220%. This is the current annual return on investment on Bitcoin for the month of August 2019. The performance of other investment products is pale compared to such a return, while Bitcoin is emerging from a difficult 2018. Could this new type of asset not be perceived as a safe haven at a time when central banks are resuming very accommodating monetary policies?
Correlation is probably not worth causality, but the value of Bitcoin has risen sharply since April 2019, at the same time as commentators and economic experts were admitting that a restrictive monetary policy by central banks was no longer on the agenda. Moreover, we are probably entering an era where negative rates on government bonds will become the norm and no longer the exception, demonstrating growing difficulties in regulating global debt.
An abuse of monetary tools that devalue state currencies?
But what is the relationship between monetary or macroeconomic events and the valuation of Bitcoin? It’s all about the value of money. In the current monetary system, with, for example, the euro or the dollar, the ECB and the FED influence the exchange rates of these currencies, they choose the interest rate and the money supply issued.
However, the ECB has kept its key rates close to zero since 2016, and the US Federal Reserve has just announced for the first time since 2009 that it is lowering its rates. Decisions usually linked to a context of economic fragility and a need for recovery.
Adding the likelihood of a new ECB Quantitative Easing programme (measures to repurchase public and private debt in government and corporate bonds), the feeling of concern about the global economy remains.
The abuse of these two levers to support the economy weakens currencies such as the Euro or the Dollar and gradually leads the monetary authorities to a headlong rush.
Do the accommodating monetary policies of central banks value Bitcoin?
Since its creation in 2009, Bitcoin has evolved outside the traditional monetary system. Before being a cryptocurrency, Bitcoin is above all a payment system that is not controlled by a central bank, a company or an individual, but by a consensus system among all its users. This principle of decentralization is the subject of much debate, but no one decides on its monetary issue, which is explicitly written into the software’s computer code and is neither guided nor adapted to the production of wealth.
This is a major difference with state currencies. While these can be issued in infinite quantities, even if it means damaging their value in the long term, bitcoins are issued regularly, but in a degressive way, until they reach a maximum of 21 million by 2140.
This scarcity, combined with the lack of centralized control, makes Bitcoin an ideal store of value in the current economic context. Recent decisions by monetary authorities seem to make the euro or the dollar less attractive as reserve currencies.
Over the long term, when imagining a scenario of devaluation of these currencies and increasing risks on traditional financial assets, investors may be tempted to invest part of their capital in Bitcoin to protect themselves.
Bitcoin as a tool for asset diversification?
Since the end of July 2019, the Sino-American trade war has taken on the appearance of a currency devaluation race, since Washington accused China of devaluing the Yuan to mitigate the effects of the increase in US customs duties. The S&P 500 benchmark index then lost more than 6% in a few days.
At the same time, Bitcoin has been gaining nearly 30% since the beginning of August. A negative correlation between traditional and cryptoasset markets that could be interesting to analyze if it continues. More than a safe haven, some investors could then see Bitcoin as a diversification instrument, while being aware of the risks associated with its high volatility.
A change in the monetary paradigm
Beyond the possible rumours of capital transfers from the traditional financial world to the cryptoasset world, the escalation of tensions and the difficulties of the current monetary system to ensure healthy growth are in favour of Bitcoin.
Even if its high volatility and use, which may still seem complicated, make its status as a safe haven still premature, its disruptive technology based on a distributed and immutable network disrupts traditional ways of thinking about money as such. Financial and digital professionals are already impacted by Bitcoin and other blockchain protocols.
Coinhouse believes that savvy investors should be interested in this new asset class represented by Bitcoin and also offers a premium membership to guide their members in their investments in this atypical universe.
Finally, it is likely that, in a world caught between inflationary risks and tighter regulation, the freedom and transparency that Bitcoin offers its users will lead to a rise in cryptoassets and, why not, to the new form of money of the 21st century.