Category: Economy

The Bitcoin bounce back

On By mehranmuslimiblogIn Altcoins, Bitcoin, EconomyLeave a comment

At the end of last week a new Covid variant appeared called Omicron. As a result, the cryptocurrency market experienced a sell-off on Friday 26th. It wasn’t the only market where panic had set in. But by the end of the weekend, we had seen some confidence returning as traders realised that it was likely there would be no return to full lockdowns this time round.

Yesterday, Monday 29th November looked very promising. Digital assets were mostly back in the green, although as Billy Bambrough points out, Bitcoin appeared not to be leading the market in this bounce back. Instead it was noticeable that the assets rebounding most strongly were Ethereum (ETH), Solana (SOL) and Polkadot (DOT) showing higher gains of around 7%, while Bitcoin (BTC) was somewhat lower at +4-5%. But there were still several wins for Bitcoin along the way.

El Salvador buys ‘discounted’ Bitcoin?

As Bitcoin dipped to $53,000 some were ready to buy the dip. Nayib Bukele, El Salvador’s “bitcoin-besotted” president was one of them. He announced to the press that his country had bought another 100 Bitcoins during the dip at the end of last week, adding to El Salvador’s stash of 1,000 BTC. Luckily for Bukele and his country, Bitcoin rallied after he’d made what he referred to as his ‘discounted’ BTC purchase, so he must be happy at least.

However, Bambrough points out that there Bukele’s buy should be noted, because he is “is doubling down on bitcoin in the face of international warnings and condemnation.” What is this about?

Well, last week plans were announced for a $1 billion bitcoin bond. This is supposed to fund an ultra-low tax city. However, it had the effect of sending El Salvador’s dollar-denominated bonds to an all-time low, and gave the country a debt profile that is even worse than that of Lebanon. In fact, it’s the worst in the world now. The Bank of England governor had warned last week that the “country’s decision to adopt Bitcoin as legal tender alongside the US dollar was concerning because people could be caught out by its volatility. He couldn’t believe that a country would choose Bitcoin as a national currency he told Cambridge University student union. He also told the assembled students that the IMF was really not very happy with El Salvador.

Did Microstrategy power the bounce back

But El Salvador’s purchase of 100 BTC was nothing compared to Microstrategy’s announcement that it had acquired 7,002 Bitcoin on Monday at an average price of $59,187 per coin. It’s an announcement that pleased the bitcoin bulls, as did the one from the German stock market operator Deutsche Boerse, which is listing the Invesco Physical Bitcoin, an exchange-traded note (ETN).

And in other good news for Bitcoin supporters: over the past week, the Bitcoin network has transferred or settled an average of $95,142 of value for every $1 worth of fees. This means the network’s value settlement efficiency has been improving steadily recently, with more being settled for lower fees. On-chain analyst, Dylan LeClair, tweeted, “Bitcoin is the most efficient monetary settlement network the world has ever seen.” Despite its recent ups and downs, Bitcoin is here to stay, and it’s still a digital asset with enormous influence, even if a handful of altcoins occasionally deputize as market leaders.

Thinking about crypto as money

On By mehranmuslimiblogIn Bitcoin, Blockchain, crypto, EconomyLeave a comment

There are a number of people in the financial world who make derisory remarks about cryptocurrencies ever becoming accepted as ‘real money’. Their arguments point to its volatility, which they say makes it impossible “for cryptocurrencies to serve what traditional economics describes as the three functions of money: 1) a medium of exchange, 2) a store of value, and 3) a unit of account,” as Michael J. Casey writes at Coindesk.

Casey suggests that this argument doesn’t work if “the three functions framework is based on a flawed, or overly narrow, definition of money.” He points us towards a book by Felix Martin ‘Money: The Unauthorized Biography’, in which the author says that historically people have had a flawed view of money as a “thing”, i.e. a banknote, but he says that it is really “a socially invented governance system for tracking transfers of property and clearing debt in a commonly trusted manner.” Martin believes we have “fetishized” money as something to be owned and accumulated, rather than seeing it as a means to an end.

In Martin’s view a nationally accepted currency, such as the dollar, is merely a tool that makes it easier to carry out transactions “across a community of otherwise untrusting strangers.” Casey says this makes cash similar to a decentralized, peer-to-peer record-keeping device. Still, it is difficult to challenge the dominant thinking about national currencies, which are effectively a system of social organization and control in sovereign states. But is this the only way to think about money?

Cryptocurrrencies do challenge the sovereign state narrative about money, simply because they are “censorship-resistant, geography-agnostic value transfer systems.” They provide rules and a framework of trust for users without needing to draw their authority from governments, although as Casey mentions, crypto users still have to follow the laws of their governments around cryptocurrencies.

Casey also argues that while some see Bitcoin as a replacement for the dollar, there is a bigger picture to consider, and that is the potential of digital assets to dispense with the need for universal common currencies altogether. As he correctly says, we are a long way from that happening. However, if interoperability protocols and transaction processing can be scaled in a properly decentralized manner, allowing cross-chain atomic swaps in mass numbers without having to trust intermediaries, something like a global system of fractionalized digital value exchange could be realised.

According to Casey, central banks in Singapore and the United Arab Emirates are already exploring interoperability solutions for their central bank digital currencies (CBDCs). This is a move that threatens the status of the dollar as the world’s reserve currency. If this happens, crypto could become a universal unit of account. Casey concludes by pointing out that if the dollar’s role is diminished then “the role of bitcoin, ether, NFTs and other digital assets could increase.” And how we think about money will have changed as well.

Is Bitcoin Evergrande’s hostage?

On By mehranmuslimiblogIn Bitcoin, EconomyLeave a comment

After the excitement of bitcoin breaking through $68k to reach a new ATH, we were all brought back to earth again on 10th November, as the price dropped and it looked as though there had been a minor bloodbath in the crypto world, with so many tokens showing red. Why did it happen? One theory is that conflicting announcements about Evergrande, the Chinese property giant caused the wobble due to questions about whether or not it would default on its overdue loan payments.

Evergrande Group is China’s second-largest property developer and has debts of $300 billion, a significant amount for sure, and there is a fear that if it defaults it could cause a collapse across the world’s financial markets. According to Cointelegraph: “Two minutes after Evergrande’s payment was due, the Deutsche Markt Screening Agentur (DMSA) issued an announcement on Nov. 10 at 4 p.m. UTC stating that it was preparing bankruptcy proceedings against Evergrande.” Shortly after that, bitcoin’s price fell to $62,800 over the course of several hours.

Another media outlet also published information saying Evergrande had defaulted, supposedly confirming the approach of disaster, and it wasn’t until  Bloomberg issued a story saying that it hadn’t that the price of BTC started climbing again. Eventually, the price started to stabilise around $64,500 when Allison McNeely of Bloomberg tweeted “contrary to what you may have heard ~on the internet~ Evergrande did not default today.”

A collective sigh of relief reverberated around the globe amongst bitcoin owners, but the spectre of Evergrande has not gone away. William Fong, senior trader at Australian crypto-asset investment platform Zerocap, commented that whilst Evergrande had not defaulted, he does not believe it will be bailed out any time soon, because “Chinese regulators were the initiators of a cap aimed at over-expansion in developer’s leverage.” He added, “This has created potential contagion risk across the entire property developer space and has expanded towards financial institutions and industries dependent on the sector as well.”

A stock market meltdown is another fear in the cryptosphere, and there are questions about the amount of Tehther’s exposure in terms of ‘commercial paper’, which is a corporate debt note with a short expiration date, usually under a year. Tether says it doesn’t have any in Evergrande, but the fact that Tether has about fifty percent of its reserves in commercial paper valued at $30 billion is making some rather nervous, especially as some of this commercial paper is in Chinese companies.

There will always be fears around markets, but we must hope that we’re not all forced to hold our breath every time Evergrande has to make a payment, or bitcoin and its owners will be held like hostages every month.

Bitcoin is ‘safer’ in a stock market crisis

On By mehranmuslimiblogIn Bitcoin, EconomyLeave a comment

Apart from the fact that Bitcoin is not integrated with traditional finance, it also has another trick up its sleeve: it can’t be forcibly sold to cover your financial losses in other markets. This is very good news should there global stock markets collapse.

We know that Bitcoin’s price is volatile. This is because there is what Marcel Pechman calls “the discrepancy of its use cases.” Some see it as a store of value, others as a tech project or a type of software and network.

The stories about Bitcoin’s potential change over time. El Salvador’s BTC adoption should show us how the Lightning Network performs, with the Layer 2 scaling solution allowing instant and very cheap transfers. Pechman says, “As these narratives about Bitcoin shift over time, so does BTC’s correlation to traditional assets,” gold being one that has attracted special mentions. For example, the March 2020 crash caused devastation in almost every asset class, but during the six or seven months that followed, recovery was virtually identical for gold and Bitcoin.

BTC also appeared to “mimic the Hong Kong stock market”, Pechman points out, if you follow the Hang Seng Index. However, will it succumb to the Hang Seng downward movement seen in the past 90 days? Pechman suggests it might be better to decouple it from the Hang Seng now and allow Bitcoin to continue being “a safe haven amid a general correction.”

Due to the recent disastrous results for China’s Evergrande Group that forced the company to postpone payments over its debt, which is in the range of $300 billion, analysts are concerned this could severely impact the broader market. As we have seen over the weekend, almost all cryptocurrencies have taken a dive. The crash in May this year was also due to China, in this case the banning of crypto mining.

Bitcoin has never faced a major economic crisis, largely because it was created in response to the previous one. Now there could be one that puts the $250 trillion-plus global debt markets at risk. Could Bitcoin survive this?

Pechman says: “Until Bitcoin becomes fully entrenched in financial markets and accepted as collateral and deposits, the mid-term systemic risk for the cryptocurrency is lower than the traditional market.”

In this case, having Bitcoin could save the day if the global stock markets crash, and because it has an edge over traditional markets like commercial real estate, stocks, and bonds. That’s worth thinking about.