If the crypto-currency Bitcoin proves its worth in this coronavirus crisis, we are on the verge of a revolution in the monetary system.
We are currently facing an historic watershed. The next few months will show how institutional investors will react in the medium term to the countless rescue packages in the wake of the coronavirus crisis. One thing is clear: governments and central banks have their backs to the wall. The powder is already shot at the beginning of the crisis. Should investors lose confidence in the measures taken, the consequences would be far more dramatic than a short-term stock market crash.
The first big test for Bitcoin
No one can predict today what our monetary system will look like in the future, but the history of money has always been characterized by sometimes radical system changes. The historically and in their extent unique interventions in the free market might in retrospect mean the beginning of the end of our present monetary system with its fiat currencies “created from nothing”.
Bitcoin as “digital gold” and escape currency? This is more true than ever: Bitcoin was created in 2008 in response to the financial crisis – the current chaos on the global financial markets is thus the first major test of its ability to assert itself as an alternative and new asset class. But when liquidity is needed, as it is now, everything is sold – especially risky assets. John Bollinger, the inventor of the so-called Bollinger Bands, a technical indicator, rightly noted that in crisis situations investors “sell everything that can somehow be sold”, and only after assets have been turned into cash will they invest in crisis-proof assets such as gold.
Escape into “hard money”
In contrast to state currency guardians, who (not only since the coronavirus) have been trying with one avalanche of money after another to ensure a “still functioning market” (and thus pervert this idea), Bitcoin’s pricing is regulated solely by supply and demand, without any intermediaries being able to influence it directly. Bitcoin is limited in quantity (to exactly 21 million units), which means that, unlike classic fiat money, no more of it can be printed at will. Through a complex but clearly predefined process, new Bitcoin is “dug” in the same way as other commodities such as gold, i.e. the amount of newly available Bitcoin is not changeable by anyone.
In probably soon hyperinflationary times, this is a clear advantage and the classic monetary system is no longer without alternatives. “Creative instruments” such as helicopter money and other interventionist measures are not possible with Bitcoin in this form, and neither politics nor (central) banks or other institutions can in any way manipulate or change the parameters of this new decentralized asset class. Moreover, as the hegemonic power of the USA is increasingly dwindling, the question of a new reserve currency will arise at some point. It is already foreseeable that Bitcoin (and other crypto-currencies) will compete with central bank digital currencies (CBDC’s). Bitcoin as the “digital world currency”? What still sounds like science fiction is actually not that far-fetched.
In the meantime, even the first institutional investors have discovered cryptographic values like Bitcoin for themselves. In times of crisis, however, these investors also withdraw their capital quickly from risky investments, and Bitcoin is currently still classified as such by the majority.
I am personally convinced that Bitcoin and other digital assets can only benefit from the current developments, which are dramatic in their long-term consequences.
This article is a guest contribution by Marc P. Bernegger and was first published in the Schweizer Monat.