10 years of Crypto
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Could the Trade War be Crypto’s Best Friend?
Since the birth of Bitcoin, just after the global financial crisis of 2008, there is a determined and persistent community arguing that decentralized currency will become a store of value – an asset used for long term investments and as a relative safe haven against the bumping markets. Those who hold this opinion – usually coin owners, known as Hodlers, a deliberate misspelling of holders – ignore the short-term bitcoin price fluctuations, focusing only on its impressive price rise over the years. On the other hand, they claim, the global financial system has been in a shaky position for over a decade.
Recent events prove them right. For example, the world debt pile has grown to an enormous size of around 250 trillions (!!) of USD , by latest estimates, which is more than three times the size of the global economy. As the risk that this burden will collapse over the head of the global economy, we see more and more investors who look for assets that promise relative safety – and have a hard time finding any.
Global Debt Pile
Source: Institute of International Finance (IIF)
The question is whether current events in world politics are bringing cryptocurrencies, particularly Bitcoin, closer to becoming such an investment property, a store of value, that will be used in wider communities, far above and beyond the original Hodlers.
What fuels the recent rise in the prices of cryptocurrencies?
Let’s start by checking the current price levels. Cryptocurrencies crashed in early 2018, and was followed by a long crypto winter. However, recent months have seen prices rise – but for what reason?
- The first and most probable cause is speculation. Speculators have always been, and will always be, in every market, and they are doubtless a key player in the crypto market, riding every trend, amplifying it, and distorting it in a way that makes no sense beyond immediate profit. However, this is less relevant to the topic under discussion.
- Another reason is the growing interest of institutional investors in the crypto market and the blockchain technology, among which are Fidelity, JPMorgan, Vanguard, as well as the New York Stock Exchange, and Facebook.
- The third and most applicable reason for the purposes of this article, is the possibility that Bitcoin will fulfill a role for which it has been nominated for years: digital gold. As Federal Reserve Chairman, Jerome Powell, recently said, in a rather positive remark towards Bitcoin hodlers: “Almost no one uses Bitcoin for payments, they use it more as an alternative to gold. It’s a speculative store of value.”
Bitcoin volatility over time
To understand more about digital gold and store of value, here is a brief introduction to the three main functions of money:
- Medium of exchange – Relating to money as a widely accepted instrument which can be exchanged for goods and services.
- Unit of account – If there is a widespread use of money and if the currency is relatively stable, it becomes a unit of measurement. From this perspective, money enables trustworthy price comparison between assets, products and services, that enables efficient operation of the markets.
- Store of value – From a long term perspective, an asset that is expected to keep its value, with reasonable volatility, can become a tool for saving. Gold is usually considered a store of value. Bitcoin is rare, has a limited supply just like gold, and has the advantages of a digital asset, (including higher portability and easier divisibility), so may even have certain advantages over gold, and is therefore referred to as digital gold. Yet is this label justifiable?
There’s also the debate over the function of money as a store of value. The argument is that the value of money is derived from its usefulness, rather than from being an asset for long term investment. Even Satoshi, the anonymous founder of Bitcoin, defined it as a tool for micro-payments, not for savings. Add to this Bitcoin’s extreme volatility, and one could conclude that it is disqualified from being a tool for wealth reserve. Worth keeping in mind.
The anti-globalization era
Having clarified the topics we are dealing with, let’s get to business: for what reasons we should expect cryptocurrencies, or at least Bitcoin, to become a major store of value in the near future?
For the past two and a half years, U.S. President Donald Trump has arguably struggled to “make America great again”. His method of doing this is to shoot in all directions. The main enemy as far as he is concerned is China, but trade war threats, new tariffs and disputes over agreements that have been in effect for decades have been skewed in countries around the world: Britain, Canada, Mexico, South Korea, and Japan are all engaged to some extent in some form of dispute with the White House. It is questionable as to whether Trump is achieving anything for the United States with his methods, but surely the economic headline for his maneuvers is the growing anti-globalization trend all over the world.
As Thomas Friedman recently wrote in the New York Times: “If President Trump and President Xi Jinping don’t find a way to defuse it soon, we’re going to get where we’re going — fracturing the globalization system that has brought the world more peace and prosperity over the last 70 years than at any other time in history. And what we’ll be birthing in its place is a digital Berlin Wall and a two-internet, two-technology world: one dominated by China and the other by the United States. This will be a much more unstable and less prosperous world.”
This is a subject that deserves our focused attention. Russia and China are leading this charge, albeit without much discernible coordination. Both countries want to establish their status as economic powers, which means building an alternative to the United States’ central role in the world trade system and the US dollar as the world reserve currency – which is the technical term used to describe it as the most common unit of account in global transactions. China is gradually reducing its huge US bonds’ reserve, and encourages its many trade and investments partners to use the yuan rather than the dollar, and over the last year, Russia has cut at least 50% of its holdings in dollar assets. Concurrently, China and Russia are tripling and quadrupling their gold reserves, as both an alternative to the dollar and as hedge-growing risks. It has also been reported that for these reasons, Bulgaria has collected tens of thousands of Bitcoins.
Falling Global Bond Yields
Investors are facing growing uncertainty, with fear in the markets and predictions of a new crisis that may be even bigger, more difficult, and more disturbing than that of 2008. Consequently, global bond yields have fallen to their lowest in 120 years, according to a recent calculation made by Bank of America Merrill Lynch. Concerns about an impending recession has resulted in an interesting paradox: one quarter of global high quality bonds, worth 15 trillion USD, are trading at less than 0% yield. Investors are so nervous and anxious that they are willing to pay someone cash to protect their savings to some extent, without expecting anything in return. On the other hand, the price of gold is rocketing, surging 25% in the past year. Another sign of the worried markets is the yield curve inversion – the rare occasion when long term bonds have a lower yield than short term bonds, as seen today. Normally, investors demand higher returns when lending their money for a longer period, unless they are expecting a sluggish economy in the future. Since 1956, the U.S. curve has inverted prior to each recession.
World Peace, Threatened?
This situation threatens world peace. While such events as the protests in Hong Kong and the blockage on the city’s airport so far have only had a local effect, no one knows what could trigger a landslide — in times of high uncertainty, it’s difficult to forecast. Therefore, a reasonable strategy under such conditions is to look for assets that are not correlated with the shaky markets. Gold has always been considered such an asset, and it is possible that the digital gold will grab a share of that store of value market.
The deflationary nature of Bitcoin, which is mined at a declining rate to a maximum supply of 21 million coins, is also noteworthy. The scarce nature of Bitcoin, like gold, makes it even more suitable as a store of value. Regarding the aforementioned high volatility, we should add that its pace has diminished over the years, suggesting that distributed currency may be moving toward a more stable horizon. While it’s true that these features do not characterize the entire crypto market, where bitcoin dominance has recently risen to a peak of approximately 70%, if Bitcoin continues to thrive, the effect will be felt throughout the market.
On a more adverse note, we should remember that the crypto market, as adventurous and promising as it may be, is still taking its first steps in the financial world. A decade of roller coaster seems like a lifetime for bitcoin and crypto players, but in the financial world it’s veritable moment in time. The market cap of bitcoin is around 200 billion USD, and that of the whole crypto market is around 300 billion USD, in current values. In contrast, the gold market holds more than 7 trillion USD, and even that is small compared to the approximate 70 trillion of global assets under management.