In mid-March, many Americans received business checks from the government, and while the payments – $ 1,400 for every US citizen making less than $ 80,000 a year – a boon for millions in a desperate as a result of the COVID-19 crisis If there will be an economic crisis, it has roused the specter of inflation again. And like a lot of other things, this too has a bitcoin angle (BTC).
On March 15, Galaxy Digital CEO Mike Novogratz proposed NBCs Squawk box a new role for Bitcoin in the face of recent stimulus measures – as “a testimony to how citizens believe the government is managing their finances”. When people think Treasury Secretary Janet Yellen et. al. can safely land this “giant supertanker” that offers fiscal and monetary stimulus, Novogratz said, “then people will stop getting into Bitcoin.” But right now, “we are in uncharted territory about how much money we print, and Bitcoin is a testimony to that.”
Podcaster Preston Pysh pushed for something similar a few days earlier in response to news that the US House of Representatives had passed the $ 1.9 trillion COVID aid package: “Think of #Bitcoin like a tampering ad. “
What should you do with it? A new and exciting use case for the world’s first cryptocurrency – i. H. As a kind of feedback tool for policy makers? Or just another fantasy of Bitcoin maximalists?
“No Evidence” that Bitcoin is a hedge
David Yermack, professor of finance at New York University’s Leonard N. Stern School of Business, rejected the idea that BTC could serve as a “testimony” for governments, telling Cointelegraph, “There is no evidence that Bitcoin a hedge against movements in the city is the national currency. “He added that” when looking at large samples for research purposes, it is very difficult to find evidence in a statistically strict sense. “
Bitcoin is far too imprecise, say others. If inflation rises 2.4% over the course of the year, as the Federal Reserve recently forecast, will the price of BTC rise by 2.4% – or a constant multiple of that? Or, conversely, if the Fed tightened the money supply and dampened inflation, will the price of BTC also fall in lockstep? Basically, BTC has to be highly correlated to the rate of inflation to be useful as a feedback tool, and that seems unlikely.
“The Fed’s liquidity surge has resulted in gains in virtually every major asset class, with some purely speculative games like Bitcoin benefiting even more,” said Eswar Prasad, Cornell University professor of economics and senior fellow at Brookings Institution Cointelegraph, added :
“Bitcoin prices are unlikely to be viewed as a reliable guide to monetary policy of any kind, especially since they are traded in a relatively thin market that appears to be subject to manipulation and speculative waves.”
However, Novogratz found support for his hypothesis – at least on Twitter. On February 28th, he took an informal poll and asked, “Is BTC a Monetary and Fiscal Policy Report?” When the over 3,000 votes were counted, 70.8% answered with “Yes” and 29.2% with “No”.
Nik Bhatia, author of the book 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 fiscal incentives must be separated from monetary incentives.
According to him, there is clearly a positive link between fiscal short-term Stimulus and the price of Bitcoin. When people have new stimulus checks in their pockets, they are more likely to buy Bitcoin, which increases the price of BTC. A recent survey by Mizuho Securities found that US economic reviews could increase Bitcoin’s market cap by up to 3% – although that survey had a small 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 likely believe that there is a positive correlation between monetary incentives and BTC – that is, people who are alarmed by stimulus inflation will seek refuge in BTC, “but it’s impossible to prove”. According to Bhatia, the reason the price of BTC is rising now – and will continue to do so – is the “growing dominance of cryptocurrency in the international monetary system,” he told Cointelegraph.
A store of value and a fixed asset
While some say that Bitcoin may not have an immediate future in this particular use case – – as a measure of monetary policy – there are other related use cases, including “insurance against monetary policy and total segregation of assets in some countries,” as Ark Investment Management’s Cathie Wood said at a recent Bloomberg event.
Wood added that BTC is increasingly being recognized as an asset class by institutions and may even replace bonds in the traditional 60/40 model portfolio for stocks / bonds. This was confirmed by podcaster Graham Stephan, who was expecting a new model portfolio along the market, 70% one day invested in stocks, 15% in bonds and 15% in BTC.
Scott Freeman, co-founder and partner at JST Capital, told Cointelegraph, “We are seeing more traditional investors looking to BTC as a hedge against undisciplined monetary policy. We have seen that this has already driven demand in third world countries, and we expect this to be a self-fulfilling prophecy as more people join this thesis. ”
However, this is different from a testimonial or tamper evidence that assigns a number or grade to a government’s performance. BTC is still too volatile and thinly traded to be useful right now, said Freeman, adding:
“I think BTC will be more of a lagging indicator of the lack of confidence in monetary policy, at least in the short term. What we’ve all learned in the past few years is that underestimating the growth of BTC and its impact on global financial markets is a bad bet. “
times are changing
It’s also worth noting, as Arca chief investment officer Jeff Dorman told Cointelegraph, that since the US launched “aggressive monetary policy” in 2009, investors have been looking for ways to hedge against inflation. You tried to buy gold and also to sell government bonds and / or European government bonds. “None of the traditional methods worked,” Dorman said, adding, “Bitcoin has been the only winner for the past decade.”
Recent government stimulus measures are likely to reinforce the case for Bitcoin, Dorman continued, but BTC has little impact on policymakers because of its “small size and limited touch size”. But times are changing. Last week, Deutsche Bank analysts said Bitcoin had “become too important to ignore,” given the many different types of investors who are now interested in BTC – banks, brokers, insurance companies, hedge funds, corporate treasurers, individuals – said Dorman:
“You have no choice but to pay attention. So I don’t think Bitcoin is a testimony or propels policy making – but if it continues to permeate all facets of finance, it becomes a benchmark that needs to be monitored. “
Use cases cannot be enforced
But if BTC isn’t a meter or a feedback loop yet, what is it? How can you tell if governments are losing their hold? There are always the traditional inflation indices like the consumer price index and the producer price index – that is, the official measures – Mauro F. Guillén, Zandman professor of international management at the Wharton School, told Cointelegraph, where “anything over 3% -4% will be Problem. ” He added:
“Cryptos are very small right now compared to the trillions and trillions of dollars that are in circulation. In addition, they are only an investable asset. They are not yet used as a general method of payment or as a unit of account. “
In short, given that Bitcoin is only 12 years old, volatile, and (perhaps) owned by only 1.3% of the world’s population, it seems premature to expect that it can become a testimony to government monetary policy.
BTC is a promising store of value today, a growing asset class, and one day it may have other uses, including as a medium of exchange and / or a unit of account, but these future use cases will happen organically and are unlikely to be forced.