What Would Happen If the Second Round of Stimulus Checks Were Spent on Bitcoin?

A fascinating & entirely theoretical study into the effects of a coordinated mass movement

[This story was picked up by Forbes and my research used as a basis for their own article. You can see their piece here.]

Like almost 13,000 others, I am following the @bitcoinstimulus handle on Twitter and look forward to receiving the regular updates.

This account was set up when Americans received their first round of stimulus checks a few months ago, and it tracks the current dollar value of the $1,200 check had that amount been placed entirely into bitcoin at the time of issue.

At the time of this writing, that particular value had risen to $2,129, an impressive increase of 77%.

For many Americans, that stimulus check was a godsend, an absolute lifeline for the basics to keep a roof over their heads, and as a result, investing it in this way was probably not a realistic option.

However, data from various U.S. exchanges show that the precise amount of $1,200 was spent on bitcoin by a very small percentage of customers exactly around the time of issue.

Almost certainly at least some of that was stimulus money, but the impact on price, adoption and overall ecosystem of Bitcoin was negligible, if anything.

In fact, it’s most likely that people who did convert their stimulus money to bitcoin already held some, could afford it and knew exactly what they were doing.

But it got me thinking. While letting my brain venture into the creative and unpredictable world of “what ifs,” I began to wonder what would happen if everyone decided to do exactly this with their stimulus check the second time round.

In my mind, unencumbered by all practical realities, the result was positive, and the world moved closer to that Utopian existence that we all secretly hope exists somewhere.

But would that really be the case? Is it even possible to obtain that much bitcoin on an open market? Could it actually lead to disaster rather than an economic positive? What would be the real, net effect of a mass movement on this scale?

So, more for my own curiosity than anything else, I decided to take a guess at what the implications may be by looking at what we know now. You may, or (more likely) may not, agree with this entirely hypothetical assessment, but I found it a fascinating concept to try and model.

Perhaps you will too.

Phase 1 — Buying

It’s hard to find an exact figure for the cost of the first round of checks, but it usually sits between $250 billion and $295 billion dollars in most news sources.

The next round is, supposedly, going to be a higher amount, but let’s assume it’s $300 billion, somewhere close to the first amount.

This creates our first problem. Bitcoin’s entire market cap figure was roughly $215 billion on CoinMarketCap at the time of this writing, considerably less than the amount people have been receiving through the aforementioned stimulus checks. How would an influx of $300 billion affect the market?

The obvious answer is that this level of demand, chasing a very low supply, would quickly create an impossible-to-imagine jump in the dollar price of bitcoin.

No one would be owning a whole bitcoin any more, except those who held it before, and everyone would be dealing with a few Satoshi, now selling at a level previously reserved for entire bitcoin. With so few sellers, in real terms, the price would increase exponentially.

It would also be very messy and uneven. Those who received their checks first would be able to secure a decent price, and those who receive it even a few days later would already be paying enormous premiums. Given the price would have appreciated so much, they’d also probably be happy to pay it — the classic boom scenario.

Bitcoin would go from being worth thousands of dollars to millions of dollars in a few days — the biggest price increase in history. And that would have consequences.

Those who hold large amounts of Bitcoin for the long term would suddenly become billionaires — or even trillionaires — in dollar terms and would be likely to unload some or all of it after not moving it for years.

This would help with supply, but since demand is so large in relative terms, it would be swallowed quickly, because by this time, the rest of the world, not just America, would be piling in with such profits to be made.

Bitcoin would be booming, but would that help anyone?

Phase 2 — Impact

Without the Lightning Network being ready, Bitcoin would never cope. Fees would run into thousands of dollars, take days or weeks to settle, and miners would also find themselves the recipients of a giant wealth transfer, prompting massive investment and a global gold rush for hash rate.

Once again, those who provide the “picks and shovels” like the days of old gold rushes would fare very well!

But the price would be piling up minute by minute, so people would pay it and bid more for the fastest settlement. Second-layer solutions would massively increase their efforts to go live to capitalize, driving development, possibly leading to sloppy releases and lost Bitcoin, further depressing supply.

Scams would relieve new investors, excited and green, of both their money AND their bitcoin on a scale never seen before, helping the underworld line their pockets at a unprecedented rate.

With returns like these, equities, bonds, property and even gold would be dumped, or leveraged, so that the money could be reinvested in bitcoin, driving markets and prices lower and wiping out retirement plans in days.

But who cares, because everyone would be rich anyway, right? Everyone, not just in America, would want a piece of the action. It would be too good to resist.

Bitcoin’s global use would jump from less than the 0.5% that is it today to many tens of percentage points, perhaps even as much as 40%, a number way in excess of any current forecasts.

And this would drag the process out, as news spread and demand poured in, propping the price for days, weeks or even months on a global scale. Fiat would be out, Bitcoin would be in.

Of course, the direct impact the stimulus had on the economy would, initially, be zero, since none of the money made it to the traditional economy-boosting businesses.

However, what happens when people “feel” rich? They spend, even if their wealth is only an illusion. But where will the money come from?

Phase 3 — Selling

While businesses and organisations would suddenly scramble to accept bitcoin in its native form, overwhelming the relatively small number of current solutions, the high dollar value would inevitably lead to selling.

This is, of course, assuming there is no universal move by governments to dump the dollar as the reserve global currency and jump to Bitcoin as the adoption rate rockets.

Since such a move is unlikely, except perhaps in a few special cases, so human nature would play out exactly as we would expect.

The upwards price trajectory would be fast, and it’s likely that many long-term HODLERs would offload on the way up, helping satisfy the demand, but ultimately failing to stop the price rise, at least initially as the rest of the world jumps on board.

But someone, somewhere, would start the sell-off at exactly the time it matters.

What would happen from this point is interesting to consider and, in my mind, it would come down to first-mover advantage.

Those who first off-loaded even a few units of bitcoin for fiat would be part of the greatest wealth transfer in history, but, of course, this doesn’t have to be in the U.S.

If, for example, a country with a weak currency that already has an element of the population engaged in Bitcoin acted first, economic wealth could be transferred from the richest countries on earth to the poorest at the drop of a hat in a way the world has never seen before.

At first, the dip in prices would be swallowed by the next round of eager investors as in any overheating market cycle, but eventually, the price would come down. The demand for dollars would surge at a level not seen before in history.

And, as price drops, experienced traders would make their calls, lock in dollar profits, while the rest, disproportionately represented by inexperienced individuals, would ride the coin down to a level way below their buy price, eventually capitulating and selling at a loss.

In other words, it would materialize just like any asset bubble in history, except this time it would be faster, bigger and will involve the wealth of more people on the planet than ever before.

With numbers this big in play, literally anything can happen. Funds could collapse, banks could fail if they had big enough exposure and currencies themselves could come under pressure.

People become crazy when huge sums are involved.

Phase 4 — The Aftermath

Of course, this is the sort of subject where we could discuss the possibilities between us for hours, rather than cramming a few answers into a mere 1,800-word article. Probably like yourself, I can think of a thousand other implications that are really quite fascinating to spend some mental energy engaging in.

But, if this scenario did play out, there is plenty of history to tell us who wins and loses. On the whole, a few will do well, but most will not. And those few, of course, are the ones who were in the best positions to start with.

The fact is that we’d expect humans to behave like humans and the laws of supply and demand to prevail. These things won’t change anytime soon.

So an exponentially exaggerated version of the usual market cycle is the most likely outcome, driven by ease of access by individuals globally that has never been possible before, the sudden influx of unprecedented amounts of capital to an asset that has incredibly limited supply and doesn’t have enough infrastructure to support it as yet.

In other words, it would be a bubble of such epic proportions that it would relegate the South Sea events and tulip bulb mania to mere blips on the historical chart.

Meanwhile, the stimulus would be lost, thereby increasing the U.S. debt further, with no discernible return and transferring more wealth to those who already had it and who know how to protect and keep it.

The economy would continue to falter, requiring more stimulus and more debt and the U.S. could even, indirectly, transfer its wealth abroad, possibly even to enemy states.

None of those outcomes are positive on a macro scale.

Too far, too soon?

The bottom line is that Bitcoin is simply not ready for something like this. The network is the most secure in the world, but it is nowhere near ready to handle the transaction level that would be required to operate properly on a global scale, and too few people currently use and work with it.

But, of course, many people aren’t ready for Bitcoin either, and it will be many years (outside of a “mania” that is) before global adoption is a real possibility.

Those two factors keep the balance in check and ensure that Bitcoin will one day be an excellent store of value AND global currency. Upsetting that balance now could set back the whole process back for decades through loss of confidence and the world would lose out as a result.

So, the net result of a mass buying of Bitcoin at a rate faster than the underlying infrastructure is growing and developing could actually be a disaster not just for economies, but for Bitcoin and all cryptocurrencies.

So, for now, let’s use the stimulus checks for what they’re designed, even though the economic argument behind them is unproven at best. It’s true that Bitcoin is growing and developing at an unstoppable rate, but looking at the bigger picture, we’re a long way off the global scene yet.

And you know what? That’s fine with me.

After all, in my experience, “slower” is often “quicker.”

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You’ll probably also find these relevant:

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What happened to the “stimulus” money issued to Americans recently? And is it what they expected?

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Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics. This article was first published on voice.com

Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.