Balaji Srinivasan, the former CTO of Coinbase and author of The Network State, has made a bet of 1 BTC and $1 million on whether the US will experience hyperinflation. Only if BTC will reach $1 million by June 17, Balaji will win this outrageous bet. What has he been smoking?

Hyperinflation tends to happen in countries that are politically unstable, economically weak and have a lot of debt denominated in another, more stable currency. The United States, while not so politically stable anymore, surely doesn't have the latter problem.

The most well-known example is of hyperinflation is that of Germany post World War 1 (Weimar Germany). Described in the book When money dies. 

Why hyperinflation in the US?

So why does Balaji envision hyperinflation? Because there isn't enough money in the banks to cover withdrawals. Many banks are currently 'under water' as they hold a lot of bonds on their balance sheet. These have plummeted in value because of the rapid interest rate increases by the Fed. 

The American Central Bank recently promised banks a facility called the Bank Term Funding Program (BTFP), offering loans to cover the holes on the bank's balances.  

Balaji believes that this situation will create a tipping point and the US and global fiat-based monetary system will await a similar fate as many less fortunate nations before us, such as Weimar Germany: 

"This is the moment that the world redenominates on Bitcoin as digital gold, returning to a model much like before the 20th century." 

Indeed, the price of gold rose exponentially in Weimar Germany, as their paper Mark devalued into nothingness. 

As can be seen from the graph, hyperinflation took many years and began in earnest in 1922. It's for this reason that not many analysts agree that Balaji's scenario is even remotely likely. 

Societal collapse

Besides from the highly speculative timeframe of 90 days, a collapse of the currency in such a short time would do enormous damage to society. A collapse of the currency within 90 days would probably make us interested in buying other stuff than Bitcoin. Stockpiling food comes to mind. 

And anyways, what were we to gain if BTC indeed reaches 1 million dollars in a few months time? Those dollars wouldn't be worth much anymore. 

We like to see BTC being adopted gradually, with a corresponding gradual price increase. That's much healthier. In that case let it ride to $1M!

Balaji's book The Network State

Balaji's bet is a nice stunt to draw attention to Bitcoin (and himself?). But that doesn't mean that he lives for hype. His book The Network State is serious and thought-provoking. It claims that like-minded people scattered across the globe will form new societies, by building communities on the internet and using crypto as a means of governance and payment. These communities can become as powerful as nation states.