed throughout the economy.
The narrative was not to worry about inflation, and later it was said that “inflation is temporary.” But experienced investors didn’t fall for it. Paul Tudor Jones and Stanley Druckenmiller said on CNBC, “Inflation is coming!” They both bought Bitcoin because they believed it would be the fastest horse in the inflation hedge category.
This was a correct prediction.
In the summer of 2020, when the inflation rate was below 2%, the price of Bitcoin was around $8,000. By March 2021, less than a year later, the price of Bitcoin reached $64,000. There are many reasons for the price increase, but the main reason is that the market has foresight.
Investors see the impending inflation and start buying Bitcoin in large quantities. They hope to protect themselves before inflation arrives. Please remember that investors do not wait for inflation to arrive before buying 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 actively suppressing inflation. The media celebrates the significant decline in year-on-year CPI. But this is not a true assessment of the situation.
According to WinfieldSmart, “The real risk at present is the resurgence of inflation. The ISM service price has always been a leading and accurate indicator of inflation. And it has just surged significantly.”
Most importantly, Donnelly_Brent points out that businesses are still seeking price increases. This is the ultimate indicator of future inflation. If businesses continue to raise prices, it doesn’t matter what the Federal Reserve does.
Therefore, the risk of inflation resurgence is increasing. Some investors are buying Bitcoin in anticipation of this scenario. Through the new investment tool of ETFs, there is more capital available for this asset than ever before.
With this influx of funds, many investors who were bearish on Bitcoin have been liquidated. Bitcoin analyst Checkmate explains the difference between this rebound and when Bitcoin touched $57,000 in 2021. This time, short sellers continued to bet on the current upward trend and ended up being liquidated. At the peak of a true bull market, leveraged longs are eliminated. Currently, it is leveraged shorts that are being eliminated.
This is the best reflexivity. The market begins to chase after assets that are escaping from them. Smart investors initiate this trend, but followers push it even further and faster than previously imagined. As WClementeIII wrote yesterday, anyone who buys a Bitcoin ETF is now up at least 15% because its trading is only 25% away from price discovery. Anyone waiting to see if the ETF will have an impact will soon become a momentum buyer. Then, buyers who break historical highs will follow. Reflexivity.
I completely agree. Bitcoin ETFs have caught the attention of most people because capital inflows are quantifiable. They have exceeded everyone’s expectations. It is interesting to watch Wall Street push up the price of Bitcoin to make Bitcoin holders sell their Bitcoin.
However, don’t believe the narrative that this surge is only related to speculative interest from large capital allocators. There is a significant 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 said it best.
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