Another enormous program of quantitative easing (QE) ought to benefit bitcoin, both in terms of its reputation as a hedge against centralized changes to the financial system, but also directly, as asset prices gradually rise across the board.
While QE may be anathema to crypto hardliners, some experts agree the net effect on prices is positive, one way or another.
QE has helped drive up the price of bitcoin (BTC) over the past decade, according to economist and author Frances Coppola. “What QE does is raise asset prices across the board and that would include new alternative assets like bitcoin,” she said.
The idea bitcoin is somehow uncorrelated with the financial mainstream is now being convincingly laid to rest, Coppola added (last week’s coronavirus shock saw bitcoin shedding close to 50 percent of its value).
Central banks conducted three rounds of QE between 2009 and 2015, during which time the S&P 500 rallied by more than 200 percent. Gold, a classic safe-haven asset, rose from $800 to $1,921 in the three years leading up to 2011 only to fall back to $1,050 by December 2015. Since the last financial crash in 2008, QE helped global private wealth grow by two-thirds to $166 trillion, according to the Boston Consulting Group.
However, the notion that expending the quantity of money in developed economies leads to hyperinflation – a popular idea among some bitcoin advocates – is false, Coppola said.
“There is absolutely no evidence that QE causes hyperinflation. The way QE works is to push investors into higher-yielding assets – and bitcoin, while being unbelievably volatile, is higher yielding. So what you actually get are asset bubbles, including bitcoin,” she said.
In the current state of crisis, the bazooka of measures by the Federal Reserve failed to stabilize markets caught in a desperate flight towards cash. To counteract the ongoing coronavirus pandemic, the Federal Reserve announced a $700 billion bond buying program and that it would be cutting the interest depository institutions charge one another overnight for reserves to between 0.0 and 0.25 percent.
Simon Peters, a market analyst at eToro, agreed that once the rise in COVID-19 cases outside China tails off, investors will be looking toward assets like bitcoin.
“Investor sentiment could shift to, ‘Now I have all of this cash and with the increase in monetary supply, what do I do and where do I put it?’” said Peters, adding:
“Holding cash is not beneficial in these circumstances because the currency has been devalued and you are losing purchasing power so where do you put it? That is potentially where the likes of bitcoin and other crypto-assets may see the benefit.”
A so-called Cantillon Effect refers to the change in relative prices resulting from a shift in the money supply. Assets like stocks and real estate become overpriced, meaning assets like bitcoin become more attractive over time, as noted by analyst Pierre Rochard and VanEck director Gabor Gurbacs.
Based on what’s happening in the mainstream financial system, bitcoin still counts as “Doomsday insurance,” according to Alex Mashinsky, CEO of crypto lending platform Celsius Network.
“They are printing money that did not exist yesterday and they are giving it to everybody,” Mashinsky said of central banks. “But you can’t say, ‘We have this disease so we are going to print another 5 million bitcoin,’ or, ‘We want to be re-elected so we are going to print another 10 million bitcoin,’” he said.
For some time now, Caitlin Long, the force behind Wyoming’s blockchain legislation and now CEO of Avanti Financial Group, has been critical of the Federal Open Market Committee (FOMC). Long called for increased capital requirements on banks to deleverage the situation, back when there were rumblings in the repo market that liquidity was starting to become scarce.
“History is not going to support the decision of the FOMC to ease the banks’ capital requirements,” she said.
Central banks are running the same playbook as always and it’s not working, Long said, adding:
“The quantity of stimulus that they are throwing at this is staggering in size if you compare it to the size of QE1, QE2 – they are now doing QE1s in a single day, when QE1 was done over a span of months.”
The QE1 program lasted from December 2008 until March 2010 and saw the Fed buying $600 billion in mortgage-backed securities and $100 billion in other debt.
For the first time in several years, Long said she went out and bought some bitcoin right after markets crashed last week (she cautioned this is not to be read as financial advice).
“All I know is bitcoin is an asset that is no one’s IOU. I would prefer to diversify my wealth away from assets that are someone’s IOU, when I don’t know if that someone is solvent,” Long said.
As traditional finance zigs down the QE route, bitcoin is zagging in the opposite direction.
In two months, the supply of new bitcoin will be reduced by 50 percent – an occurrence scheduled for roughly every four years known as the “halving.”
“As the U.S. government prints another trillion-plus dollars, this will have long-term ramifications on inflation and dilution of money. On the other hand, we will still have 21 million [bitcoins] available, ever,” said Alex Blum, COO of Hong Kong-based fintech firm Two Prime. “The halvening will happen when it’s set to happen.”
Bitcoin’s scarcity to value argument involves “an ideological statement of faith,” in Coppola’s opinion.
“There will always be people who believe that scarcity alone is sufficient to make something valuable. In actual fact, something that is so scarce that nobody wants to buy it isn’t valuable at all. Things need to have liquidity,” she said.