Bitcoin: The Recession Investment Thesis

Joe Howe
12 min readMar 31, 2020

At this point it is no secret, the United States and the rest of the world is in a global recession. Stock markets around the world are getting crushed, unemployment is skyrocketing, and companies are going out of business. All while central banks are attempting to fill the holes of their cracked economic and financial systems by firing up the printing presses. Investors everywhere are scrambling to find the right place to allocate capital, but right now, nothing is safe. As mass hysteria peaks, mass selling follows. At the end of the mass hysteria and a return to normalcy we will see some once in a lifetime investment opportunities. In this article I am going to unpack why Bitcoin will be the clear winner after this pandemic subsides. I will be taking the article in a few directions but it will all inevitably come back to why Bitcoin is the best investment over the next 2–5 years. To understand this we first need to start with how things got so bad so quickly and why they will get much worse.

The equities market has gotten crushed over the last few weeks with some indices falling over 30%. This is the fastest selloff of equities in the history of the stock market. The most obvious reasoning, as with the Bitcoin selloff is that people need liquidity and they need it now. What many people do not realize is that this crash was coming with or without the virus. The Virus was simply the lit cigarette thrown onto the pool of gasoline, the pin that popped the bubble. The US economy as well as economies around the world have been in trouble for a long time now. The canary in the coal mine displayed itself in the fall of 2019 when we saw the almighty recession indicator — the inverted yield curve.

The bond market is typically seen as “smart money” as it is far less speculative than stocks or commodities. This has allowed the bond market to be a strong indicator of future economic conditions. This is why the inverted yield curve we saw in 2019 was a good sign tough times were ahead.

As you can see in this picture investors were buying the hell out of 10-year treasuries since early 2019 (bond yields move inversely to the price of bonds and as there is more demand for bonds the price of those bonds go up while the yield goes down). This means investors were fleeing to safety in long term bonds as they felt economic downturn was around the corner. Now the chart below (created a few months ago) is showing you the real yields (bond yield minus inflation) of 10-year bonds around the world. As you can see over 70% of the world was operating with negative yielding bonds. Yes that means if you buy the bond today you will get less money back in the future. You do not need to be on Wall Street to know that this is an ass backwards investment. Never in history has there been a situation like this. Treasuries have almost always offered investors positive real yields. However, following the Great Recession in 2008, investors continued to buy Treasuries due to their status as a “safe haven” even when the real yields on these investments were negative. The non-riskiness of the assets allows investors to balance their portfolio and be certain they won’t take any huge losses from this particular asset. The need to hold assets that are in essence safe during recessions is why so many people are willing to eat the losses to make sure their money is “safe”.

Why are all of these investors fleeing to treasuries? That answer is not black and white but it may have to do with the main underlying problem with the US economy. DEBT. To understand debt and how it impacts the economy take a look at these two slides from the KPMG COVID-19 impact presentation. These two slides are showing how initially debt amplifies the growth of an economy, but when there is a negative shock to the system like we are seeing now, all that debt accelerates the contraction of the economy.

Normal or even a little bit above normal levels of debt are not bad and can be managed, but when you reach the levels of debt currently seen in the US economy, you can be damn well sure there will be a reckoning. That is why I and many others have referred to COVID as the pin that pricked the (debt) bubble.

The US has been building up a massive debt bubble over the past 50 years. Think about this: US nonfinancial sector (households, businesses, and government) debt has gone up by 10% in just the past two years! Here is another fun fact: 38% of companies in the S&P500 cannot currently service their debt with their current EBITDA. Forget paying back their debt. That ship has sailed. They can’t even make their debt payments. Right now all this debt in the economy is deflating or at least it is trying to, just as it tried to do in 2008, 2001, 1997, 1994, 1987, 1981, and 1974. Each time this has happened there has been enough fed balance sheet capacity to reinflate the system with newly printed money (more debt). So the US was still solvent at this point meaning they still had enough assets to match the additional debt created. As seen in the two pictures above, when debt expands, liquidity grows and it pushes up financial asset prices (aka why we have seen crazy stock market returns since 2008–2009 global financial crisis). From the picture above we also know the reverse is true. When the debt deflates and the economy contracts you see massive liquidity and solvency problems for companies, industries and governments that are over levered. This is where the US runs into trouble. For a long time the US in particular has been consuming far more than it’s produced and has been borrowing to do it. What does all this mean? Well it means that in order to keep this ship afloat the government is going to have to inject massive amounts of new money (liquidity) into the economy. Numbers being tossed around right now are upwards of 5–10 trillion dollars. I hope at this point you are thinking “Where does all this money come from?” Well my friends as the fed board member Neel Kashkari said in an interview on 60 minutes “There is an infinite amount of cash at the Federal Reserve”. Hell yeah Neel! That means no more having to work or pay taxes right!? Well no not exactly. See, if you “print” enough of something it will eventually become worthless. Scarcity is a main reason something holds value and can be categorized as money. All of this “printing” leads to the inevitable dollar crisis in which the value of the US dollar gets completely diminished. I will dive into that in a future article. Note, I put “ “ around “printing” because in this day and age they are not actually printing physical dollars are actually simply moving decimals around on the computer screen.

Anyone that has told you the economy is in great shape over the last few years has either been lying, misinformed, or was simply analyzing the health of the economy based on financial asset prices. Nobody talks about the fact that 40% of Americans cannot afford a $400 emergency expense. That stat alone proves the economy is and has been crippled for a while. It is important to understand that the foundation of the US economy is nowhere near as sturdy as it once was. This understanding will help in the future when making investment decisions.

So where do we go from here? Did we see the bottom for financial markets? My answer is no I do not think so. In my opinion when this crash is all said and done it will resemble the 1930s more than it does the 2008 global financial crisis. Yes that means I think equities will fall another 20–50%. You may be thinking, but how the stock market is recovering? While it does seem the fed has been able to put a band aid on the extreme crash we saw in March, I do not believe this will hold for very long.

First off it is very important to remember that some of the biggest rallies in the stock market have happened during the worst economic downturns. Below is a picture of the S&P 500 during the 1929 crash in which the index plunged 34% in a month and the following two days rallied by 18%. The index then proceeded to fall another 26% in the next 13 days. Bear markets typically have three stages — sharp draw downs, reflexive rebounds, and a drawn out fundamental downtrend. I believe we have just experienced the reflexive rebound.

The market has not felt nor could it have possibly priced in the effects of millions of people becoming unemployed almost overnight. Check this chart out of the unemployment claims released last week. This number is only going to get worse as more and more companies struggle to weather the storm ahead and are forced to lay employees off.

The markets have also not felt nor have they priced in the long term effects of entire countries being on lockdown. There is extremely low economic activity being generated at a time like this and it could last another month or two. All of this makes for a very unique situation in that there is a drastic demand shock to the economy at the same time as there is a drastic supply shock. This is truly uncharted territory for the US and the rest of the world. I believe it will take a few years to get consumer demand back to the levels it was at pre pandemic and this will as you can guess cause large drawdowns in company profits and overall GDP growth.

The picture below on is a clear example of this. The charts are displaying foot traffic at car dealers in major cities. The huge fall off was only as of 3/15, so we can expect those numbers to be much lower at the end of March.

The picture above (from KPMG COVID impact presentation) shows a recent prediction for 2020 US GDP growth. The US could see a -4.3% year over year GDP growth. Notice how far consumption is expected to fall. Many smaller companies are going to fail and large companies are going to struggle. These massive impacts have certainly not been felt by the market and will be a big reason for the carnage ahead.

Now, before I get into why Bitcoin will be the best investment coming out of this recession I would like to note that I do believe the stock market will reach new highs in the next 2–5 years. I think you will be able to make easy 30%-100% gains by getting into the market near the bottom. It is important to understand here that a reason equities are plunging is due to the dollar strengthening. Any crisis like this makes “cash” king and pivots investors to find safety in US dollars. In order for the US to stop this deflationary spiral and stabilize markets it will have to flood the market with dollars (liquidity) which will devalue the currency and skyrocket the prices of financial assets. It will be very similar to the years following the global financial crisis. This is a picture of the S&P 500 five years after the GFC.

I also think we will see gold hit over $2000/oz in the next 2–5 years. This would be a solid 20–50% gain. As the global reserve currency gets devalued like it never has before investors will seek hard money that is protected against inflation. Gold is that for many people (I prefer Bitcoin). Both equities and gold will be in my portfolio in the medium term, but my main investment remains Bitcoin. I believe the reward profile of Bitcoin is so far beyond other assets that it is irresponsible to not be exposed to the asset.

On to the hardest, purest, freest money in the world. Bitcoin. Similar to gold as the nations around the world rush to devalue their currencies faster than ever before, investors are going to seek an inflation hedge. Bitcoin already is that hedge for many investors and it will become that hedge for many more. What are my expected returns for BTC over the next 2–5 years? I think you will be able to easily 3–10X your investment. That would put Bitcoin at a price of anywhere between 18K-60K. Keep in mind this is a conservative estimate on my end. Here is why.

Bitcoin is approaching something called a halving. This happens every four years and without getting too technical on the topic, what you need to know is that it causes a drastic supply shock. The incoming supply of Bitcoins gets cut in half. Here are some numbers so you can visualize it. There are currently around 18 Million Bitcoins in circulation, however it is going to take another +100 years to mine (produce) the last 3 million for a total of 21 million. That is because these halvings happen every four years, meaning the asset becomes more and more scare as time goes on. Below is a picture to help all of this make sense. The blue line represents the amount of bitcoins in circulation over time and the red line represents its inherent inflation rate.

So how does this affect the price? Well, it is simple supply and demand economics. If the current demand for Bitcoin holds while the incoming supply gets cut in half we will see a surge in price. Adding fuel to this fire is the inflation hedge nature of the asset I spoke about above. Investors all around the world will be looking for ways to hedge against the impending inflation in the coming years. This means that as we see the supply of incoming bitcoins get cut in half we will also be seeing a large spike in demand for the asset. This is the perfect recipe for a parabolic move upwards.

To solidify this point let’s look at the Stock to Flow model (pictured below). This model represents the correlation between the supply of Bitcoins and its price over the past 10 years. The gray lines represent the supply shocks (halvings) to Bitcoin and the red dots represent the Bitcoin price. As you can see circled in the red are the last two times Bitcoin has gone through a halving (2012, 2016).

Notice the red dots (price) following these events. Both times we saw massive spikes in the price about 1–2 years following the halving. This model has predicted price with extreme accuracy thus far and I expect it to hold again over the next few years. As you can see if the model does hold that will bring Bitcoin to a price of somewhere between 30–100K. So as I mentioned above if you buy some Bitcoin now at a price of $6000/btc you can potentially 3–10X your investment. Keep in mind this halving event also occurs again in 2024.

In conclusion, I believe we are still headed for some rough times ahead. I think 2020–2021 will be some of the toughest economic times of my life. I think we will see all assets continue to sell off until economies around the world return to normal and a clear bottom is reached. With that said, I also believe the coming years will provide the financial opportunity of a lifetime for those who are prepared. As central banks around the world rush to devalue their currency and prop up the prices of their financial assets, I am turning to the asset that sits outside the traditional system. The asset that is unaffected by inflation/deflation and ludicrous monetary/fiscal policies. The best performing asset in the world over the past 10 years. Bitcoin.