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Bitcoin: Overton Window Lurches Forward
A landmark announcement heralds a new era for Bitcoin in the national conversation
If you pay attention to the weekly chatter in the Bitcoin community, you’ll know that the main topic for the last week has been the Stock-to-Flow Model. My piece last week stirred up a lot of passion from some of the largest personalities in the space (1, 2, 3, 4, 5, 6) and a war has been raging ever since. As a Once-in-a-Species subscriber, you read about it first.
While the Bitcoin community continues to battle it out, we will turn our attention to the most important Bitcoin development this summer. Otherwise, in the ongoing squabbling over S2F due to last week’s Once-in-a-Species post, you might have missed it.
On July 18th, Presidential candidate RFK Jr. spoke at a fundraising event for Heal-the-Divide, a PAC founded (and funded) by early Bitcoiners beginning to flex their considerable Bitcoin wealth to shape political policy.
In the speech, RFK Jr. announced his administration’s plan to “exempt the conversion of Bitcoin to the U.S. dollar from capital gains taxes.”
Additionally, he announced his intent to back a small portion of the US National Debt with hard assets (including Bitcoin): “My plan would be to start very, very small, perhaps 1% of issued T-bills would be backed by hard currency - by gold, silver, platinum, or Bitcoin.”
As for his reasoning for this unorthodox proposal, he elaborated, “Backing dollars and U.S. debt obligations with hard assets could help restore strength back to the dollar, rein in inflation and usher in a new era of American financial stability, peace and prosperity."
This is a big deal. Let’s unpack what it all means.
Shifting the Overton Window
First of all, make no mistake, this proposed policy will not happen. Not yet. RFK is too fringe of a candidate to have a shot at the presidency (or is he?). Even if he won, this is the kind of campaign trail promise that stands no chance of being implemented. But that’s not the point.
What matters is the trend. A few years ago, politicians would never have hitched their wagon to Bitcoin. Now, fringe politicians are embracing the Bitcoin community and receiving tremendous attention and support for doing so. Every other politician is seeing this. Some are thinking “maybe I should tap into this too.”
Years ago, no politician would advocate for Bitcoin. Now, fringe politicians are advocating for Bitcoin. In a few years, mainstream candidates will do the same.
What began with Cynthia Lummis winning a seat in the Senate with support from the Bitcoin contingent has grown to politicians like RFK Jr, Vivek Ramaswamy, Ted Cruz, and even Ron DeSantis courting Bitcoiner support.
In this sense, what we’re witnessing is not a proposed policy that will succeed or fail. Instead, we are witnessing the shifting of the Overton Window — what policy points are viewed as legitimate options to talk about in the mainstream arena. This RFK Jr. announcement is a big milestone in that ongoing process.
Bitcoin is now a part of the national policy conversation.
This particular proposal will fail, but this moment is already a big win for Bitcoin because it sets the precedent for a proposal like this to succeed in the future. But what exactly would a policy like this mean?
Capital gains taxes for Bitcoin
Although this was a minor part of RFK Jr.’s remarks, removing capital gains taxes on Bitcoin transactions would be a major leap forward for Bitcoin adoption. (Admittedly, RFK Jr. only specified this policy for Bitcoin to USD transactions, but that would effectively remove capital gains tax considerations for all US Bitcoiners.)
Currently, any transactions in Bitcoin must be booked against the tax basis of those assets, creating a realized gain or loss. This information must be dutifully logged and captured in any individual or organization’s tax filings.
This status quo is a hassle for users and a major impediment to Bitcoin adoption. For now, most people interact with Bitcoin as a buy-and-hold portion of their investment portfolio. In my opinion, this continues to be the wisest and most valuable way to use Bitcoin — a savings vehicle, not a spending currency.
However, Bitcoin can and will also grow to be a preferred medium-of-exchange. This is part of the path-dependent process when any fledgling asset takes on the emergent properties of money. First, it is simply a collectible, then it grows to become a reliable and trusted store-of-value asset. Only once a large group views it as a preferred store-of-value asset will it then be used as a currency between parties in trade — a medium-of-exchange.
The current classification of Bitcoin requires the logging of taxable events whenever it is exchanged. This new proposal would remove that major inconvenience and barrier to Bitcoin’s adoption as a medium-of-exchange in the United States.
While this idea is radical in the United States still, it has already been implemented in smaller jurisdictions with considerable success, most notably in El Salvador. Although it will surely be quite a few years before the United States follows suit, the idea is now officially part of the national political conversation.
Backing US Government debt with Bitcoin
The splashier part of RFK Jr.’s statement was the proposal to back a portion of the US National Debt with hard assets. It will come as no surprise that I think he is right — such a move would restore strength to the US Dollar and usher in an era of greater financial stability. This is because the alternative is business as usual — deficit spending and unbacked money printing — which will continue to erode the United States’ fiscal strength and ultimately decimate bondholders.
Again, RFK Jr.’s proposal won’t happen. Not yet. But it may happen in the future as Bitcoin continues to become a more mainstream topic. For now, the S.S. Fiat System is only listing to the side a bit, so few feel a need to rush to the Bitcoin lifeboat. But unfortunately, ignoring the problem of incessant deficits and escalating national debt will not right the ship. At some point, the Bitcoin lifeboat may look extremely attractive.
And again, while the US won’t be engaging in such a strategy of central bank Bitcoin purchases anytime soon, El Salvador already has, and other nations ostensibly will too.
But what if it were to happen? The US National Debt is now $32T. 1% of that is $320B. Bitcoin is a tiny $600B asset class. Obviously, if that amount of buying pressure was pointed towards Bitcoin, it would send Bitcoin’s price soaring.
And it doesn’t even have to be the US, necessarily. Several mid-size countries could adopt an El Salvador strategy to create the same ~$320B of buying pressure. And the positive signal of this would generate even more global demand for Bitcoin — the numbers get pretty crazy, pretty quickly.
Capital inflows and valuation multipliers
How do you purchase $320B of an asset whose total valuation is $600B? Slowly and methodically over years. But even then, you would quickly exhaust the pool of willing sellers. To find more willing sellers, you’d have to raise your bid price in order to entice holders to become sellers. This is an incremental process that plays out in free markets as price discovery.
Part of this process is that each time an incremental trade is executed at a higher price, it raises the total valuation of all existing supply. This creates a multiplier effect — when $1 flows into Bitcoin, it doesn’t raise the value of existing Bitcoin by a total of $1. Instead, that $1 raises the value of all Bitcoin by (the change in the market price of 1 Bitcoin) * (21M total Bitcoin). And of course, this is also offset by the inverse effect during market downtrends — when $1 flows out of Bitcoin, it drops the value of all existing Bitcoin.
The amplification effect in the bull markets nets out with the amplification effect in the bear markets, but not completely. Overall, Bitcoin’s 14 years has been characterized by net new adoption — net inflows of capital.
As a result of this, the amplification force is net positive. Here are some sensible data points to approximate the scale of this multiplier effect:
The Bank of America figure is obviously an outlier, as it seems to have been calculated near the top of the 2021 bull market when willing sellers were especially few and far between. For the most part, I think numbers in the 2-5x range are reasonable and more accurate.
Here’s what each of these multipliers would mean if the US backed 1% of its National Debt with Bitcoin…
If RFK Jr.’s proposed plan is set in motion, it could send Bitcoin’s price to anywhere from $68k to $1.8m. And that’s with no other demand at all.
But of course, if the US started using Bitcoin to partially back its debt, every individual, business, and sovereign nation would be inclined to start adding Bitcoin to their portfolio strategies as well.
Such a tipping point of positive endorsement could easily magnify that $320B allocation 10x, to $3.2T, or even more.
While the US won’t be doing this anytime soon, this type of policy could be set in motion by another sovereign nation, or several. A few mid-size countries adding Bitcoin to their central bank balance sheets could easily amount to $320B in nation-state buying pressure in the coming few years, and the positive endorsement of these actions could easily inspire 10x more global capital to do the same.
In that case, the numbers in the table above would all need a zero added — just $320B in central bank buying pressure could inspire $3.2T in global demand, sending Bitcoin’s price to $680k or higher. Hypothetical, but not an outlandish scenario.
And that would still be just the beginning for Bitcoin.