One of the secrets behind the bitcoin rally is in the world's big money printers

ΣL ArTiStA 彡

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Mar 28, 2021
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It is undeniable that bitcoin has been one of the star assets in 2020 and so far in 2021. Although the global stock markets and other assets have also rebounded strongly after the fall they suffered at the beginning of the covid-19 crisis, the Bitcoin has appreciated nearly 800% in the last year, outpacing the 216% rebound in oil or 76% in the S&P 500. However, bitcoin is a controversial asset, receiving equal parts criticism and praise.

Among the critics include central banks and other regulators that the bitcoin tachan to be a very volatile asset contaminantand that is not backed by anything. However, it is the central banks themselves and their policies that could be behind the growing popularity of this crypto asset and all its 'cousins'.

An alternative to the monetary system
It seems contradictory, but to understand it you have to go back to the beginnings of bitcoin. This cryptocurrency was launched in 2009 with a very clear supply limit: a maximum of 21 million coins. The idea was that bitcoin was an alternative to the unlimited printing of money by central banks during the financial crisis, since these movements (if they had caused inflation) would have depreciated these fiat currencies, eroding the purchasing power of consumers and saving families.

Natixis IM: "Bitcoin has been used as a true store of value, a hedge against a possible depreciation of paper currencies controlled by central banks"
Fear of the impact of central bank policies, based on the creation of new money (printing of symbolic money because they are electronic annotations) that they inject into the economy in exchange for assets, gave life to bitcoin (along with other factors such as anonymity in payments or the security provided by the blockchain). Today it is also the big money printers of the Fed, the ECB, the Bank of Japan ... which are helping to raise the price of this asset for different reasons.

Pierre Savarzeix, portfolio manager at Seeyond, a manager of the Natixis Investment Managers group, explains in a note that "beyond a crazy rise in its price in recent months (certainly with a strong speculative component), bitcoin has been used as a true store of value, a hedge against a possible depreciation of paper currencies controlled by central banks. The latter, by creating massive amounts of liquidity to counter the deflationary effects of the COVID-19 crisis, also facilitated the conditions for a depreciation of their currencies. "

On the one hand, bitcoin rises due to the fear that traditional currencies will depreciate in the face of massive money printingof central banks. Although this seems somewhat distant in currencies such as the euro, the dollar or the pound, other countries with weaker monetary systems have suffered strong depreciations in their currencies due to the massive printing of money to finance the public deficit, something that does not seem so far after the covid crisis in developed countries.

Crypto assets in general and bitcoin in particular have made a significant number of investors / citizens support their cause with great conviction. Many times behind that conviction there is a high exposure to bitcoin, but other times it is simply the defense of what they create a superior alternative to the current monetary system: a decentralized, anonymous, digital alternative with a limited supply of currencies.

Expansive monetary policies boost asset prices
On the other hand, these same injections of liquidity from central banks are driving the price of many assets for reasons totally different from that fear of currency depreciation or impoverishment of the dominant system. Much of the money injected by central banks (they buy bonds in exchange for newly created money) stays within the financial system or flows to other real assets such as housing . The result is that in the real economy these injections are not yet perceived in an obvious way, but in the asset markets (stocks, bonds, houses ...) it can be clearly seen how prices have risen.

Central bank balance sheets and bitcoin price up to January.
The graph shows how the aggregate balance sheet of the four most important central banks in the world (US Fed, ECB, Bank of England and Japan) and the price of bitcoin have evolved. It can be seen that there is a certain relationship in the movements of both until January, the last available date of the sum of the balance sheets of the four banks, which totaled 24 trillion dollars in assets (bond purchases, liquidity auctions ... .), driven to all assets.

TD Securities analysts comment that effectively "the rising tide in risk assets has lifted all ships, including bitcoin." This rise in balance sheets has also been related tothe growing disconnect between the real and financial economies . On the day of this Tuesday, bitcoin rises 3% and touches $ 59,000 per unit, very close to its record set at $ 60,000.

TD Securities analysts comment that in addition to traditional risk assets, "we have also seen a strong demand for alternative assets during this cycle. Whether it is the demand for art, wine or now digital assets, the appreciation has been staggering. The price of bitcoin is a prime example, with the value increasing more than 10 times from the 2020 low. This demand for crypto assets has even spawned an entirely new type of asset, called non-fungible tokens (NTFs).. What is clear is that there is a lot of money in the financial markets chasing and raising the prices of all assets. "

Other strengths of bitcoin
However, the Natixis expert believes that bitcoin also has some strengths that attract attention to investors and people interested in technology: "The great strength of this emblematic digital currency is based on 3 elements: its portability, the preservation of the anonymity of the holder and the promise of monetary exchanges without third-party commissions ."

This set of factors are behind the strength of bitcoin, which does not mean that criticism from central banks, regulators and experts makes sense. As Jerome Powell pointed out ., bitcoin is not backed by anything, it is very volatile and behaves like a speculative asset . Also, it does not generate a return like bonds, nor does it pay a dividend like stocks. As long as central banks retain power, it seems unlikely that this crypto asset will become a widespread means of payment.
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