Crypto enthusiasts this week are rejoicing- not only are crypto prices rallying, with Bitcoin climbing to a nine-month high, but market sentiment is also improving. The crypto greed and fear index, which crossed 50 just last week, has now almost reached 70- indicating that the primary emotion that is driving investment in crypto is now greed.
Many are also savouring the rich irony that fiat currencies now seem to be on the opposite side of the spectrum. Investors have been relentlessly punishing banking stocks following the collapses of Silicon Valley Bank and Signature Bank, while Credit Suisse was effectively forced to sell to its longtime arch-rival UBS. In this sector, fear is the reigning emotion.
Things are looking up for crypto, and not so well for trad-fi.
But before we get carried away with the hype, it would be good to consider why crypto is rallying- and what that means for the future of crypto.
Money Printer Go Brr?
The influx of capital certainly has some fans- BitMex co-founder Arthur Hayes says that the Bitcoin rally “will be one of the most hated ever”.
On the surface, Hayes seems to have hit the bullseye on his predictions.
The core argument of Hayes’ thesis? That the influx of capital was due to what was effectively money printing on the part of the US.
While the Federal Reserve has not announced any new quantitative easing measures, it has certainly presented a policy that has been raising eyebrows: the Bank Term Funding Program (BTFP).
What the BTFP does is that it opens up a new source of liquidity for banks, credit unions, and depository institutions. The goal is to shore up confidence in banks and prevent any more bank runs from happening.
How this is done is by allowing banks to essentially pledge collateral to the Federal Reserve, in exchange for the Federal Reserve pledging the par value of the collateral in cash to the banks.
Of course, this would imply an increase in the M2 Money supply- all that has been done is to enable banks to more easily convert bonds and other non-current assets to cash, turning these long term assets into cash equivalents.
And as we all know, when cash becomes more readily available, people look for investments like Bitcoin and other cryptocurrencies in order to make some money. After all, the last time that quantitative easing happened was when the pandemic started- and that bull run saw Bitcoin jump from US$3000 to US$69000.
Even if the Fed just printed US$4.4T- So what?
Under most circumstances, what Hayes is saying would make plenty of sense.
The crypto bull run coincided with the onset of Covid restrictions as people spent stimulus checks on crypto. Effectively, money flowed into crypto faster than it flowed out, and crypto prices rose.
But the situation was not one of excess money from QE going into crypto.
That bull run originated from stimulus checks that went into crypto as other stocks crashed.
The BTFP, however, is different. People hoping to withdraw money from banks and put them in crypto would still be drawing down from their own savings, instead of spending government stimulus packages. There is effectively no change in the total money supply, though money has been made more liquid.
Does this mean that there will not be any impact? No. But it does mean that the impact will not be as significant as Hayes and others are hoping for.
And because it's the Fed that we are dealing with, exchange rate effects of money printing are not as significant.
In establishing itself as the world’s reserve currency, the USD has effectively unlimited demand in currency markets- no country will say no to having more USD in order to back up their own domestic currency.
What this means is that while a Bitcoin and wider crypto rally may be in the works, we should probably not get too hyped up over it- the impact of such a rally is still yet to be determined.
But taking a look at what the BTFP actually is and contextualising it in terms of the foreign exchange policy of the US over the past 70 years, we see that it is not likely to be due to an expansionary fiscal policy resulting in increased consumption.
Hayes may not be right- but could BTC be gold nonetheless?
That being said, crypto prices are still rising across the board- and the consequences of this are still worth considering.
Given that avoiding exchange rate risk and lowered confidence in traditional banks might be driving up demand for crypto, it is possible that certain cryptocurrencies will see renewed interest- particularly blue chip cryptocurrencies like Bitcoin and Ethereum.
The USD has dominated the global financial system since 1945- but the US is no longer in the same position of economic dominance as it was when it enforced its will with the Bretton Woods System.
Instead, economic rivals like China and the BRICs countries have emerged, and many have already shown that they are not exactly keen on maintaining the systemic power of the USD.
Instead, many of them have expressed some interest in breaking away from the system, and possibly forming an alternative system to compete against it.
For the past few years, China and Russia have been stockpiling gold, calling it a strategic monetary asset. And they have also announced that they are developing a new global reserve currency based on rare earth minerals.
If BTC is seen as a rising asset, these countries may soon see pragmatic value in backing their currencies with it.
After all, BTC has several features that make it suitable for such a role as a reserve currency.
Cryptocurrency nodes are decentralised, meaning that any foreign government hoping to control it would face a difficult task.
Additionally, Bitcoin will not face typical inflationary problems since there is a limit of 21 million Bitcoin that will ever be created.
Considering the quantity theory of money that inflation occurs when money supply outstrips demand, cryptocurrencies like Bitcoin with a fixed supply will also serve to appreciate in value. Central banks that hold these assets will find that they are able to increase the supply of their own fiat currencies without necessarily causing long term inflation.
The time may yet be ripe for cryptocurrencies to find new purpose- not as an alternative to other currencies, but as a better form of gold, one immune to supply shocks and government intervention.
Hayes and other enthusiasts may or may not be right when it comes to the price of Bitcoin and other cryptocurrencies- but crypto prices are nevertheless on the rise, and we should consider what that means for the future of crypto.
Weiliang
Joy
Miyuki
Weatherly