In mid-March, Many Americans received incentive checks from the government, and despite the payments ($ 1,400 for every US citizen earning less than $ 80,000 a year) It will be a boon to the millions of people in extreme financial distress as a result of the COVID-19 crisis, The specter of inflation has resurfaced. And like many other things, this also has a Bitcoin (BTC) angle.
On March 15, the CEO of Galaxy Digital said, Mike Novogratz, suggested on show Squawk Box CNBC has a new role for Bitcoin in light of recent stimulus measures; As a “report card on how citizens think that the government manages their financial affairs.” Novogratz said that if people believed that US Treasury Secretary Janet Yellen and others could safely land on this “supertanker” which is a financial and monetary stimulus, then “people will stop resorting to bitcoin.” But right now, “We are in uncharted territory in terms of how much money we print, and Bitcoin is a newsletter about that.”
Podcast Preston Beach He said something similar a few days ago in response to the news that the US House of Representatives approved a $ 1.9 trillion relief package from COVID: Think of Bitcoin as an indicator of manipulation.
What can be done about it? An exciting new use case for the world’s first cryptocurrency, i.e. as a kind of feedback tool for monetary policy makers? Or just another fancy bitcoin fanatic?
There is “no evidence” that Bitcoin is a hedging tool
David Yermak Professor of Finance at New York University’s Leonard in Stern School of Business, I rejected the idea that BTC could act as a “report card” for governments, He says to Cointelegraph: “There is no evidence that Bitcoin provides a hedge against moves in the national currency.” He added that “when you look at large samples for research purposes, it is very difficult to find the evidence in the strict sense statistically.”
Others say Bitcoin is a very imprecise scale. If inflation increases 2.4% over the year, as the Fed recently predicted, will BTC also rise 2.4%, or a steady multiple of that number? Or vice versa, if the Federal Reserve restricts the money supply and curb inflation, will the price of BTC also fall in time? Basically, BTC has to be highly correlated with inflation to be useful as a feedback tool, which seems unlikely.
“The increase in liquidity from the Federal Reserve has led to gains in nearly every major asset class, with some purely speculative operations such as Bitcoin benefiting more,” Cointelegraph said Eswar Prasad, Professor of Economics at Cornell University and Senior Fellow at the Brookings Institution, adding:
“Bitcoin prices are unlikely to be seen as a reliable guide of any kind of monetary policy, especially as it is trading in a relatively small market that appears to be subject to manipulation and speculative rallies.”
Nevertheless, Novogratz collected some evidence for his hypothesis, at least on Twitter. On February 28, he took an informal poll, asking: “Does BTC Report Card on Monetary and Fiscal Policy?” When more than 3,000 votes were counted, 70.8% answered “yes”, and 29.2% answered “no”.
Nick Bhatia The author of the book Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies And an associate professor of finance and business economics at the University of Southern California, he told Cointelegraph The fiscal stimulus should be separated from the monetary stimulus.
According to him, in the short term, It is clear that there is a positive relationship between fiscal stimulus And the bitcoin price. When people have new incentive checks in their hands, they are more likely to buy Bitcoin, which raises the price of BTC. In fact, A recent survey by Mizuho Securities said that US stimulus checks could increase Bitcoin’s market value by as much as 3%. Although this poll had a very small sample.
However, the relationship between monetary stimulus is difficult to prove And BTC, Bhatia continued. long-term, Most Bitcoin clients will likely believe that there is a positive correlation between the monetary stimulus and BTC, which means that people worried about the inflation resulting from the stimulus will seek refuge in BTC, “but it is impossible to prove this.” In Bhatia’s view, the reason Bitcoin is currently (and will continue to) soar is because of the “increasing dominance of cryptocurrencies in the international monetary system,” he told Cointelegraph.
A store of value and investment assets
Although some argue that Bitcoin might not have any immediate future in this specific use case (As an indicator of monetary policy) it still has other related use cases, including “Insurance against distorted monetary policy and wealth segregation in some countries”, As he said recently Cathy Wood From Ark Investment Management, at the Bloomberg Event.
Wood added that BTC has been gaining more and more recognition from institutions as an investment asset class, and it can even substitute bonds in the traditional 60/40 stock / bond portfolio model, Opinion shared by podcasters Graham Stefan, who predicted that a new portfolio model would someday be created with an investment of 70% in stocks, 15% in bonds, and 15% in bitcoin.
Scott Freeman, Co-founder and co-founder of JST Capital told Cointelegraph: “We see that there are more traditional investors who see bitcoin as a hedge against unruly monetary policy. We have seen that this has already increased demand in third world countries, and we hope this is a self-fulfilling prophecy as more people buy this thesis. “.
But this differs from a report card or a tampering index that specifies a number or classification for government action. BTC is still very volatile and under-trading to be beneficial for that day. Freeman saw, adding:
“I think BTC will be a late sign of a lack of faith in monetary policy, at least in the near future. What we have all learned in recent years, however, is that it is a bad bet to reduce the growth of BTC and its impact on financial markets around the world.”
The times are changing
It’s also worth remembering, he told you Jeff Dorman Chief Investment Officer of Arca, to Cointelegraph, who Since the United States adopted “aggressive monetary policy” in 2009, investors have looked for ways to hedge against inflation. They tried to buy gold, as well as sell European Treasury and / or public debt. None of the traditional methods have worked. Dorman says, adding: “Bitcoin was the only winner in the past decade.”
Recent US government stimulus measures are likely to bolster the Bitcoin issue, Dorman continued, but BTC had little influence over policymakers due to its “small size and limited scope”. But times are changing. Last week, Deutsche Bank analysts announced that Bitcoin had become “too important to be ignored”. And with many different types of investors currently supporting BTC such as banks, brokers, insurance companies, hedge funds, and treasurers for companies and individuals, Dorman said:
“They have no choice but to pay attention. Therefore, I don’t think Bitcoin is a report card, nor does it drive any policy decisions, but if it continues to penetrate all areas of finance, it will become a watched indicator.”
Use cases cannot be enforced
But if BTC is not an indicator or a feedback loop, what is it? How do we know if governments are losing control? He told Cointelegraph that there are always traditional indicators of inflation, like the CPI and PPI, that is, the official metrics. Mauro F. Zandman is Professor of International Management at the Wharton School of Business, where “Anything over 3% -4% becomes a problem.” He added:
“Cryptocurrencies are currently very small compared to the trillions and trillions of dollars in circulation. They are also nothing but investment assets. They have not yet been used as a widespread method of payment or as a unit of account.”
In short, given that Bitcoin is only 12 years old, fickle and is only owned by 1.3% of the world’s population (perhaps), expecting it to become a newsletter about governments’ monetary policy seems a bit premature.
Today, BTC is a promising store of value, a growing investment asset class, and may one day have other uses, including as a medium of exchange and / or unit of account, But these future use cases will appear organically and may not be enforceable.