For most of 2016, Bitcoin hovered around the £600 mark. After the Brexit shock the price rose slightly due to sterling devaluation, but in December Bitcoin broke out and started its ascendancy rising by as much as £150 a day to a high of £950 per BTC in the latter stages of 2016. It has since fallen and risen a few times and, at the time of writing is currently sitting just over 850GBP (1,050 USD) per BTC.
What caused this sudden rise (and fall) is debatable, Chinese devaluations, Trump, collapse of currencies in Argentina, Puerto Rico, Mozambique etc. have no doubt played their part. In the past, Bitcoin has seen a surge of interest at times when investors sought a safe haven for their capital at a time when the established systems are struggling to offer that function.
When fiat money goes bad
In 2013 the Cypriot government bailed in its largest bank using ‘uninsured’ depositor money to fill liabilities of the failing bank. In a sense the loans which had turned bad were paid off by those who now held the cash. To be fair it applied to deposits over €100,000 and Cyprus was popular as a tax haven for questionably gained gains, if you know what I mean. Nevertheless, bailing in a bank is akin to theft, which doesn’t go down too well with the public.
Since 2008, the central banks have pumped trillions of pounds into their countries’ respective economies. This has, unsurprisingly, inflated the markets where this money has gone; Quantitative Easing is the reason that in a world with stagnating salaries and zero real growth we still have booming stock markets. Central bankers will tell you that they are bastions of prudence, stability and reason. That is (as Donald Trump might say) their opinion. There are other views of centrally planned money, and they aren’t as supportive.
No. 10 Drowning Street
Some of those alternative views are that the UK is drowning under a mountain of debt, and thanks to questions raised by the emergence of cryptocurrencies, people are waking up to the reality of our monetary economics; that our money supply is made up of credit/debt and that commercial banks create as much credit as they see fit, which means inflation (cost of living rise for the masses) and the syphoning of large sums of money from the productive economy directly into the banking sector.
Modern debt based economies run a bit like Ponzi schemes; to keep up the ‘illusion of growth’, new debtors have to continually bring fresh credit to the table.
This is the debt paradox, like matter and anti-matter, debt is about duality; credit and debt. If someone holds cash, someone else is in debt. When a government runs a budget deficit, this is the same as saying a country has a money supply, after all either the government can go into debt to create that money, or individual households can go into debt to create that money. The former is better for an economy, as government agents at Central Banks can simply print more money, the latter is bad for an economy as domestic spending is hampered by excessive household debt, and household spending is a significant part of GDP. Credit comes from nothing and it goes back to nothing. While a debt laden economy appears never more prosperous, in reality it has never been more destitute.
Modern debt based economies run a bit like Ponzi schemes; to keep up the ‘illusion of growth’, new debtors have to continually bring fresh credit to the table. It seems good because there’s lots of money, and lots of people are getting their hands on that money, so nobody complains about the rotten system they are all participating in. But as the debt soars, so do the repayments, and individuals’ ability to continue to to keep expanding debt becomes harder and harder. After all, the debt is created out of nothing, but unfortunately the bankers forget to create the interest payments too, so these repayments have to come from the debt already in existence, meaning that some people lose out, or from credit/debt which hasn’t yet been created. This sets up great competition for what credit money exists in an economy, and gives credit money the illusion of value, purely due to its relative scarcity.
Debt based money systems have an odd quirk. Credit gives economies the liquidity they want and need – the world is awash with money – but credit money comes at huge cost to society, as the debts get bigger and more and more fees go directly to the lenders. The way it works, commercial banks effectively charge a fee for creating our money supply, which makes them a necessary but very expensive player in the game of economics. They even make money from the government by lending it money. It seems ridiculous that a government would borrow money from a private bank, but they do. Like a broker that everyone has to go through, the banker takes his cut on economic activity, his seigniorage ‘fee’. Don’t think that low-interest rate equals cheap money either. The lower the rates the more borrowed and once compound interest and time have worked their magic, the banks take even more.
As Debts Deflate, the Value of Money Increases, and Prices Drop
What we see at the peak of a debt cycle is debt deflation. In a world awash with funny money, prices have gradually fallen, but as the debt defaults start to occur, the quantity of money in the economy shrinks, and as there is less money chasing the same goods and services, the value of that money goes up, or the prices of those products purchased goes down.
When almost all money is loaned into existence, the system will not work if too many people save
When prices start to fall, people put off buying things today because they will be cheaper tomorrow. This is the reason central banks love inflation; it brings forward consumption, and consumption is good for economies, while putting off consumption tends to be less good.
The Logic behind ‘ZIRP’
Central Bankers know that fiat money, credit based monetary systems must have a good flow of cash. If too many people are saving, then the likelihood of the many other creditors meeting their repayment obligations is lessened. The recent trend towards zero and negative interest rates demonstrates this understanding. When almost all money is loaned into existence, the system will not work if too many people save; a lack of cash flow, a decrease in the velocity of money, means more chances of default, and if more debtors default, banks lend less, and the vicious circle begins and we end up at a Credit Crunch.
Central banks’ response to deflation is to print money to try to create inflation. Inflation helps those in the most debt, as the value of money diminishes, but so does the value of the debts. 1,000% inflation gives you 20 times your salary, and debts 1/20th of their earlier size (your debt of £500,000 is now worth just £25,000). But you have to be earning for this effect to work. If you’re on a fixed income such as a pensioner, such inflation will hammer you hard. Reducing the value of your house, and reducing the value of your pension, and its spending power. Given the unfounded pension liabilities owed to baby boomers, and the huge debts taken on to pay for them, inflation may just be the trick that governments have up their sleeves to balance their books.
For those who have assets and cash, unless you have bought property – which could be considered the ultimate hedge against inflation of the money supply, as most of the money created goes into property – you are going to have to find an asset, something of value, or a means of exchange, to protect your wealth from being inflated into obscurity.
governments cannot shut Bitcoin down even if they wanted to
In the past this something has been gold. The amount of gold brought into existence has mirrored global economic growth so it is a good store of value being worth the same over the years; historically an ounce of gold has been able to buy a decent suit both today as it did in 1960. As compared with paper money. Unfortunately for gold bugs, the precious metals market has been the subject of manipulation.
As Bitcoin now has no such financial jiggery pokery taking place, is it a more real market and not subject to the same market manipulation. Ownership of Bitcoin is absolute and proof is indisputable. It is hard to see how they can mess with an individual’s holding of the cryptocurrency.
As I write this, Bitcoin is around 830 GBP or 1,000 USD. So what?
- Bitcoin is Gold 2.0, a decentralised store of value, a new commodity class out of the clutches of central banks and the IMF. Say what you like about PBOC trying to control Bitcoin exchanges, but as a truly decentralised asset class, governments cannot shut Bitcoin down even if they wanted to. Controls on the way that people get into and out of Bitcoin will affect the price, but only as it relates to demand of Chinese mom and pop day traders. Bitcoin isn’t going away any time soon.
- Even at 10 times the current price, Bitcoin is still cheap, so I see a $1,000 price as no big a deal. Judging by the rapid increase in price, I don’t doubt that a lot if others agree with me, and this ‘short squeeze’ will only add to the increase in price in the long term. Some of the world may have heard about Bitcoin, but I doubt many really understand or know what it is. I don’t think we have even found the one killer use for Bitcoin yet. Even if they like the concept of having control of their money, having Bitcoin isn’t much use to the public. What we need is just one great app on iPhone and Android that can open up the marketplace for Bitcoin. Then we’ll start to see adoption taking off. The more uptake, the less the price volatility, but it’s s bit chicken and egg because you won’t get uptake until you get less volatility. So this could take a while.
- Bitcoin is deflationary – only 21 million will ever exist. Many of these have been lost so that greatest figure is academic. If you have £500,000 in the bank, do you think that is the best place for it? Do you trust banks, or governments not to take your money to bail in the next failing bank? And those banks will fail, it is inevitable, it is built into the credit based money supply. When money is debt, it can be no other way but boom and bust. Something physical, like a house or a bar of gold has its place when seeking asset security, but Bitcoin can perform this function too, and with much less friction than the other two. Bitcoin needs no storage fee, and unlike a house it isn’t falling apart.
- To buy Bitcoin is like buying into the greatest tech stock. Buying Bitcoin is like buying shares in Visa, MasterCard or Western Union on a global level, but better. Buying Bitcoin is a bit like buying shares in the internet in the 90’s. People saw the potential, but nobody really knew what we would use it for. Ditto Bitcoin in 2017. Visa and other payment systems have value because they allow the exchange of value. A Bitcoin in itself has no value, what is valuable is what it affords the user. A trusted, almost free transfer of value to anyone in the world with an internet connection. Bitcoin is the internet of money. No tax, no supervision, no fees. Governments don’t like this idea as it removes their power to control markets, manipulate money and collect taxes. This is why Bitcoin has seen such support from those with libertarian leanings.
- Bitcoin is just getting started. Recent publicity will have been really good for Bitcoin. People who have never heard if it, and there are many, will now be aware of the excitement and interest and may look to buy some in the future.
- Bitcoin is the headline act. Other cryptocurrencies are speculative schemes for those who set them up, and are used as test beds for Bitcoin. A case in point is Ethereum, and its hard fork, a message for Bitcoin to not take these kind of decisions lightly.
I don’t expect to see a meteoric rise in Bitcoin, but once it passes its previous high and people who invested last time cash in theirs and take their profits, I expect to see a gradual and steady rise in Bitcoin value in the coming years.