The Matter with Bitcoin

Currencies / Bitcoin Jun 30, 2017 - 02:32 PM GMT

Bitcoin’s valuation surged in the first five months of this year. And in the sixth, it plateaued. What does this tell us – about Bitcoin itself and about the actual state of financial markets?

The facts alone are of almost no importance. Some investments thrive, others don’t and some are stable. That is trivial. And for Bitcoin’s surge, there are plenty of reasons. After all, it is a deflationary “system” (leaving it open, if it is a currency and whatnot). This means, the total number of units supplied is limited. Furthermore, demand widens and even government offices, for example in Japan or Switzerland, started to accept Bitcoins as public tender. Tight supply and more demand results in higher prices.

So far so good. But is this the whole story? Maybe not. There are some indications that Bitcoin might be a defensive and/or speculative move. A move in relation to what? Basically: To what is usually referred to as “unconventional monetary policy”. As Central Banks worldwide engage in a megalomaniac plan to expropriate all holders of capital – sorry: a plan to “jumpstart and maintain economic growth” –, some investors might become preoccupied. Others might rejoice in the bounty of cheap money. And others still do both at the same time.

The defensive move: Unconventional monetary policy distorts everything that has to do with money supply, velocity of money, capital accumulation, and the productivity of capital. Central Banks are blurring the line between debt and equity. Those bankers without limits even invented the negative interest rate and try to influence the epistemic state of investors through forward guidance. Almost nothing can be kept safe from them. One of the few exceptions are Bitcoins.

Therefore, it should not be a big surprise when investors put their money in Bitcoin as a genuinely defensive move. Bitcoin is decentralized, there are no central policies, and no policy-decisions based on the political agenda of a small group of power-hungry technocrats. Bitcoins is – for the moment – outside the sphere of influence of unconventional monetary policy. And yet, it is influenced by it.

The speculative move: The Central Banks’ massive money bonanza created a very long bull market. Since money is not neutral, it percolates the economy through different channels; and one of them is Bitcoin. In any long bull market created by expansionary monetary policy, there are always one or two asset classes facing an above-average surge. Historical examples: Dot-com stocks, or space exploration companies, or apartments in central London, or hedge-fund managers, or if you go back far enough, radio shares, or South American railway companies, or even tulips.

The main question for speculative investors is, then, if they are only mirroring the defensive moves of others - i.e. riding on the flow - or if they are the drivers of valuation themselves. If the second is the case, there might be a bubble underway. This alone isn’t very frightening. Especially since contagion effects coming from Bitcoins are ephemeral at most. On the other hand, both, the defensive as well as the speculative move, show how shaky this particular bull cycle is.

If Bitcoin is a defensive move, its massive surge shows how preoccupied markets are. If it is a speculative move, Central Banks created - once again - a bubble. In short: Central Banks embarked in unconventional monetary policy to bring stability to the economy. The result is the exact opposite. The more they meddle, the less rational investors act. That is the matter with bitcoin.

Henrique Schneider is chief economist in the Swiss Federation of Small and Medium sized enterprises. He also serves in non-executive boards of asset management companies and pension funds.

Copyright © 2017 Henrique Schneider - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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