It is a sign of the times that Bitcoin is doing so well

The past week or two has seen quite a rally in the price of Bitcoin and as I type this it is US $16.700. This gives various perspectives and let me open with a bit of hype, or at least what I think is hype.

An independent report from Citi Bank’s Managing Director argues that Bitcoin is the digital gold of the 21st century. The devaluation of the worlds’ reserve currency—the U.S. dollar—formed the basis of the commentary. ( Crypto.Com)

As a starter Citibank have suggested that the US Dollar will fall or depreciate by 20% which has created something of a stir in itself. There are bears around for plenty of currencies tight now as others suggested that the expected December move by the ECB might put the skids under the Euro. Both roads would look bullish for Bitcoin as it is an alternative. The Citibank view starts with a comparison with Gold post Bretton Woods.

With a relatively free currency market, gold’s price grew enormously for the next 50 years.

The monetary inflation and devaluation of the greenback are the basis of Fitzpatricks’ comparison of Bitcoin with gold. ( Crypto.Com)

This is then linked to what we have seen with Bitcoin.

Bitcoin move happened in the aftermath of the Great Financial crisis (of 2008) which saw a new change in the monetary regime as we went to ZERO percent interest rates.

The next step is this.

Fitzpatrick pointed out that the first bull cycle in Bitcoin from 2011 to 2013 when it increased by 555 times resulted from this.
Currently, the COVID-19 crisis and the government’s associated monetary and fiscal response are creating a similar market environment as gold in the 1970s. Governments have made it clear that they will not shy away from unprecedented money printing until the GDP and employment numbers are back up.  ( Crypto.Com)

He then applies his technical analysis.

“You look at price action being much more symmetrical or so over the past seven years forming what looks like a very well defined channel giving us an up move of similar time frame to the last rally (in 2017).”

Which leads to this.

Fitzpatrick did not stop there; his price prediction chart sees Bitcoin price at $318,000 by December 2021.  ( Crypto.Com)

That in itself will no doubt be contributing to the present rise as it puts us in what is called FOMO or Fear Of Missing Out territory.

The Economics

The issue of the money supply and its growth is an issue of these times whereas the situation for Bitcoin is different.

Bitcoin’s total supply is limited by its software and will never exceed 21,000,000 coins. New coins are created during the process known as “mining”: as transactions are relayed across the network, they get picked up by miners and packaged into blocks, which are in turn protected by complex cryptographic calculations. ( coinmarketcap.com)

So there are two differences. Firstly there is a cap and with the present number in circulation being 18.5 million it is not that far away. Secondly whilst there is growth the process of creation is likely to be slower rather than fiat money which as I am about to discuss has been rather up,up and away.

If we start with the world’s reserve currency which is the US Dollar I note a reference to money printing in the Citibank report which we could argue is QE.

Consistent with this directive, the Desk plans to continue to increase SOMA holdings of Treasury securities by approximately $80 billion per month……Similarly, the Desk plans to continue to increase SOMA holdings of agency MBS by approximately $40 billion per month. ( New York Fed)

So we have US $120 billion a month from the main two efforts where bonds are swapped for electronically produced money.

My preferred way of looking at this is the money supply and if we do that we see that in the year to the 2nd of this month the narrow measure of the US money supply has risen by 41% over the past year. This sort of measure used to be called high powered money although right now due to the plunge in velocity it is anything but. However it has been created and I also note that having gone through US $2 trillion in August the amount of cash in circulation is also rising and was US $2.04 trillion in October. So mud in the eye for those predicting its death,especially as we note the switches to using electronic money in retail. As the Belle Stars put it.

This is the sign of the times
Piece of more to come

If we go to the wider money supply measure called M2 we see that it has grown by 23.9% in the year to November 2nd. That is quite something for a number that is now just shy of 19 trillion. So there is a money supply argument in the background. We can add to it by noting fast rises in other types of fiat money. Japan has been at the game for some time and we have seen notable expansions in Euros and UK Pounds as well.

Interest-rates

There was a time that the lack of an interest-rate from Bitcoin was a weakness. The 0% compared unfavourably to what you could get in fiat currencies. After all pre credit crunch many of the major currencies provided interest-rates of 4 to 5%. But now life is very different as we have seen the US Federal Reserve cut interest-rates to just above 0%. Indeed in some cases now Bitcoin has a relative advantage because the spread of not only negative official interest-rates but of negative bond yields ( which total around US $17 trillion now) makes it look much more attractive than before.

Who would have thought that a 0% interest-rate would be attractive? But increasingly that is true.

Comment

When we look at something like this we see that it requires a combination of reality and psychology/belief. The former gets reinforced because as I have pointed out over the past decade the direction of travel has been both clear and consistent. This morning has seen an example of part of this journey.

Italy’s Ruling 5-Star: ECB Should Cancel Covid-Related Debt It Owns – Party Blog Doing So Would Be “Not Only Fair But Easily Achievable” ( @LiveSquawk )

These sort of proposals appear and will no doubt be denied and rejected. But in a year or two’s time past history suggests it may well be on the agenda and then get implemented. It is quite a cynical game but we see it played regularly and feeds into our “To Infinity! And Beyond” theme.

Also there will be demand from those looking to park what are considered to be ill gotten gains. The official response will be around crime but it is probably more likely to be another version of this.

Many Turkish companies and individuals bought foreign currency last week even as the lira registered its biggest weekly gain in almost two decades, Bloomberg reported, citing currency traders it did not identify. ( Ahval )

Turks are using the Lira rally as a chance to buy more US Dollars in a clear safe haven trade. People will disagree about how safe that is but there will be similar flows into Bitcoin. It has its own risks as we note the issues around security and the wide swings in price. The latter are something of an irony because they are exacerbated by a strength which is the supply restrictions and limit. But this is a time of risk in so many areas.

Another way of looking at the change in perception of Bitcoin is the way that central banks are now looking at Digital Coins in a type of spoiler move as it poses a potential challenge to their monopoly over money.

I will be particularly interested in reader’s thoughts on this topic