Updated: Feb 17
Bitcoin has bounced back in a big way thanks to a little uncertainty and some big hedge funds. When we wrote our first article about cryptocurrencies in general, Bitcoin had managed to rebound off multi-year lows but it still suffered from lack of utility and development. It is at this time that we’d like to share yet another narrative with you, perhaps utility of Bitcoin itself and development in the ecosystem doesn’t matter. It’s very possible that Bitcoin has managed to integrate into the economy as yet another financial engineered tool for hedging and speculation.
Are Bitcoin payments even important? Maybe somewhat but Bitcoin’s use case today is more aligned with hedging.
Some have said that Bitcoin is a hedge against inflation, quantitative easing (QE), geopolitical uncertainty, unemployment, even a decline in interest rates. Bitcoin typically increases during geopolitical uncertainty, QE, rising unemployment, and a decline in real interest rates. We believe that Bitcoin "may" be a hedge against all of the above but it's far from proven.
Although Bitcoin lacks the intrinsic value of gold, it does fluctuate alongside gold as uncertainty increases and decreases. We have even heard some market participants refer to Bitcoin as the “digital gold”, some say “Bitcoin has most of the characteristics of gold with the added benefit of being able to make a payment, good luck trying to pay with gold...”.
Billionaire hedge fund manager, Paul Tudor Jones, came out in December 2020 and said that he expects the digital coin will be “substantially higher” in 20 years. He also went on to say that “in a world where you’ve got $90 trillion worth of equity market cap and God knows how many trillions of fiat currency, etc.... it’s the wrong market cap (for Bitcoin), for instance, relative to gold, which is $8 or $9 trillion,”. Jones later said that he ranks Bitcoin as #4 on his list of inflation hedges, this was enough to spark a further rally in the digital currency.
When Jones referenced the market caps of equities, fiat currencies, and gold he was making a play at the expansion of the money supply. It should be clear to all that the all powerful Federal Reserve will continue to print dollars until the end of time. In this way, Jones was drawing a connection by saying if equities are inflated, fiat currency is inflated, gold is inflated, Bitcoin must also become inflated. He attempts to paint Bitcoin as yet another financial instrument which will grow over time with the economy. To be sure of the connection, let’s look at a 2 charts side by side, the first is the “U.S. M2 Money Supply” and the second is Bitcoin’s price chart.
U.S. M2 Money Supply
Bitcoin Price Chart
Bitcoin without a doubt has a lot more volatility than the increase in the money supply but there might be a simple explanation for that occurrence. The Federal Reserve doesn’t print hundreds of billions one year and not print the next year, it is a sustained expansion over the years while Bitcoin miners may mine more Bitcoins in certain years over others. If you block out the short-term price movements, it does appear that Bitcoin is following the “M2 money supply”, especially if you look at the sharp spike in 2020. We hope that this article has provided you with valuable knowledge about Bitcoin and the economy.
*This article was written for informational purposes only. Banting Court Capital Management Inc. accepts no liability for any losses suffered from acting on what is written in this article.