Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Quantitative easing is back—and with a very large bang. Forced into an impasse by the coronavirus crisis, central banks all over the world are dusting off the printing presses, turning the dials to "infinite," and hoping for the best. Consequently, the financial system has inadvertently provided one of the best arguments for Bitcoin there has ever been.
The move to reignite the money machines came shortly after the stock market fell into disrepair. On March 16, the Dow witnessed one of its bloodiest days in history, tumbling almost 13%. Catalyzed by unchecked global panic and concerns of an imminent recession, global markets started falling in tandem.
It wasn't just the equities market, either. Precious metal proponents saw their safe haven narrative taking a veritable beating. The systemic collapse caught investors off guard, and many scrambled to liquidate what they could, including gold. The same occurred within the cryptocurrency market, which took an unusually correlated lead from the broader markets. In the panic to sell, nearly 50% of Bitcoin's total value was wiped in the halving no one was expecting.
From Zero to Hero
To stem the bleeding in the traditional markets, central banks flooded the economy with trillions and cut interest rates to near-zero. On April 10, the US Federal reserve went one step further, purchasing "junk" bonds—so-called because their issuers are likely to default. For many, this affirmed one thing: the financial system was nearing a breaking point.
In the time since the US pulled trillions out of thin air, safe-haven assets such as gold have rocketed in demand. In fact, the precious metal surged to a seven-year high on April 14, as investors continued de-risk against an economic meltdown. Bitcoin similarly managed to get on the road to recovery.
The return of QE was championed as the assets' savior. The argument goes that with copious liquidity mainlined into the economy, surplus stimulus could trickle into alternative markets.
One propagator of this theory is Marcus Swanepoel, CEO of Bitcoin exchange, Luno. Reaching out to Swanepoel, he alluded that past applications of QE have resulted in an uptick for the cryptocurrency market.
"Over the last few years, it has been shown that when Central Banks operate QE programmes there is a rise in the value of cryptocurrencies," he explained. "There is no surprise in this as QE offers 'cheap' money for investors and they will always look to diversify assets to reduce risk."
We appear to be witnessing a taste of this appetite for BTC as we speak. Much like the global scramble for toilet paper, crypto exchanges have been inundated with demand of late, with volumes touching record levels in March. Typically, when a crash occurs, and prices stabilize within the crypto markets, volume too takes a dive. Therefore the record-breaking trading volumes—despite a significant sell-off—could signal further adoption.
Furthermore, the trickle-down effect of the unabated stimulus seems to be starting to rear its head. On April 16, the first batch of the US government stimulus checks arrived. Along with them came calls to invest the helicopter money in Bitcoin.
Giving credence to the conjecture, Coinbase CEO Brian Armstrong revealed that several USD deposits and purchases of Bitcoin matched the precise value of the stimulus checks.
The vast majority of those throwing their stimulus into BTC were willing to do so to dodge what they believe is the debasement of fiat currency. As one Redditor aptly wrote: "Putting an inflationary currency into a deflationary currency, what a novel idea."
Is Inflation of the US Dollar Inevitable?
For Bitcoin evangelists, there's one reason for holding right now. Unlike the US dollar, Bitcoin—much like gold—can not be artificially increased. Inflation following the dilution of the US dollar is one of many factors pushing investors into safe-haven assets.
The notion is simple. The Fed's commitment to buying treasuries and other—less savory—assets has resulted in an expansion in the supply of USD. With more cash to flash, people will likely consume more, and the cost of goods and services will increase.
However, inflation isn't guaranteed. Douglas Borthwick, head of business development at cryptocurrency exchange, INX, submits that the increase of USD has been met with equal demand so far. Nevertheless, he caveated that this demand could dry up at a faster rate than expected, which would, in turn, generate inflation.
"This would come if a cure was discovered, or if the virus was deemed less deadly than previously thought," Borthwick reasoned.
For Simon Peters, crypto analyst at investment platform eToro, inflation is a sure-fire bet.
"With quantitative easing effectively increasing the overall monetary supply and thus decreasing purchasing power, investors typically turn towards gold as a hedge because people expect it to maintain or increase its value in these conditions," he said.
While central banks have been crafty when it comes to delaying inflation, they're running out of ways to keep it in check. If and when it returns, rates will once again rise, impacting balance sheets and credit ratings worldwide. This could well lead to another sovereign debt crisis—playing into the hands of both Bitcoin and gold.
Due to Bitcoin's nascency, there isn't much actual precedent to go on. However, gold—an asset extraordinarily similar in nature to Bitcoin—may provide all the insight we need.
From 1970 to 1979, costs and services in the US more than doubled amid crippling inflation. At the same time, gold prices went almost vertical—rising from around $38 to over $400. The yellow metal's parabolic stint was in both terms of a nominal price increase and by inflation-adjusted standards.
Not only did gold establish itself as a reliable way to hedge against severe inflation, but it exceeded expectations as a fundamentally sound investment.
Bitcoin, by design, shares very similar characteristics to gold. Its supply is capped at 21 million to ensure against inflation—or indeed deflation. On top of this, due to Bitcoin's quadrennial supply halving, its circulating supply is continually decreasing, thus making it scarcer.
"Increasingly, Bitcoin is being viewed by investors as an inflationary hedge against a depreciating dollar," says Peters, "because, similar to gold, it is decentralised and not affected by interest rates like currencies are."
Bitcoin as a Global Reserve Asset
Combatting the coronavirus isn't cheap. Thanks to the return of QE, Governments all around the world are adding heaps of debt to an already mountainous pile. In 2019, global debt rose by $10 trillion, marking a total of $255 trillion—322% of GDP. Now, according to the IMF, stimulus efforts undertaken within the last month alone have added a further $8 trillion. As a consequence of borrowing en masse, the world's economy will contract by about 3% in 2020, bringing the world's debt pile to 342% of GDP.
Soon the sheer amount of global debt will become unsustainable. For many a Bitcoin bull, that's when the pioneering cryptocurrency truly comes into its own.
In fact, a paper co-authored by the late analyst and Bitcoin evangelist, Tyler Jenks, not only envisioned digital gold profiting from insurmountable global debt but also outlined how it could become a reserve currency as a result of it.
The paper contends that the problem of unconstrained debt growth could be solved via a Bitcoin standard:
"If Bitcoin climbs to $10 million per Bitcoin, it could provide the world community with a stable currency, replace sovereign currencies, and act as the reserve currency of the world incapable of inflation or deflation."
While the researchers admit the figure is hefty, they imply that it's not only achievable but also the most reasonable solution to the debt crisis. At $10 million apiece, Bitcoin would be a sufficient reserve to alleviate global debt, suggests the paper:
"Assuming world debt had reached $500 trillion at that time, remember it has grown by 394% over the past 20 years, Bitcoin would represent a 40% reserve against the debt."
The researchers aren't alone in their thinking. In recent times, economists have called for a global standard—albeit a gold one. But if Bitcoin truly is a digital representation of gold, then why not a Bitcoin standard?
According to Peters, economies have historically performed stronger under the gold standard versus the fiat system.
"This system creates discipline within governments as they cannot just simply keep running up debt, printing money and increasing inflation," he says.
As for whether Bitcoin could carry the mantle, Peters opines that its likeness to gold make it worthy of the title.
"Given Bitcoin's decentralised nature, its similar characteristics to gold (fixed supply, etc) and its benefits regarding ease of exchange and storage compared to gold - you could argue that Bitcoin is a better gold," Peters explains.
Its role as a reserve currency might be a while off. However, with the economic situation only worsening, the true test of Bitcoin's mettle is likely just around the corner.