In mid-March, many Americans received stimulus checks from the government, and while payments – $ 1,400 for every U.S. citizen earning less than $ 80,000 a year – will be a blessing to millions in dire economic situations as a result of the COVID-19 crisis. the specter of inflation. And as with many other things, this one has bitcoin (BTC) angle.
March 15, CEO of Galaxy Digital Mike Novogratz proposed on NBC Squawk Box a new role for bitcoins in the light of recent stimulus measures – as “a testament to how citizens think the government is managing their finances”. If people believe that US Treasury Secretary Janet Yellen et. al. it can land safely with this “giant supertanker,” a fiscal and monetary stimulus, Novogratz said, “then people will stop moving in bitcoins.” But for now, “we’re in uncharted territories, how much money we’re printing, and bitcoin is a testament to that.” “
Podcaster Preston Pysh he insisted something similar a few days earlier in response to a report that the US House of Representatives had approved a $ 1.9 trillion COVID aid package: “Think of #Bitcoin as a benchmark.”
What to make of it? A new and exciting case of using the world’s first cryptocurrency – ie as a kind of feedback tool for monetary policy makers? Or just another fantasy of bitcoin maximalists?
“No evidence” that bitcoin is hedging
David Yermack, a professor of finance at the University of New York at Leonard N. Stern School, rejected the idea that the BTC could serve as a “testimonial” for governments, and told Cointelegraph: “There is no evidence that bitcoins move against a sovereign currency. He added that “when we look at large samples for research purposes, it is very difficult to find evidence in a statistically strict sense.”
Others say bitcoin is too inaccurate. If inflation rises by 2.4% during the year, as recently the Federal Reserve System forecast, the price of BTC will also increase by 2.4% – or its constant multiple? Or, conversely, if the Fed tightens its money supply and dampens inflation, will the price of BTC also fall? The BTC must, in principle, be highly correlated with the inflation rate in order to be useful as a feedback tool, and this seems unlikely.
“The Fed’s liquidity boost has boosted profits in virtually all major asset classes, with some pure speculative games, such as bitcoin, benefiting even more,” said Eswar Prasad, a professor of economics at Cornell University and chief executive of the Brookings Institution. Cointelegraph and adds:
“It is unlikely that bitcoin prices will be considered a reliable guide of any kind for monetary policy, especially because they are traded in a relatively thin market that appears to be subject to manipulation and speculative waves.”
However, Novogratz supported his hypothesis – in any case on Twitter. Conducted an informal survey on 28 February, I’m asking: “Is the $ BTC a testimonial on monetary and fiscal policy?” When adding 3000 plus votes, 70.8% said “yes” and 29.2% said “no”.
Nik Bhatia, author of the book Layered money: from gold and dollars to bitcoins and digital central bank currencies and an adjunct professor of finance and business economics at the University of Southern California, Cointelegraph said the need to separate fiscal stimulus from monetary stimulus.
According to him, in the short term there is clearly a positive relationship between fiscal stimulus and bitcoin price. When people have new stimulus controls in their pockets, they are more likely to buy bitcoin, which will increase the price of BTC. Really recent Mizuho Securities Survey He said U.S. stimulus controls could increase the market capitalization of bitcoins by up to 3% – although the survey was small in sample size.
In any case, it is more difficult to show the connection between money stimulus and BTC, Bhatia continued. In the long run, most bitcoinists probably believe that there is a positive correlation between monetary incentives and BTC – meaning that people concerned about inflation-driven incentives will seek refuge in BTC, “but it is impossible to prove it.” The BTC is now growing – and will continue to do so – “the growing dominance of cryptocurrency in the international monetary system,” Cointelegraph said.
Repository of value and investment assets
While some say that bitcoin may not have any immediate future in this particular use case – as a benchmark for monetary policy – it still has other related use cases, including “insurance against limited monetary policy and direct segregation of wealth in some countries”, such as Cathie Wood of Ark Investment Management. he said recently at the Bloomberg event.
Wood added that BTC is gaining increasing recognition from institutions as a class of investment assets and may even replace bonds in the traditional portfolio of 60/40 stock and bond models, according to subcaster Graham Stephan, who expected a new model portfolio in the spirit of 70% investment in shares, 15% in bonds and 15% in BTC one day.
Scott Freeman, co-founder and partner of JST Capital, told Cointelegraph: “We see that there are more traditional investors who see BTC as hedging against undisciplined monetary policy. We have seen that this has already led to demand in third world countries, and we expect it to be a self-fulfilling prophecy as more people buy into this work. ”
However, this differs from a report card or a manipulator, which attaches a number or a stamp to the performance of a government. BTC is still too volatile and poorly traded to be useful at the moment, Freeman said, adding:
“I think the BTC will be a rather lagging indicator of mistrust in monetary policy, at least in the short term.” What we have all learned in recent years is that it is a bad bet to underestimate BTC’s growth and its impact on global financial markets. “
Times are changing
It should also be noted that, as Jeff Dorman, Arca’s chief investment officer, Cointelegraph, said, since the United States adopted an “aggressive monetary policy” in 2009, investors have been looking for ways to hedge against inflation. They tried to buy gold and also cut government coffers and / or European government bonds. “None of the traditional methods worked,” Dorman said, adding: “Bitcoin has been the only winner in the last decade.”
Recent government stimulus measures are likely to strengthen the argument for bitcoin, Dorman continued, but BTC has little influence over policymakers due to its “small size and limited contact size.” But times change. Last week, Deutsche Bank analysts said bitcoin was growing “too important to ignore“And with so many different types of investors now gravitating towards BTC – banks, brokerage companies, insurance companies, hedge funds, corporate treasurers, individuals – Dorman said:
“They have no choice but to pay attention.” So I don’t think bitcoin is a report card, nor does it guide any political decisions – but if it continues to permeate all aspects of finance, it will become a yardstick to follow. “
Use cases cannot be enforced
But if BTC is not yet a measuring or feedback loop, what is it? How do you know that governments are losing control? There are always traditional inflation indices, such as the consumer price index and the producer price index – ie official measures – Mauro F. Guillén, professor of international management at Wharton School in Zandman, said Cointelegraph, where “anything over 3% – 4% is starting to be a problem . “He added:
“Cryptocurrencies are now very small compared to the trillions and trillions of dollars in circulation.” In addition, they are only an investable asset. They are not yet used as a general form of payment or as a unit of account. “
In short, given that bitcoin is only 12 years old, volatile and in possession only about 1.3% of the world’s population (perhaps) seems premature to expect it to become a testament to government monetary policy.
Today, BTC is a promising store of value, a growing class of investment assets and may one day have other uses, such as a medium of exchange and / or a unit of account, but these cases of future use will appear organically and are likely to be forced.