Many Americans received government stimulus checks in mid-March, and while the payments – $1,400 for every U.S. citizen earning less than $80,000 a year – will be a boon to the millions desperate for economic relief after the COWID-19 crisis, they have raised the specter of inflation. And as with so many things, there is a bitcoin (BTC) aspect.
The 15th. In March, Mike Novogratz, CEO of Galaxy Digital, suggested a new role for bitcoin on NBC’s Squawk Box in light of the recent stimulus measures: a report on how citizens feel the government is handling their finances. If people believe that US Treasury Secretary Janet Yellen and others can safely land this huge supertanker, i.e. fiscal and monetary stimulus, Novogratz said, people will stop investing in bitcoin. But we are currently in uncharted territory in terms of the amount of money being printed, and bitcoin is proof of that.
Podcaster Preston Pysch made a similar call a few days earlier following the announcement that the US House of Representatives had approved a $1.9 trillion aid package to combat CovID: Think of #Bitcoin as a manipulative probe.
What will happen? A fascinating new case of using the world’s first cryptocurrency, i.e. as a feedback tool for monetary policymakers? Or just another maximalist fantasy about bitcoin?
There is no evidence that bitcoin is ahedge.
David Yermack, a professor of finance at New York University’s Leonard Stern School of Business, dismissed the idea that BTC would be used as a calling card for governments, telling Cointelegraph: There is no evidence that bitcoin offers any protection against government currency fluctuations. He added that when looking at large samples for research purposes, it is very difficult to find evidence in a statistically accurate sense.
Bitcoin is too inaccurate a measure, others say. If inflation rises by 2.4% over the course of the year, as the Federal Reserve recently predicted, will the price of BTC also rise by 2.4% – or by a permanent multiplier of that number? Or vice versa: If the Fed tightens the money supply by reducing inflation, will the price of BTC also gradually fall? In fact, BTC would have to be highly correlated with inflation to be useful as a feedback tool, and that seems unlikely.
The Fed’s liquidity boost has boosted gains in almost every major asset class, and some purely speculative currencies, such as bitcoin, have benefited even more, said Eswar Prasad, a professor of economics at Cornell University and senior fellow at the Brookings Institution, in an interview with Cointelegraph :
It is unlikely that Bitcoin prices can be considered a reliable measure of monetary policy, especially since they are traded in a relatively thin market that seems vulnerable to manipulation and speculative waves.
However, Novogratz did offer some support for his hypothesis – at least on Twitter. The 28th. In February, he made an informal inquiry and asked: Is the $BTC a testament to monetary and fiscal policy? After more than 3,000 votes were counted, 70.8% said yes and 29.2% said no.
Nick Bhatia, author of Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, and associate professor of finance and business administration at the University of Southern California, told Cointelegraph that tax incentives should be separated from monetary incentives.
In the short term, there is clearly a positive correlation between the fiscal stimulus and the price of bitcoin, he said. If people have new stimulus checks in their pockets, they are more likely to buy bitcoin, which will cause the price of BTC to rise. A recent study by Mizuho Securities found that U.S. stimulus measures could increase bitcoin’s market capitalization by as much as 3 percent – although this study was based on a small sample size.
In any case, it is more difficult to demonstrate the link between monetary stimulus and BTC, Bhatia said. In the long run, most bitcoinists probably believe there is a positive correlation between monetary stimulus and BTC – that is, people who suffer from stimulus inflation will seek refuge in BTC, but there is no way to prove it. According to Bhatia, the reason why the price of BTC is up today – and will continue to rise – is the growing dominance of cryptocurrencies in the international monetary system, he told Cointelegraph.
Value and capital assets
While some argue that bitcoin has no immediate future in this particular case – as a measure of monetary policy – there are other related use cases, including insurance against insane monetary policy and outright asset separation in some countries, as Cathie Wood of Ark Investment Management said at a recent Bloomberg event.
Wood adds that BTC is becoming increasingly accepted as an asset class by institutions and could even replace bonds in the traditional 60/40 stock/bond model portfolio. This view is shared by podcaster Graham Stephan, who expects that one day there will be a new model portfolio that invests 70% in stocks, 15% in bonds and 15% in BTC.
Scott Freeman, co-founder and partner at JST Capital, told Cointelegraph: We note that there are more traditional investors who see BTC as a hedge against undisciplined monetary policy. We have seen that this has already created a demand in the third world, and we expect this to be a self-fulfilling prophecy as more and more people believe in this proposition.
But it is different from a report or a manipulative measurement tool that assigns a grade or score to government performance. BTC is currently still too volatile and thinly traded to be of any use in this regard, says Freeman, who adds:
I think BTC will be more of a lagging indicator of a lack of confidence in monetary policy, at least in the short term. That said, we’ve all learned in recent years that underestimating the growth of BTC and its impact on global financial markets is a bad bet.
It is also worth remembering, as Jeff Dorman, chief investment officer at Arca, told Cointelegraph, that investors have been looking for ways to hedge against inflation since the introduction of aggressive monetary policy in the US in 2009. They tried to buy gold, as well as short-term European treasury bills and/or government bonds. None of the traditional methods worked, Dorman said, adding: Bitcoin is the only winner in the last decade.
Recent government incentives have likely strengthened the case for bitcoin, Dorman continued, but BTC has had little impact on policymakers due to its small size and limited influence. But times are changing. Last week, Deutsche Bank analysts said bitcoin had become too big to ignore and that many different types of investors – banks, brokers, insurers, hedge funds, corporate treasurers, individuals – are now looking at BTC, Dorman said:
You have no choice but to pay attention. So I don’t think bitcoin is a report or a driver of policy decisions – but if it continues to permeate all aspects of finance, it will become a metric to keep an eye on.
Mandatory use of enclosures cannot be
But if BTC is not already a counter or a feedback loop, what is? How can you say that the governments have lost their way? There are always the traditional inflation indices like the consumer price index and the producer price index – those are the official measures – Mauro F. Guillen, the Sandman Professor of International Management at the Wharton School, told Cointelegraph, where anything above 3 percent to 4 percent starts to become a problem. He added:
Cryptocurrencies are now very small compared to the trillions and trillions of dollars in circulation. Besides, they’re just an investment piece. They are not yet used as general currency or unit of account.
In short, given that bitcoin is only 12 years old, volatile and (presumably) owned by only 1.3% of the world’s population, it seems premature to expect it to be a testament to governments’ monetary policies.
BTC is now a promising store of value, a growing asset class, and may one day have other uses, including as a medium of exchange and/or unit of account, but these future uses will emerge organically and likely cannot be taxed.
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