The Million-Dollar Bitcoin Bet

Bitcoin’s price rose 37 per cent in the two weeks immediately following the Silicon Valley Bank collapse. Was this purely a coincidence, or did the collapse trigger funds flow into Bitcoin as a flight to (perceived) safety?

Cause and effect is impossible to gauge in traditional markets let alone the hyper-volatile crypto markets. But perhaps some market participants are buying into Satoshi Nakamoto’s original vision of Bitcoin as an alternative to the vagaries of nation-state fiat currency.

That may be what’s behind a million-dollar bet between two crypto personalities that Bitcoin’s advance will continue until it exceeds $US1 million per coin by mid-June.

Befitting crypto’s reputation for extremes, noted Twitter identity and Silicon Valley entrepreneur Balaji Srinivasan publicly waged the bet with James Medlock, an advocate of higher taxes and cash benefits to address wealth inequality and other societal ills. Medlock offered the wager which was quickly accepted by Balaji (as he is generally known).

While Medlock is a pseudonymous Twitter lurker, Balaji is the former chief technology officer of Coinbase, largest cryptocurrency exchange in the US, and a former general partner at Andreessen-Horowitz, a Silicon Valley venture capital firm founded by the legendary Marc Andreessen, which has $35 billion in assets under management across multiple funds.

Given the wild west nature of the crypto-verse, investors would be well advised to think very carefully before drawing any investment conclusions from the wager. It is not impossible that Balaji’s bet is a pump-and-dump marketing ploy to drive Bitcoin’s price sufficiently high that his profit on his Bitcoin holdings exceeds his loss on the bet. As with all things crypto, caveat emptor.

But it is worth examining whether his rationale for suggesting that this is even possible has any merit whatsoever. Balaji has long been a crypto-bull, but his latest thesis is based on the concept of “hyperbitcoinsation” in the face of a US dollar hyperinflation scenario.

This thesis essentially sees Bitcoin as a “flight to safety” asset in the face of a rapidly inflating fiat currency and a banking segment in turmoil. The recent and dramatic failures of Signature, Silicon Valley and Silvergate banks in the US and Credit Suisse in Switzerland have certainly shone a spotlight on insolvency risk in the banking sector.

Medlock staked 1 BTC at the then price of ~$US27,000, and Balaji $US1 million in the form of USDC, the stablecoin pegged to the US dollar. If BTC price fails to reach $US1 million by 17 June, Medlock keeps the cash and Bitcoin. But if it does reach $US1 million, then Balaji keeps his staked cash and Medlock’s 1 BTC.

At $US27,000 at the time of the bet, Bitcoin’s price would need to rise 37 times in the 10 weeks remaining to the mid-June deadline. That would mean a market cap of $US20 trillion, up from $US540 billion today. This would place Bitcoin’s total market cap significantly higher than gold (at ~$US13 trillion) and around 20 per cent of all equity markets worldwide (at ~$US100 trillion-plus).

What makes this bet newsworthy is that Balaji and Medlock have apparently put their money where their mouths are by locking their stakes in escrow and are seemingly committed to honouring the outcome. For Medlock, a loss of $US27,000 would hurt, presumably not fatally, whereas Balaji stands to lose $US1 million in staked cash. He has even doubled down by offering to stake an additional $US1 million if somebody else wants to play.

The wager underlines the discussion about the future and role of currency.

Legendary Bridgewater Associates founder Ray Dalio warned back in February of a looming currency crisis saying: “We are in a world in which money as we know it is in jeopardy …we are printing too much, and it's not just the United States”. He went onto say “the question over the next number of years is really what is money, not just as a medium of exchange but as a store holder of wealth”.

As of writing, Bitcoin at $US29,000 has a long way to go to reach $US1 million. Should Bitcoin price rise even remotely towards that lofty target over the next 10 weeks, it would likely mean very significant turmoil in the real and financial economy. While Bitcoin enthusiasts see potential for materially larger market cap over time, it’s hard to imagine anyone salivating at the market disruption needed to drive such an accelerated price rise in so short a period.

As for Balaji Srinivasan, his presumed net worth likely shields him from financial destitution should he lose. He may even emerge a winner if gains over his existing Bitcoin holdings outweigh his loss on the wager. It won’t be long before we find out.