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Don’t Look Now But BTC is Relatively Stable as World Currencies Struggle
The world continues to see record-high inflation as a result of massive amounts of government spending. Central banks have two blunt instruments at their disposal to tame and maintain a desired level of inflation of around 2-3%. They can stimulate spending by printing more of their currency and lower interest rates to encourage more borrowing.
The problem they run into is that units become devalued as more currency enters the market from printing. A slight devaluation is desirable to encourage people to spend money today rather than save it for tomorrow. However, a lot of printing leads to debasement and high inflation to the point it becomes difficult for individuals to afford staples like food, gas, and fuel. Similarly, raising interest rates reduces borrowing, inevitably leading to reduced spending and a contraction in the economy. However, not raising interest rates will continue to fuel high inflation. If unchecked, either of these two scenarios can lead to potential political instability and a currency depreciation with an eventual crash.
What is a Currency Crash?
A currency crash occurs when a nation’s currency depreciates against the value of other exchanged currencies. A currency crash impacts a country domestically and can cause a contagious ripple effect across the globe.
As the value of a currency declines, so will its imports. It will cost more currency to purchase the same goods that it did before. Additionally, fewer imports will lead to purchasing more local and domestic items. This may appear to be a silver lining, but if a currency starts to fall too rapidly, it may spook international investors and cause them to decide to cease operating in that country. This can lead to higher unemployment rates and more people drawing on government services. This adds downward pressure on the currency as governments are forced to print more currency to address the costs of a growing unemployed population.
A currency that remains strong during other currency crashes is not immune from contagion. As one country starts facing a currency crash and begins to reduce imports, simultaneously, a country with a strong currency will see a reduction in its exports to its trading partners. A reduction in export demand can have a similar impact on high interest and lower borrowing rates—higher levels of unemployment and more strain on government social services.
Currency crashes can also be attributed to high market instability from extreme political events. This could take anything from the rise of a new political party with radical market views to a referendum changing the course of a nation’s history i.e. Brexit.
Is BTC Stable Above $18,000?
It is difficult to talk about the price stability of Bitcoin when its price has fallen by 70% since it was an all-time high of $69,000 a year ago on November 10th, 2021. Yet when we dig deeper, it may appear to be a better store of value when compared to the depreciation of its fiat counterparts.
One of the prevailing arguments during the last bull cycle was that Bitcoin could be used as an inflation hedge. While this theory has not been totally debunked, it has not proven entirely accurate, at least in the short term. High inflation and rising interest rates dramatically impacted the value of BTC through forced sell-offs from retail and institutional investors. For companies and individuals to afford the new cost of living, they were forced to become more liquid by selling off their investments, which many used Bitcoin as. The black swan events of the Terra/LUNA meltdown, alongside the abrupt bankruptcy of the Celsius Network caused additional sell-offs of Bitcoin, causing its value to crash back to the levels we see today. Yet since hitting its bottom in June of just over $18,000, it has maintained stability for the last five months against other exchanged currencies.
What Makes Bitcoin Stable?
However, when we look at the fundamentals of Bitcoin, we get a different perspective. What makes Bitcoin unique and resistant to similar currency debasement and crashes is that it is the first commodity to have absolute scarcity built in. Unlike gold which Bitcoin is often compared to, there will never be any additional Bitcoin mined beyond the 21,000,000 defined in the Bitcoin Whitepaper. The same is not true about gold. Earlier this year, an additional 320,158 metric tonnes were discovered in Uganda. Overnight, gold added $12.8 trillion of value to the gold supply, although it still has to be dug out of the ground.
This absolute scarcity allows Bitcoin to be inflation resistant in the long term. If no more Bitcoin can be minted beyond its defined limits, then it cannot become devalued through the same policies as fiat.
The US Dollar Still Reins Supreme
There are two big caveats to this article:
- The USD dollar is stronger than it’s ever been (compared to global currencies).
- Bitcoin is still down 70% from it’s all time high nearly a year ago.
The first point is a sign that investors are flocking to the stable US dollar as other currencies like the Japanese Yen, British Pound and the Canadian Loonie struggle immensely. Basically Bitcoin has performed well lately against world currencies but not against the US dollar.
As for the second point, you definitely don’t want to see a 70% drawdown in any asset but there were a number of external factors that played into BTC’s drop including the crypto lender crisis (Celsius, Voyager), Terra implosion and 3 Arrows Capital bankruptcy. It remains to be seen whether the unhealthy part of the industry has been surgically removed or whether there is more pain to come.
The Future of Bitcoin as an Inflation Hedge
As the global economic environment continues to become more unstable through larger economies’ currencies depreciating in value, individuals may start to look for alternatives to store value. In addition, currency crashes often lead to political instability, ironically leading to panic policies of printing more currency to fight inflation. This, in effect, is like trying to put out a fire with gasoline. It leads to more inflation, a further decline in the value of a currency, higher political instability, and civil unrest.
Where gold was traditionally used as a store of value, the introduction of Bitcoin has enabled people to store value digitally. Bitcoin has the added advantages of being easily transportable and uncensorable. If a currency crash occurs, individuals can opt out of their country’s monetary policy without fear of their money being seized or frozen. Before Bitcoin, exchanging currency or moving it internationally was cumbersome, expensive, and time-consuming. Bitcoin allows for the freedom of movement of one’s value at a moment’s notice. The more people start to use and accept it as payment, the more accessible society will become, and the better individuals can defend themselves against future currency crashes.
