By Robert GuySenior Writer - Financial Review

Analysis

How central banks boosted bitcoin

Deficits, debt and fears of currency debasement have stoked the record-breaking rally in digital currencies.

It's tempting to dismiss the surge in the price of bitcoin and ethereum as a speculative blow-off powered by hot money chasing momentum. But the rally in digital currencies reflects an unease about the unholy trinity of debt, deficits and debased currencies forged by policymakers desperate to revive growth.

The rally in bitcoin beyond $US30,000 ($38,850) is a digital indictment of the easy money policies embraced by the world's central banks, as increasingly aggressive balance sheet expansions obliterate the concept of a price for risk and fuel an ever-growing "everything bubble".

In an era when monetary policymakers are trying to out-dove each other, where once unconventional policies – such as quantitative easing and yield curve control – have become standard operating procedure, it's easy to understand why more capital is seeking an exit from, or a hedge against, a system where central banks have gone wild.

Bitcoin's deterministic monetary policy – only 21 million will be issued at a set pace – looks relatively sober compared to the $US3 trillion expansion in the Federal Reserve's balance sheet and $140 billion swelling in the Reserve Bank of Australia's since the start of the virus crisis.

Digital currencies are no longer the preserve of fintech geeks. Bitcoin has won the backing of US hedge fund legends Paul Tudor Jones and Stanley Druckenmiller, while US-listed companies Square and MicroStrategy have invested some of their corporate treasury in the digital currency.

Digital Asset Capital Management chief executive and co-founder Richard Galvin says 2020 was a "break-out year" for the sector amid an embrace of bitcoin's "digital gold" narrative and the broadening adoption of decentralised finance, or DeFi.

That shift in perception was reflected in its Digital Asset Fund returning about 420 per cent last year, while its DAF Liquid Venture Fund returned just under 500 per cent.

Where the growing interest in digital currencies reflects a desire to step outside the traditional central banking system, the adoption of DeFi highlights the flow of capital beyond traditional banking and finance.

The fusing together of capital and technology into programmable money provides innovators with a potentially powerful tool when interest rates are near zero, yields are miserly and central bank engineering of the shape of the yield curve has changed the rules of the banking and finance game.

Investors have been left with no choice but to chase risk in a world devoid of yield.

TINA – there is no alternative – has become the catchcry for investors pouring into stocks, commodities and digital currencies given the meagre returns on offer at the bank or in bonds.

But nominal yields only tell part of the story. Real, or inflation-adjusted, yields are nil or negative, meaning there is no opportunity cost for investors in non-income producing assets such as gold and digital currencies. The stock of debt trading at a negative yield stands at $US17.7 trillion.

Bitcoin has also been helped by the slide in the value of the US dollar to a 2½-year low.

The prospect of yet more debt being deployed to prop up US growth in 2021 means more supply of dollars. This will keep the Fed buying bonds to repress yields as the US Treasury makes a greater call on lenders.

And around and around it goes.

Almost a decade on from the US having its credit rating downgraded from triple-A by Standard & Poor's, holders of US dollars in the form of US Treasuries have watched successful administrations make a mockery of the debt ceiling.

The August 2010 downgrade came when US government debt was $US14.3 trillion – it's now $US27 trillion. And let's not get started with the $US100 trillion-plus of long-term entitlements that still need to be paid and funded with yet more greenbacks.

While it's easy to claim bitcoin is being driven by speculators, its rise partly reflects concerns about the ongoing speculation by policymakers on the durability of debt-fuelled growth.

Central banks need only look in the mirror to understand bitcoin's success.

Sounds like a pyramid scheme

The original intention of bitcoin was as a currency that isn't government controlled (very useful for criminals)
But now it's being looked at by speculative investors (ie gamblers)

If you are going to invest (gamble) in it only use money that you can afford to lose

The_Barnacle wrote on Jan 6^th, 2021 at 3:21pm:



Pyramid scheme analogy is the same as any market-it relies on more capital being invested to raise the value of the vehicle, people who invested early and held take a disproportionate share of long term capital growth. If your going to call BTC a pyramid scheme you have to call everything a pyramid scheme- equities, bonds and real estate.

Once BTC broke $1 breaking $1 million became inevitable. Looks up Greshams law. This is the start of the 2nd wave (institutional money) should run it up to 6 figures pretty easy.  I've been riding it since 2016, been retired for two years now. Do as you wish.