There is never a dull moment in the world of blockchains and cryptocurrencies.
The two earth-shattering stories of the past two weeks – the launch of the Libra project and the wild swings in the bitcoin market –
might seem like unrelated topics. And, for the most part, the causal
impact of the former on the latter is probably not much greater than
that of another oft-noted bitcoin price correlation: the avocado chart.
However, the coincidence of these two developments does speak to how
globally impactful Satoshi Nakamoto’s invention has now become.
From that wider perspective, these two developments are not at all
unrelated. Indeed, they both capture elements of a massive, worldwide
financial transformation, all happening at a time of growing economic
uncertainty.
Bitcoin’s role as ‘digital gold’
Whether now or in the future, I believe the arrival of Libra, far
from being a competitive threat, will be extremely supportive of
bitcoin.
Not only will the looming international debate over Libra elevate the
conversation around cryptocurrencies and so draw more people into the
most established of them, it also represents a major step toward the
kind of world in which bitcoin should thrive.
Whether or not Libra succeeds, it confirms the inescapable reality
that international money movements in the digital era will be based on
blockchain-like solutions that disintermediate the existing gatekeepers
and challenge the bank-and-sovereign money-dominated model of the
20th century. It also underscores how we are moving into an age of
digital assets.
And, just as people sought out physical assets to protect their
wealth from the vulnerabilities of the analog era’s trust-dependent
system – by storing value in gold, for example, or in real estate – they
will now seek out similar protection in digital assets with similar
properties. Bitcoin is not described as “digital gold” for nothing; it
offers a level of censorship resistance and isolation from the
politicization of money that the corporate-driven Libra project cannot.
I see mainstream global money movements in the next decade or so
flowing through a mix of blockchain-era stable-money services that
operate along a centralization-to-decentraliza
So, regardless of whether or not there is a causal relationship, the
Libra announcement offers important context for the continued,
accelerating demand for bitcoin, the surge of buying that saw it rally
from around $7,000 on June 10 to a peak just below $14,000 on Thursday
last week.
A backdrop of global economic uncertainty
This wider transition in the world’s money paradigm adds a dynamic
new variable to what may be a serious global economic downturn. As with
previous periods of global economic tensions, the current dicey state of
U.S.-China trade relations is directly impacting monetary conditions
and policy expectations. But this time it’s happening at a time when
cryptocurrencies and blockchains are looking like an alternative vehicle
for people to manage the risks they face in this deteriorating
environment.
The trade war between the U.S. and China has spooked businesses and
investors the world over, resulting in a surge of demand for traditional
safe-haven assets. A flood of demand into long-dated bonds has driven
down their yields and led to an inversion in the U.S. Treasury yield curve – a market scenario that Wall Street has traditionally viewed as a harbinger of recession.
That, in turn, has stoked expectations of monetary easing by central banks, most likely led by the European Central Bank, whose President, Mario Draghi, last week signaled the strong possibility of stimulus. Recalling
the trillions of dollars, euros and yen that were added to the world’s
base money levels during the “quantitative easing” era that accompanied
and followed the global financial crisis and European debt crisis within
the past decade, investors have once again started buying inflation
hedges. And this time, it’s not just the traditional version (gold, up
almost 10% in June); it’s also the new one (bitcoin, up almost 40%).
Chinese capital flight
More specifically, there is talk of capital flight out of China and
Hong Kong, a pattern of behavior that naturally boosts interest in
bitcoin if not outright demand.
China’s balance of payments is showing a very large “errors and omissions” component,
traditionally an informal measure of how much renminbi is escaping
through unofficial channels to bypass the limits that Beijing imposes on
its citizens’ purchases of foreign currency. Almost certainly, this is
in part driven by Chinese manufacturers seeking to move their production
operations offshore, to places such as Taiwan, to bypass the U.S.
tariffs. (Their ability to do so is more evidence of why this is such a
harmful, ham-fisted policy by the Trump administration.)
But it’s also likely coming from wealthy Chinese businesses and
individuals who are simply looking to protect their funds in an
uncertain environment, a group that these days includes bitcoin miners.
Meanwhile, the massive protests in Hong Kong, stoked by concerns
about encroaching judicial oversight by the Chinese mainland, have also
stirred talk that the territory’s business class will move funds
offshore.
The bulk of that flight capital will go into dollars. But if even a
small part of it, spooked by the prospects of more quantitative
easing from central banks, goes into bitcoin, it can have an outsized
impact on the price of the cryptocurrency. Certainly, volumes seen on
the more data-reliable crypto exchanges, such as Coinbase’s, have shown
surging demand.
The wider point, however, is that the new round of global economic
uncertainty is occurring at the same time that cryptocurrency and
blockchains are establishing themselves as key elements of the emerging
financial architecture of the world.
In the financial crisis of 2008, nobody other than the small number
of names on the cypherpunk mailing list to which Satoshi posted his
white paper on Oct. 31 of that year had any idea that this alternative
model for the global finance existed. Now cryptocurrencies and
blockchain are high of mind among banks, global companies and regulators
– with Libra, as I mentioned, playing no small role in elevating the
technology’s profile.
I hate to say it, but maybe this time is different.
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