The news this year has been filled with headlines regarding increasing tensions among the United States, China, Iran, Russia, and Venezuela. A full-fledged trade war is underway between the United States and China, and there is perhaps some potential for this to flare up into a military conflict. The United States has levied the most severe sanctions in history against Iran following the collapse of the Iran nuclear deal, and Iran’s escalating rhetoric regarding the annihilation of Israel and the United States.
Venezuela’s economy and currency are collapsing, and the United States is attempting to foster a rebellion against President Nicolás Maduro and implement a democratic government. Lurking in the background is Russia, archrival of the United States since the end of World War II and an ally of China, Iran, and Venezuela. It’s possible that the world could be on the brink of the next world war if any of these regions flare up into a military conflict with the United States.
Bitcoin, the world’s first and by far most popular decentralized currency, is poised to increase massively in value if war breaks out, and an increase in Bitcoin’s value can be expected even if tensions remain the same or escalate without war. There are several reasons for this as will be explained in this article.
The Chinese Trade War Is Weakening the Stock Market and Economy, Causing Investors to Flock to Bitcoin
The trade war between the United States and China officially started on Jan. 22, 2018 when President Trump levied a 30% tariff on foreign solar panels and a 20% tariff on foreign washing machines. China is the top exporter of solar panels and washing machines to the United States, so these tariffs were aimed at China, and China decried the tariffs.
Notably, the stock market reached its zenith the same week, with the Dow Jones Industrial Average hitting 26,600 points after nearly a decade long bull market. Since January 2018, the stock market has been sideways and volatile, revealing the negative impact the trade war has had on the stock market since it first started.
The trade war started due to the tremendous trade imbalance between China and the United States. China had a $337 billion trade surplus with the United States in 2017. Essentially, hundreds of billions of dollars per year were flowing out of the United States into China. Specifically though, the trade war started to to punish China for its theft of U.S. technology — including top secret military technology — via hacking and espionage.
In March through August 2018, the United States put 25% tariffs on $50 billion of Chinese goods. China responded with similar tariffs on $50 billion of U.S. goods. In September 2018, the United States put 10% tariffs on $200 billion of Chinese goods. In May 2019, the tariff increased to 25% for the $200 billion of Chinese goods, with threats to impose tariffs on another $300 billion of Chinese goods. China has responded by saying it will increase tariffs on $60 billion of United States goods by June 1, and there is the possibility of China taking even more extreme measures.
Additionally, there is a hint of military conflict between China and the United States. China has been aggressively expanding its military control in the South China Sea and claiming territory that is also claimed by Malaysia, Vietnam, Brunei, the Philippines, and Taiwan. The reason for this is the South China Sea is rich in resources and also intersects several important international shipping lanes. The United States has responded by sailing warships throughout the South China Sea to send the message to China that international maritime boundaries will be maintained and respected.
The result of this trade war so far is an increasing number of red days on the global stock markets and increasing fear. The bond yield curve has inverted three times, meaning that investors are rushing into 10-year federal treasury bonds, causing the 10-year yield to fall below the three-month yield. This means investors think the 10-year bond rates now are better than they will be in the medium term once the stock market enters a recession. A bond yield curve inversion is a solid leading indicator of an economic recession, and generally, the recession happens one to two years after the bond yield curve inversion.
The Chinese trade war could effectively end up being the needle that pops the global economic bubble. The world now has $244 trillion of debt, 318% of the global GDP, spurred by a decade of free money.
In response to the Great Recession of 2008, the governments of the world responded by lowering interest rates to near zero, essentially giving free money to banks and corporations. This flow of free money continues to this day, and it is a primary force that props up the global stock markets. However, if the Chinese trade war triggers a recession, defaults will happen on a scale never seen before, and the debt bubble will collapse and take the global economy down with it. It is possible that governments will respond by printing tremendous amounts of money in a last ditch effort, which would lead to fiat hyperinflation.
Bitcoin has soared since December, rising 160% from $3,100 to $8,100. Undoubtedly, some of Bitcoin’s price increase can be attributed to the Chinese trade war weakening the the U.S. economy, which has resulted in some investors who typically invest in stocks diversifying into Bitcoin.
Bitcoin’s market cap is currently $143 billion, in contrast to the tens of trillions of dollars in the stock and bond markets. Only a small fraction of the capital invested in stocks and bonds being diversified into Bitcoin can cause a major Bitcoin rally, and indeed it seems this movement is already underway.
This may only be the beginning of Bitcoin’s long-term rise. If the coming stock recession is deep enough to pop the debt bubble, and governments respond by printing money en masse, Bitcoin will be one of the only safe havens left for investors.
The Impact Of Sanctions On Iran
In 2015, the United States and 7 other countries entered into the Joint Comprehensive Plan Of Action with Iran, aka the Iran Nuclear Deal. The point of the deal was to prevent Iran from developing nuclear weapons via reducing its stockpile of enriched uranium, getting rid of a majority of Iranian centrifuges, ending construction of Iranian heavy water facilities, and giving the other countries party to the deal access to all of Iran’s nuclear weapons research. In May 2018, the United States withdrew from the Iranian Nuclear Deal after Israel shared evidence that Iran was continuing to pursue nuclear weapons.
After withdrawing from the deal, the United States imposed severe sanctions on Iran, including cutting Iran off from the international banking system, banning all trade or business with Iran, seizing as much of Iran’s assets as possible, and banning Iranian oil exports.
The Iranian economy largely depends on oil exports, and banning Iranian oil exports is more than enough to cripple Iran’s economy. In May 2019, the United States ended all sanctions waivers and declared that no country could import Iranian oil, in order to drive Iranian oil exports as close to zero as possible. In response, Iran says it is beginning to accumulate enriched uranium and creating more centrifuges.
The effect of the sanctions on the Iranian economy is severe. Iranian citizens are struggling to buy basic essentials and face an unemployment rate of 12% and youth unemployment of 25%. The Iranian Rial has collapsed in value, with the exchange rate dropping from 32,000 Iranian Rials per U.S. dollar in 2015 to 148,000 Iranian Rials per dollar currently. This hyperinflation has wiped out the life savings of Iranians, and combined with the lack of international exports, the prices of basic necessities in Iran like food and medicine are skyrocketing.
Bitcoin adoption is likely increasing in Iran since compared to the Iranian Rial, Bitcoin is an excellent store of value. Citizens have practically no capability of accumulating savings when using Iranian Rials, but with Bitcoin, Iranians can safely store money for future use. Further, Bitcoin can be used to facilitate international trade. International banking and trading is barely functioning in Iran due to the sanctions, but Bitcoin still functions perfectly.
The Possibility Of War With Iran
Chinese Foreign Minister Wang Yi declared that China firmly opposes the sanctions against Iran, indicating that China may continue to import Iranian oil despite the ban. This has escalated the Chinese trade war with the U.S. even further, raising the dark possibility that China may defend Iran in the event the United States goes to war with Iran, a possibility whose likelihood seems to be increasing.
A naval strike group led by the nuclear aircraft carrier USS Abraham Lincoln is currently in the Arabian Sea not far from Iran and will likely cross into the Persian Gulf via the Strait of Hormuz.
The Strait of Hormuz has long been a place of high tensions between Iran and the rest of the world. It is a narrow body of water abutting Iran, and all oil shipments coming through the Persian Gulf come through the strait. Further, the United States is now deploying 1,500-2,000 troops to the region to defend against any threats from Iran. Essentially, the United States is preparing for a war with Iran.
Although there is no official shooting war between the United States and Iran, there are already active proxy wars between Iran and allies of the United States. Iranian Revolutionary Guards have invaded Syria as part of the Syrian Civil War. More than 2,100 Iranian Revolutionary Guards have been killed in the conflict so far. Israel, a key ally of the United States, is now consistently bombing Iranian military outposts in Syria. Further, Israel has been in conflicts with Hezbollah in Lebanon and Hamas in the Gaza Strip for years, and these are considered proxies for Iran. Indeed, in the past month, Hamas launched hundreds of missiles into Israel, and Israel responded by bombing the Gaza Strip. Iran appears to have funded Hamas in this recent conflict.
Saudi Arabia is another key ally of the United States, and for years Saudi Arabia has been in a war in Yemen against the Houthis, another group considered a proxy for Iran. In the past week a drone strike against critical Saudi Arabian oil infrastructure has been blamed on Iran, although the Houthis took credit for the attack.
Aside from the proxy wars, the rhetoric coming from Iran is intense. Iran’s Khameni said this week “You young people should be assured that you will witness the demise of the enemies of humanity, meaning the degenerate American civilization, and the demise of Israel”.
A war between Iran and the United States would end up pulling in many other nations on both sides. As we said earlier, China seems ready to back Iran, and Russia is an ally with Iran as well. Therefore, a conflict between the United States and Iran has the potential to turn into a global conflict, possibly World War III.
So how does this potential war with Iran affect Bitcoin? Bitcoin would benefit from global economic and political instability. Wars cost tremendous amounts of money, which governments obtain through money printing. As well, international trade is severely disrupted during a major war. The combined effect of this will be a weakened stock market, if not market chaos. Fiat currencies will experience inflation, which would cause investors and other people to jump into Bitcoin as a safe haven to protect the value of their wealth. Bitcoin has a very limited supply and cannot be printed, which means it would gain value in the event of fiat inflation. Further, investors who typically trade in the stock market would flock to Bitcoin since it would be profitable in the event of a war, versus the stock market which would likely see heavy losses.
Conflict In Venezuela
As if the tensions between the United States and China, Russia, and Iran were not enough problems, there is also a festering conflict in Venezuela. Venezuela’s economy and currency has collapsed under the Maduro regime. The Cafe Con Leche Index, which tracks Venezuelan inflation via the price of a cup of coffee in Caracas, indicates that inflation is well over 100,000% per year. This has resulted in Venezuelans losing their life savings. As well, when Venezuelans are paid, they are forced to buy their necessities immediately or face losing a significant amount of the value of their money while they sleep. Zooming out, this hyperinflation has caused the Venezuelan economy to collapse. This has resulted in widespread poverty and starvation in Venezuela.
Bitcoin and cryptocurrency have been a well documented solution to Venezuela’s hyperinflation crisis. Venezuelans are using Bitcoin and Dash as a safe and secure way to store money without losing its value to inflation. Further, since Venezuela is under sanctions from the United States, cryptocurrency is a way for Venezuelans to continue doing business despite the sanctions.
The Venezuelan economic crisis has been inching closer towards civil war. In January, opposition leader John Guaido declared himself president of Venezuela after a seemingly fraudulent election where President Maduro was re-elected, the same president who presided over the collapse of Venezuela’s economy.
The United States and 53 other countries quickly recognized John Guaido as president of Venezuela, but Russia, China, Iran, Cuba, Syria, and Turkey continue to recognize Maduro as the president. On April 30, an attempted uprising to overthrow Maduro failed due to lack of support from the Venezuelan military for John Guaido.
The United States appears to be continuing to support the opposition in Venezuela, although there are no signs of an imminent United States military intervention. Meanwhile, Russia has deployed a limited number of troops to Venezuela to support Maduro, and Russia says it will back Venezuela in the event of a U.S. attack. Further, China is an adamant supporter of Maduro.
Looking at all the evidence and news, it is clear that the trade war with China, the escalating tensions with Iran, and the political uprising in Venezuela are pieces of a broader international conflict between the United States and its allies and Iran, Russia, and China.
Those facts don’t guarantee World War III will happen. Indeed, the world has successfully backed away from global war multiple times over the last 70 years. However, even if tensions in China, Iran, and Venezuela never boil over into a shooting war, it seems Bitcoin is poised to gain value with each passing news story involving these tensions.
In the event of a war Bitcoin, would become extremely valuable due to it being the one of the only safe havens from a stock market collapse and fiat hyperinflation. Further, Bitcoin may be the only payment system that works internationally in a world divided by war. Numerous investors are aware of this and are hedging their portfolios with Bitcoin, which is likely a fundamental force behind Bitcoin’s 160% price rise since December.