Inflation game: Bitcoin can compete with fiat currency in value, but the transaction volume is insufficient
Among the many supporters of popular cryptocurrencies, Bitcoin is regarded as a “very great currency”. The limited supply of Bitcoin is 21 million, and the computing power of more than 12 billion hashes per second is guaranteed. For cyber security, consensus among industry commentators generally favors that Bitcoin will become a global super currency.
Bitcoin has only been around for 10 years, and its speculative value is already the 11th largest base currency in the world. In early November, the market value of Bitcoin surpassed the Russian ruble for the first time in history.
Although the fiat currency has depreciated under the economic pressure that has intensified due to the coronavirus pandemic, Bitcoin has maintained an upward trend for most of 2020. Despite the violent volatility of Bitcoin’s price and its plummeting on Black Thursday in mid-March, Bitcoin is still up about 120% year-to-date.
As the economic recovery plan may involve a large number of economic stimulus packages, it is expected that this cash injection will cause a substantial depreciation of the legal currency. If Bitcoin follows the parabolic upward trend predicted by many market analysts, it will be ready to move higher in the global base currency at any time.
All the historical records of world reserve currencies have always been consistent with the ups and downs of the base currency. Of the six currency eras since 1450, no currency has maintained its global dominance for 110 years. Given that the U.S. dollar has been the world’s reserve currency for 95 years, some hope that this indicates that the situation may soon change.
With the further depreciation of the ruble against the US dollar and Bitcoin breaking the $16,000 mark, 1 BTC is now equal to 1.2 million rubles. Bitcoin’s next goal to surpass is the Canadian dollar. According to the current circulating supply, if the price of Bitcoin exceeds $18,000, it will exceed the Canadian dollar.
As previously reported, Bitcoin has surpassed the historically highest prices of currencies in seven countries including Brazil, Argentina and Turkey. The economic stagnation caused by the new crown pneumonia has exacerbated the rise in inflation and has a negative impact on these types of legal currencies.
So far, the highest price of Bitcoin in history is still $19,665 reached during the bull market in December 2017. However, according to John Todaro, head of research at the institutional trading platform TradeBlock, Bitcoin needs to reach six-figure prices for it to start challenging major global currencies such as the U.S. dollar, renminbi and yen. He told Cointelegraph:
“We can see that Bitcoin surpasses other major fiat currencies, but it depends on how people measure the size of the foreign exchange market. The New Zealand dollar is at a lower level in this category of currencies and is most easily surpassed by Bitcoin, but the current daily trading volume exceeds US$100 billion is much higher than Bitcoin. Unlike other hard currency assets, Bitcoin’s trading volume is indeed high, so even with a slightly higher market value, Bitcoin’s nominal trading volume may be much higher than it is now.”
As the global economy stagnates, Bitcoin shines
The parabolic rise has pushed Bitcoin to such a high price, which will also firmly classify Bitcoin and gold in the same category-a real means of storing asset value. Several proponents of popular cryptocurrencies have seen Bitcoin as a suitable tool to hedge against currency depreciation and other forms of economic uncertainty.
Travis Kling, founder and chief investment officer of Ikigai Asset Management, warned that when the interest rate cuts in 2019, the debt situation at that time may trigger another global financial crisis. According to Kling, the central bank is supporting growth indicators to portray signs of a healthy economy. When Kling made these comments, the world had not yet been affected by the coronavirus pandemic.
Bitcoin often appears in discussions about safe-haven assets that may be used to hedge the risk of a global recession. In the panic of asset selling caused by the new crown virus, Bitcoin failed to escape the large-scale liquidation of “Black Thursday”, which proves that it has not yet reached the desirable status. The price of the cryptocurrency with the largest market capitalization plummeted nearly 50% to around $3,800. However, after 8 months, the price of Bitcoin has risen by more than 300%.
When talking about the possibility that Bitcoin may reach a record high in the short term, Todaro said that it is difficult to continue to push Bitcoin to a record high before the end of 2020, and further added: “From a longer-term perspective, this bull market The cycle should give us opportunities far beyond the previous few times, and with the increase in government spending and the halving in May, we are already in one of the most attractive bullish periods in Bitcoin history.”
Joe DiPasquale, CEO of crypto hedge fund BitBull Capital, also believes that in the current bull market, Bitcoin will hit a record high. He told Cointelegraph: “Bitcoin is likely to reach a record high, because Bitcoin has now broken through $16,000, which is a key resistance level. It is not far from $20,000 unless there is significant negative news in the short term. Affect the market.”
Covid-19 and unlimited quantitative easing
Although inflation is still a real concern for many countries, in terms of supply, 2020 is a crucial year for Bitcoin. The Bitcoin halving in May halved the daily supply of new Bitcoins.
At the same time, in response to the economic pressure caused by the new crown pneumonia, some governments have adopted active monetary policies including injecting stimulating cash into the market. According to estimates by the World Bank, global GDP is expected to fall by 5.2% in 2020, the largest contraction in decades. As early as June, the World Bank formulated a road map for countries to deal with economic problems, which stated:
“Both short-term and long-term reconstruction policies need to strengthen health services and take targeted stimulus measures to help restore growth, including support for the private sector and direct funding to people. During the mitigation period, countries should focus on maintaining the economy Activities and provide support for families, companies and basic services.”
Some companies are aware of the decline in the value of their cash holdings and have begun to use Bitcoin as a reserve asset. In August of this year, MicroStrategy, a Nasdaq-listed company, announced the purchase of 21,454 BTC (valued at $250 million at the time), which made headlines. As large traditional institutions sought to buy Bitcoin as a means of reserve, they quickly generated more interest.
The business intelligence company purchased another 16,796 BTC ($175 million) in September. In less than two months, the value of BTC held by the company has increased by more than $160 million. Other non-crypto companies that buy BTC as reserves can do the same.
Although Bitcoin retains certain characteristics related to currency, since there is no upper limit on the supply of fiat currency, any attempt to compare the two is problematic. If this is the case, perhaps market capitalization is a better parameter to measure the growth of Bitcoin relative to other major underlying assets, as DiPasquale said:
“Bitcoin surpassing fiat currency is not an indicator we should pay attention to, because fiat currency itself has no circulation restrictions. On the contrary, market capitalization is a better indicator, and Bitcoin is now among the top 20 assets.”
The economic downturn may be difficult to reverse
In a speech delivered on November 6, Fed Chairman Jerome Powell underestimated the expectation of a rapid recovery from the current economic contraction: “The current economic downturn is the worst in our history. The economic activity and employment levels returned to the beginning of this year have returned. It will take a while.”
Powell’s speech is similar to similar warnings issued by the World Bank and other financial institutions. In fact, it is generally believed that the new crown pneumonia has exacerbated global, regional and national economic constraints, which are difficult to reverse in the short to medium term.
Pharmaceutical giant Pfizer recently announced that its new crown pneumonia vaccine is more than 90% effective in preventing the virus. Although this progress is good news for the fight against the pandemic, market analysts say that regardless of the vaccine, the economy is doomed to decline.
Todaro believes: “The stock market sees the new crown pneumonia vaccine as the savior of industrial and personal retail companies.” However, he added that good news alone will not promote economic recovery, because economic recovery requires the re-establishment of supply and demand. In addition, according to Todaro, many incumbent companies are in terrible financial conditions, and without additional government assistance, they are likely to go bankrupt: “This uncertainty has now begun to reappear and the stock market has also experienced a correction.”
As more difficulties are coming, Bitcoin seems to have received the attention of more institutions as well-funded players are looking for alternative investment tools. In fact, the savvy funds flowing into Bitcoin have led some stakeholders to predict that Bitcoin will challenge gold’s status as the de facto hedge asset of choice for institutional investors.
