Despite the recent lull in the Bitcoin price, it is clear that the cryptocurrency market is back in another uptrend. Year to date, BTC has rallied some 200%; altcoins are up a similar amount in the same time frame.
Of course, many investors, especially those without allocations for Bitcoin, have sought to figure out the “why” and “who” behind this surge.
One finance journalist for the Financial Times and the Nikkei Asian Review recently brought up her own theory, explaining her thesis about why Bitcoin’s value is swinging to the upside.
Central Banks Are Digging Their Own Grave
Bitcoin was born to take down central banks. While Satoshi Nakamoto, the creator of the project, never used that exact wording, many involved in the industry have extrapolated the protocol itself and some of his writings to determine that he isn’t a fan of fiat finance.
The nail in the coffin of this theory is, of course, the article headline embedded in the Bitcoin Genesis Block, which outlined a bank bailout in 2009. What else could that have been but a statement?
What’s ironic is that central banks may be the one group of entities driving up the value of Bitcoin — and thus its chances at succeeding.
Bitcoin Has Fiat to Thank
Henny Sender, the chief correspondent for international finance for the Financial Times, discussed why she thinks this is in her latest column for the Nikkei Asian Review.
The headline, “Central banks drive demand for bitcoin by devaluing their currencies”, conveys her point well. But she took some time to explain what exactly is happening.
The world is currently trending from globalism to protectionism. Just look to China and the U.S. or Japan and South Korea, with there being two raging trade wars. Simultaneously, the uptrend of the current business cycle has started to taper off, resulting in slower growth and even economy shrinkage in some nations.
To combat this, central banks have gone “dovish”, cutting interest rates and injecting money into the economy through quantitative easing. In fact, for the first time since the Great Recession, the Federal Reserve cut rates a number of weeks back.
Sender argues that these policies, “which amount to competitive currency devaluations in the name of reflating economies”, are driving up the price of Bitcoin.
Indeed, just look at the correlation between the Chinese Yuan and Bitcoin. When the Chinese currency fell through seven RMB to the USD level due to a People’s Bank of China decision, Bitcoin surged. Investors, she implied, are looking to Bitcoin as a hedge against their wealth wasting away. Just look to this excerpt from a recent report from Grayscale:
“Bitcoin has the potential to perform well over the course of normal economic cycles as well as liquidity crises, especially those involving currency devaluations. It has store-of-value characteristics similar to real assets like gold, with hard-money attributes like immutable scarcity.”
That’s not all. Sender goes on to write that the low — sometimes negative — yields on sovereign debt is only “dropping the opportunity cost of holding gold or Bitcoin dramatically”. Indeed, when an investor is losing money on investments that were once some of the best in your portfolio, they’re likely to go and seek alpha. And right now, Bitcoin and other cryptocurrencies are some the only return-generating assets being traded on the market.
Grayscale, in fact, reported that since Donald Trump started the latest trade war between the U.S. and China, the average asset class — including everything from the Chinese Yuan to emerging markets — has lost 0.5%. But, during the same time period, Bitcoin has gained just over 100%. Nice.
