How central banks paved the way for bitcoin’s birth

The success of cryptocurrency bitcoin is a direct result of the financial crisis and central banks' reaction to it, says John Stepek. It's what happens when you can’t trust money.


This content is subject to copyright.

We're living in the "everything bubble".

And the logical result of this bubble? $10,000 bitcoin...

How today's monetary environment created bitcoin

My colleague Dominic will be writing more about the king of the cryptocurrencies specifically in tomorrow's Money Morning, but I just want to consider what it says about today's monetary environment.

I that it's fair to say that low interest rates, and quantitative easing (QE) in particular, paved the way for bitcoin to take off.

Advertisement - Article continues below

Of course, bitcoin is far from unique in this.

Let's say, for sake of argument, that a Leonardo da Vinci of shaky provenance is the most valuable painting available for sale in the world. What do you pay for the most valuable painting in the world?

Well, I guess you pay whatever you can afford. When that adds up to nearly half a billion dollars, well, that says a lot more about the perceived value of those dollars than it does about the painting.

And if you're willing to buy a "risk-free" government bond at a price that will guarantee you a loss in nominal (ie before inflation) terms, then what does that mean for the value of everything else?

If your minimum required return is negative, then the price you will pay for every other asset is going to be driven higher. If you'll pay up for a money-losing asset, what will you pay for one whose expected return is positive?

Advertisement - Article continues below
Advertisement - Article continues below

Loose monetary policy has affected asset prices across the board.

But when it comes to bitcoin, I'm not really thinking about the financial impact (although we'll get to that in a moment). I'm thinking about the philosophical impact.

There's no doubt that the events of 2008 changed the way that people view money. I'm going out on a limb here (in that I can't point to any statistics that would prove this), but I suspect that most of us didn't spend a lot of time agonising about the true nature of money before the entire financial system imploded.

But then, suddenly, it mattered. The financial economy and the real economy collided disastrously. And then the financial side came out with a whole load of solutions that made the real economy wonder what was actually going on behind the curtain.

I'm not saying that everyone understands how money creation works economists still argue with each other over exactly what money is and what role it plays. But I do think it's fair to argue that most people today have a much more abstract view of money. Even if they don't know a great deal about it, they do know that it's a lot more complicated than it might look.

Advertisement - Article continues below

And when you have central banks around the world almost literally printing money (it's only not literally, because they do it electronically), you can hardly blame the rest of us for seeing money as far less tangible than it once was.

Magic beans, you say? Sounds plausible

After 2008, the idea of mining something out of thin air sounds like honest hard work, compared to the idea of printing something out of thin air. You might be sceptical but it wasn't much crazier than everything else that was going on.

So when bitcoin launched in 2009, it was falling on fertile ground. The public was both angry at the establishment and suddenly distrustful of a financial system whose pipes had burst and flooded the whole economy. If ever an idea like bitcoin was going to thrive, that was the right place and the right time.

To be clear, I'm not dismissing bitcoin. I think there's something there (though I'm not invested in it, and I do think that this current phase will end in tears). But it could only have taken off in today's world.

Bitcoin is just the logical conclusion of today's monetary policy. What happens when you can't trust money? You find an asset that has a lot of the trappings of money (it can be moved digitally and swapped for other currencies), but which apparently removes the need for trust from the equation.

No wonder it's rocketing.




The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Bitcoin has just crashed hard – where will it go next?

The bitcoin price has taken a beating, down by 15% in one day. Dominic Frisby looks at what’s behind the crash, and where the cryptocurrency might go …
25 Sep 2019
Spread betting

Another bubble in bitcoin for traders to short

This surge in the bitcoin price seems no more likely to endure than the last one, says Matthew Partridge.
16 Jul 2019

Most Popular

Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020