Since its creation in 2008-2009, bitcoin has been one of the most popular assets, but also the most successful assets of the decade 2010-2020. The most interesting thing about all this is to know that bitcoin was introduced at the same time as the cash injection program in 2009. Is that a coincidence? This is where we are going to tackle the subject.
Creation of bitcoin
For a quick reminder, the idea of bitcoin was presented in November 2008. More unofficially, it was officially created in January 2009. The purpose of bitcoin is to be, on the one hand, a virtual currency to create, but also to have. decentralized currency of all institutions. Specifications of bitcoin compared to the currency fiat (central bank money) that its supply is limited. There are only 21 million of them and so far, 2 million are left to be mined.
For those who don’t know, fiat currency is central bank money, like the local currency. For example, put the evolution of bitcoin against the US dollar (fiat currency).
Bitcoin has been the best performing and most profitable asset in history for the last ten years from 2010-2020.
The financial crisis and bitcoin
During the 2008 US financial crisis, the US economy was on edge. This period is known as “The Great Recession”. It was during this period that America’s central bank, the FED, put the ” quantitative easing or quantitative easing.
Just a little reminder of the QE principle. This program is about injecting money into the financial system. More technically, the Central Bank buys government bonds, resulting in more liquidity in the financial system. These injections available allow financial institutions to have more liquidity to make available for credit. Therefore, families/companies can obtain loans in an easier way to consume, develop and invest. Hence, this process helps in picking up economic growth as well as inflation.
The role of cash injections
The basic premise of QE (quantitative easing) is to try to reduce inflation to around 2%. During a crisis, when growth is negative, this weakens inflation further. This inflationary vulnerability has been accentuated by the fact that we have been in a deflationary environment for the past several years. As a result, the Fed started using its main tool, bringing the key rate down to 0%. But if this is not enough to raise growth as it happened in 2008 or 2020, something else is needed. This is where the Central Bank had to create a new tool, liquidity injections.
Here’s a graph highlighting 0% rates and QE during the 2008-2020 crises.
My point here, as I approach the matter, is that we know that the only current collateral that the central banks still have is their credibility. Yes, he prints money out of thin air. Because there is no collateral, it can be printed indefinitely. Therefore, it implies that the monetary supply is growing more and more while the value of the local currency is decreasing.
The fact that bitcoin has a term supply limit of 21 million bitcoins and was created at the same time as the QE program defense against our institutions.
The demographic situation
The 1970s were marked by significant inflation supported in part by demographic force. This is a theoretical reminder; you should know that growth is stimulated by two things:
- demographics;
- the debt.
Inflation and growth often go hand in hand, if we have growth, we will have inflation. Now that we know that the 1970s were marked by strong growth driven by demography, today this is no longer true. If we look at the demographic level for people of working age, we can see that the level is becoming more problematic.
The debt situation
The other way to encourage growth remains debt. This is why it is even more important these days, as we rely on an injection of liquidity/money to sustain growth.
Here’s an overview of public debt in the US:
Since we rely on debt to sustain growth, we need to inject money to revive the economy during times of crisis. As I said earlier, this is the case for 2008, but also for 2020.
Printing money stimulates spending because borrowing costs are lower. And if you stimulate spending, it increases consumption within the economy.
Printing increases the money supply, as seen in the chart below. The more money there is in circulation, the more its supply increases and therefore its value decreases. Here is a chart of the money supply.
And we must not forget that one of the consequences that can occur if we inject too much money over time is hyperinflation.
But at the same time, it still has the advantage of bitcoin limited offer. The fact is that only 21 million of bitcoins making it a safe haven. Yes, we can take the countries with hyperinflation like Argentina for example.
Bitcoin and Central Bank Actions
By taking into account the previous data as well as the activities of the Central Banks, we are going to put that together to get a better understanding.
This is where we will look at the bitcoin variations both in terms of injections or during a monetary contraction “ quantal or QT exacerbation “.
When we inject money, it increases the money supply. When liquidity is withdrawn from the financial system, ie withdrawal of injections, we have a contraction in the money supply.
If bitcoin was created in parallel to combat the system of our institutions and its supply is limited to 21 million, it should automatically react to the actions of central banks.
- When the FED injects liquidity into the financial system, the money supply expands, and thus, bitcoin rises steadily;
- When the Fed decides to be restrictive, it pulls liquidity from the financial system and thus Bitcoin has more difficulty operating.
Here is a chart showing bitcoin with Central Bank actions.
QE = liquidity injections (increase in money supply)
QT = liquidity withdrawal (money supply contract)
Conclusion
When we collect the data, we can still hypothesize that its date of creation is only a result of chance. Even if bitcoin remains a technological advance through the blockchain system, we can assume that it is also a culprit in the failures of our institutions.
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After working for 7 years in a bank in Canada, including 5 years in a portfolio management team as an analyst, I left my job to devote myself fully to the financial markets. My goal here is to democratize financial market information for Cointribune’s audience on various fronts, including macro analysis, technical analysis, intermarket analysis…
