EUR drawdown effect on BTC – Galois Capital – Medium


Throughout the years, equity research has always had the defining feature of the price target that has more recently been morphed into a ‘target range’ which gave the authors of the research more room for variation and a smaller probability of being ‘incorrect’. Everyone who has made incorrect price target calls will tell you that it is difficult to do given that the time frames that they chose were insufficient to have their thesis play out and their price target reached. In crypto, I think it gets even a bit more complex. In 2018 alone, there were all sorts of price target predictions that were supposed to play out by year’s end. Just about all of these predictions ended up being incorrect, often by a very wide margin given that the year ended at ~3,750 USD/BTC. These price predictions were often made on very public media channels by leaders in the crypto markets for whom I have tremendous respect and admiration for. When confronted in 2019, some of the people explained why they believed that their predictions did not play out and adjusted their targets and time tables, while others said that Bitcoin price is difficult to predict for a myriad of reasons and vowed to not make further price predictions.

In my decade of experience in the markets, I have yet to make a public price prediction on anything, but I think that this would be a great time for a first go at it. Although I am not intending to say that I expect Bitcoin to be worth X USD by date Y, I plan for this to be a series of articles that touch on several macro themes that I believe have a good probability of occurrence during the next 2–4 years. In this series I will provide a range of Bitcoin prices that I think are reasonable to expect if said macro theme occurs in isolation.

The series will mostly focus on several assumptions that are related to Bitcoin, specifically, as a store of value. After these assumptions are made clear, I will show how potential macro events will trigger cash inflows into Bitcoin which will result in a subsequent expansion of the market capitalization through a resulting demand for Bitcoin which will ultimately affect its price.

A primary assumption here is that 2% of the cash flows, during a devaluation, that would normally flow to gold, will move from risk assets to Bitcoin instead. This will be because as investors gain confidence that Bitcoin is a secure, less volatile and more accepted throughout the institutional investment space it will make more sense to diversify from precious metals as the only safe haven assets. Second, in order to make a meaningful impact on the price of Bitcoin, institutional investors only have to make a very small percentage of the total amount that they diversify away from precious metals into Bitcoin as the total market capitalization of Bitcoin (91.6bn USD as of this writing) is miniscule in comparison to the flows that will result as a consequence of adverse macro moves that will be triggered by the events that I will describe below.

In this article we will look at what would happen if a country within the Eurozone would experience a debt crisis. If we look at recent history of macro tremors in the Eurozone that were caused by geopolitical events combined with high sovereign debt loads, the most prevalent was the Greek debt crisis in 2009 and 2010. While most people remember the riots, the IMF and EU bailouts and the very public desire of Greek citizens to leave the EU and go back to the Drachma, let us take a step back and look at the dynamics of being a nation within the EU that uses the Euro as the primary currency, the events that happened during this timeframe and also the price action of the EUR/USD pair as well as the price of Gold denominated in USD.

The dichotomy of being a sovereign nation that is part of a greater alliance that shares a currency with the other member nations has incentives that are very misaligned between net saver nations and those of net debtor nations. A basic way to think about it is that when one nation’s debt grows as a percentage of its GDP to a level that is unsustainable, the government of that nation is unable to print more money and therefore, the burden of that debt directly and indirectly falls on the other nations of the alliance, particularly on those nations who are net savers. This not only creates an international intra-alliance fiscal imbalance but also social issues in which citizens of saver countries develop hostile feelings toward the citizens of indebted countries as a heavy debt load typically depicts a situation where a country is fiscally irresponsible due to spending above their means and not managing their affairs in an efficient manner. On a fundamental level, why would a German citizen see his Euro savings be diluted because Greece needs a bailout?

One of the root causes of the Greek debt crisis can be attributed to the Global financial crisis spurned by the collapse of the mortgage market in the United States. As borrowing costs skyrocketed and financing dried up, Greece got to a point where it was no longer able to meet payments on its debt. The chart below shows how the Greek debt to GDP ratio was much higher than that of its EU counterparts.

Eurostat (

On October 4, 2009 George Papandreou of the Greek Socialist Party becomes the Greek Prime Minister. Shortly after, the Papandreou government reveals that the Greek budget deficit will exceed 12%, a figure that is later revised to 15.4% (The Economist). This causes credit rating agencies to downgrade the Greek sovereign debt ratings to junk status in early 2010.

Looking at the USD/EUR pair, the October 1, 2009 level of 1.4537 USD/EUR compared with the June 1, 2010 rate of 1.2214 USD/EUR during the events described earlier was a 16.0% EUR depreciation. If we compare the dollar price of Gold during the same period we saw a 22.2% price appreciation from 1,004.8 USD to 1,227.8 USD. Based on this rotation into gold during a period of severe stress on the Euro, I will attempt to extrapolate how a similar rotation during the next Euro crisis will affect Bitcoin given the assumption that 2% of the total rotation to gold will instead go into Bitcoin.

The Euro started rebounding in May of 2010 after the IMF and the EU agreed to provide 110 billion EUR in loans in exchange for commitments of austerity and tax increases. In addition, the ECB launched the Securities Market Program ( which allowed the central bank to purchase government bonds of struggling countries on the secondary market.

Although there are many estimates, some of which vary as much as 20%, the World Gold Council estimates that all the gold ever mined totals 187,200 metric tons as of 2017. Taking today’s price of 1,291.5 USD per troy ounce, the total value of all gold is 7.77 trillion USD. To keep this exercise on the conservative side, we will not take into account proven but not yet extracted gold.

Looking at the chart below, although Greece is still the runaway champion here, Italy is not too far behind with 132.1% and France and Spain hovering just below the 1:1 mark. As we recall from the Eurostat chart earlier in this paper, Greece hit 130% right around the beginning of 2009 which made it very fragile to any broader macro shocks. I think that it is also interesting to note that the Maastricht treaty which led to the creation of the Euro provides guidance that no Eurozone member nation limit their debt to 60% of GDP and annual deficits no greater than 3% of GDP, rules that are more or less ignored by member nations, France is projected to have a budget deficit of 3.4% in 2019 (Reuters).

If we assume that there is a debt crisis in Italy, Spain or France, it can be expected to produce a 16% slide in the Euro just like during the Greek crisis back in 2009–2010. Again, sticking to the conservatism principle we will not adjust for the fact that the 2018 USD measures of GDP of France, Italy and Spain (2.79tn, 2.09tn and 1.44tn respectively) dwarf the Greek 0.25tn USD GDP. The bigger economies would theoretically cause a much larger depreciation in the EUR considering that all else would remain the same. However, given a different monetary policy environment, the fact that it would be bold to assume that the EUR/USD pair would fall by 50% as well as other macro based reasoning, it is difficult to say how much the currency would depreciate with any precision, so we will stick with mirroring the 16% drop during the Greek crisis, which we also assume will yield the same 22% upward response from the price of gold.

Given the above assumptions, a 22% increase in the price of gold given a 7.77tn USD market cap at current prices would imply that 1.72tn USD inflow into gold if 2% of money out of the total rotation into gold would instead be allocated to Bitcoin. Since these assumptions are difficult to get with certain degree of accuracy, I thought that a good way to look at this would be through a sensitivity table that takes a range of Gold price appreciation against a range of the % of money inflow intended for gold that would instead come to Bitcoin.

The base case of 22% price appreciation in gold with 2% of gold inflows instead going to Bitcoin shows that a price of 7,138 USD per Bitcoin, a 38% increase from current (April 7, 2019) pricing. In the next paper in this series, we will look at the corporate debt bubble that I believe is developing in the debt and leveraged loan markets and what BTC price appreciation we can derive from a bearish event in that space.