A Look Back on the Year That Put Bitcoin to the Test

When a boxer shows promise you back them, shouldn’t bitcoin be the same? An inflation warning that can’t be ignored and how risk perceptions may drive cryptocurrencies to new highs.

• Bitcoin and the pandemic – one year on
• Sinn speaks
• Risk is never static

This time last year Bitcoin was trading at just below $7,000 and the future was uncertain. We saw huge swings in national GDP levels, consumer confidence swung like a yo-yo, and unemployment shot up. 

Globally, governments faced the obvious healthcare challenges and the secondary concern that the entire financial system would, if not collapse, enter a slump that would define the next few decades. A simple recap is important. There is still a lot of noise around.

A year in, we need to now drop the approach that suggests an unknown future and embrace the today. The initial response to the lockdowns was a sell-off of cryptocurrencies across the board and a rush to treasuries. As Central bank money printing machines whirred louder, the markets did a reverse ferret and pushed equity indices to record highs. Bitcoin broke $60,000 as its acceptance and necessity were more widely recognized. 

For the previous year, we have argued that the data normally relied upon was useless in forecasting future trends. We now argue that the time to go back to basics is now.

Last week, in the EU, both services and manufacturing purchasing managers index (PMI) data posted better than expected numbers along with improved consumer confidence levels. The US posted better than expected GDP for Q4 and lower jobless numbers.

There is no doubt there are challenges ahead and uncertainty remains but looking at the past 12 months to gauge the next is over. It will take a long time to recognize the pivotal points in this pandemic, but the next quarter now looks like it is going to be a lot better on the ground than most were suggesting. 

One of the most compelling stories of the year has been the universal acceptance of cryptocurrency as a valid investment asset. Go for a walk, clear your head, and open your eyes. 

Cryptocurrencies right now are like Muhammad Ali after the Olympics. We’ve seen the promise, now enjoy the ride.

Sinn Speaks

Hans Werner Sinn, former IFO institute president and one of the most influential global economic thinkers of the last thirty years just published a piece entitled “Why is no one in Europe talking about the dangers of rising inflation?”.

His piece is a reaction to the current focus on US-centric inflation threats in the markets, and he expertly dissects the inflationary path of the European Central Bank (ECB). He finishes his piece by arguing that in the absence of proper acknowledgment of coming inflation and a prepared plan, there may be little the ECB can do when inflation eventually rears to unsustainable levels.

The reason why his piece, which only underpins our own arguments, is important is because of who he is. An advisor to the German government, he has consistently ranked in the top levels of most influential global economists. People listen to him. Governments listen to him and journalists use his pronouncements to question official policy decisions. Of course, hordes of lesser economists use him as cover to back up their own assertions, ready to point to him should their forecasts prove unfounded. 

Whilst not as prominent as in the past, having been named in 2011 as one of the top ten people who changed the world that year, he still yields incredible power within Europe.

There are still many think tanks and economists who argue that there is little threat of inflation, central banks amongst them. Herr Sinn’s piece will go a long way to moving the conversation along from one of “maybe” to “what the hell do we do about this inflation threat?”. ECB president Lagarde will not be able to publicly ignore his arguments. What she does about them is another story.

Risk is never static

“Give me control of a nation’s money and I care not who makes its laws” — M.A.B. Rothschild

News last week that the Fed is planning to allow banks to resume higher dividend payments and relax some capital requirements leads us nicely to our current thinking of risk and how it may very well define short to medium-term cryptocurrency activity.

In addition to having to hold less capital to support lending, banks are actually turning away deposits at the moment. Many, including JP Morgan, are looking at actually charging people for holding cash deposits. We know what this will do for inflation but what will it do to risk appetite?

The idea of most people earning 0% on their cash deposits is unsettling. We’re not speaking about professional money managers here but ordinary savers. To introduce a charge for the privilege will no doubt push people to look elsewhere for alternatives. 

In this kind of world, the traditionally deplorable record of a normal person’s ability to assess risk will be skewed further. Real estate will no doubt get a boost. Coupled with decreased supply, demand changes due to remote working, and easier credit access, prices can only go one way. The problem with real estate is that it’s expensive to access with all the associated buying fees and sometimes harder to get out of. 

Treasury bonds, once an easy staple of security are losing their value in the inflationary environment and equities are, well, equities. Buying and selling shares may look easy enough but the structure of even the traditional blue-chip stocks, with large debt levels and societal and technological operational difficulties, bring their own concerns. 

Regardless, all of these asset classes will benefit from the change in risk evaluations and excess cash.

Which brings us to cryptocurrencies. Anyone who gave even a passing glance at the news last week can’t have missed the Turkish Lira collapse so the idea of trading in currencies outside the main EUR, USD, CHF or JPY crosses should make everyone nervous.

It is not inconceivable that many will begin to enter the crypto market with 10 or 20% of their savings exposed. They will choose only those in the top ten cryptocurrency options and more likely just five. They will not be traders nor will they have the slightest interest or understanding of blockchain developments or non-fungible tokens. Where even two years ago, any investment in Bitcoin or Ethereum may have been scoffed at, its wider acceptance will have reduced the perception of risk. With this lower perception of risk will come growth. And with growth comes demand. 

The news next week

With Easter breaks suggesting a slow week in Europe and the US, expect this week to represent a pivot point away from the chaos of the last twelve months.

Tuesday – US Consumer confidence, can it do better than the EU? It should.

Wednesday – EU inflation data and US home sales.

Friday – US non-farm payrolls will either confirm or disrupt the recovery trend.

The author works exclusively for Xcoins.com and has spent almost 20 years in trading rooms from New York and London to Düsseldorf and Sydney. To stay up to date on all things crypto, like Xcoins on Facebook, follow us on Twitter and LinkedIn and enter your email address at the bottom of the page to subscribe.