Bitcoin, the virtual currency, although I prefer to call it “virtual reserve of value”, exceeded $ 2,700 and in a single week, its capitalization soared above $4 billion, taking it to historical highs. I think it is worth analyzing the reasons why it continues to grow.
The world’s central banks are increasing money supply uncontrollably and unjustifiably. As we have commented on several occasions, more than $200 billion of monthly repurchases in the greatest transfer of wealth from savers towards governments. As the saver sees deposits disappear with real negative rates and devaluations, and central banks are looking to beggar thy neighbor via devaluations to benefit deficit states, financial repression continues to generate a defense response from citizens, who seek to safeguard savings from the confiscating effect of devaluation.
The main factor that has led Bitcoin to rise so dizzily is this financial repression. Earlier this year, China’s demand for Bitcoin soared almost 80% due to capital controls and the more than founded fear of citizens that the government will try to cover the huge imbalances of the Chinese economy with devaluations and more aggressive capital controls than already imposed. Many defenders of financial repression state openly that China could mitigate its enormous debt and real estate bubble problems by assaulting a population that has one of the highest saving rates in the world (48% of gross savings relative to GDP, surpassed only by Kuwait and Bermuda). This risk alone could increase Bitcoin demand by up to 40%.
But it is not just China. Trading in Bitcoin from Japan and South Korea rose almost 50% due to the legal possibility of using the virtual currency in businesses. With the Bank of Japan “printing” $70 billion a month, Bitcoin is presented as both an alternative to financial repression and a store of value, since supply can not be decided unilaterally by a government or its central bank. This could increase demand of Bitcoin by another 30% conservatively assuming a moderate penetration in total retail sales.
In fact, just considering a 5% of penetration in global retail sales would multiply Bitcoin demand and send it soaring to more than double the current value.
Bitcoin has developed from a financial asset to be used more widely to exchange goods and services. As such, it loses its status as a “rare incomprehensible thing” that some wanted to ignore, to become a real monetary alternative.
But we must not ignore the risks. At the moment, countries do not consider Bitcoin a threat, but if their printing and devaluing objectives are put at risk, governments may resort to legal repression to try to stop crypto-currencies. It will not be easy, anyway.
I prefer to see Bitcoin from a more moderate perspective. As it is implemented, with other crypto-currencies, it may force central banks to return to sanity and abandon disproportionate monetary policies.
Let us not forget that central banks can afford the current orgy of monetary policy only if they maintain the confidence of the secondary market defending the role as reserve currency. When confidence and status as a reserve currency are lost, welcome to Venezuela.
That is why I am convinced that Bitcoin may serve as a mitigating factor on the runaway monetary expansion that we have been living for nine years with the excuse that “there is no inflation”, creating large bubbles in bonds and risky assets and laying the foundations of the next crisis. Bitcoin can be a shock that forces central banks back into logic knowing that they must keep their currencies as a store of value.
At the moment, those who predicted a Bitcoin crash as a kind of electronic scam have been mistaken. I see it as an urgent and necessary alternative to the mismanagement of Keynesian monetary policies. I hope that it continues to grow and that, as a result, it serves as a brake on financial repression.
A strong Bitcoin might be the best thing that happened to global economies worldwide to avoid another crisis.
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
Picture and video courtesy of Google, Bloomberg.