Since its creation in 2008-2009, bitcoin has been one of the most popular, but also the most successful assets of the decade 2010-2020. What’s most intriguing about all of this is knowing that bitcoin was introduced at the same time as the cash injection program in the year 2009. Is that a coincidence? This is where we are going to tackle the subject.
The creation of bitcoin
To make a quick reminder, the idea of bitcoin was presented in November 2008. More unofficially, its creation was made official in January 2009. The purpose of bitcoin being on the one hand, to create a virtual currency, but also to have a decentralized currency of all institutions. The particularity of bitcoin compared to the currency fiat (central bank money) is that its supply is limited. There are only 21 million of them and so far, there are 2 million left to be mined.
For those who don’t know, fiat currency is central bank money, like the local currency. For example, take the evolution of bitcoin against that of the US dollar (fiat currency).
Bitcoin has become over the decade from 2010-2020, the best performing and most lucrative asset in history.
The financial crisis and bitcoin
During the 2008 financial crisis in the US, the US economy found itself on the brink. This period is known as “The Great Recession”. It was during this period that the American central bank, the FED, implemented the ” quantitative easing or quantitative easing.
Just a little reminder on the principle of EQ. This program involves injecting money into the financial system. More technically, the Central Bank buys government bonds, this results in having more liquidity in the financial system. These available injections allow financial institutions to have more liquidity to make available for credit. Therefore, households/companies can also borrow more easily to consume, develop and invest. Therefore, this process helps economic growth to pick up as well as inflation.
The role of cash injections
The very principle of QE (quantitative easing) is to try to bring inflation down to around 2%. During a crisis, when growth is negative, this further weakens inflation. This fragility of inflation was accentuated, because we found ourselves in a deflationary environment for several years. Consequently, the FED began by using its number one tool, bringing the key rate down to 0%. But if this is not enough to raise growth as in 2008 or 2020, something else is needed. It is here that the Central Bank had to create a new tool, liquidity injections.
Here is a graph that highlights 0% rates and QE during the 2008-2020 crises.
My point here, as I approach the subject, is that we know that the only current collateral of central banks remains their credibility. Yes, it prints money out of thin air. As there is no collateral, it can print unlimited. Therefore, it implies that the monetary supply is growing more and more and 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 is a defense against our institutions.
The demographic case
The 1970s were marked by significant inflation supported in part by demographic force. Here 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 stimulated by demography, today this is no longer the case. If we look at the demographic level for people of working age, we can see that the level is increasingly problematic.
The case of debt
The other way to stimulate growth remains debt. This is why it is all the more important these days, because we depend on liquidity/cash injections to maintain growth.
Here is an overview of public debt in the US:
Since we are dependent on debt to maintain growth, we need to inject money to revive the economy during periods of crisis. As I said earlier, this is the case for 2008, but also for 2020.
Printing money encourages spending because borrowing costs are lower. And if you encourage spending, it increases consumption within the economy.
Printing amplifies the money supply, as can be seen in the chart below. The more money there is in circulation, the more it increases its supply 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 happen if we inject too much money over time is hyperinflation.
But at the same time, the advantage of bitcoin remains its limited offer. It is the fact of having only 21 million of bitcoins which makes it a safe haven. Yes, we can take the example of countries where there is hyperinflation like in Argentina for example.
Bitcoin and Central Bank Actions
By taking into account the previous data as well as the actions of the Central Banks, we are going to put this in parallel in order to better understand.
This is where we will look at both the variations of bitcoin in relation to injections or during monetary contraction “ quantitative tightening or QT “.
When we inject money, it increases the money supply. When liquidity is withdrawn from the financial system, ie the reverse of injections, we have a contraction in the money supply.
If bitcoin was created in parallel to counter the system of our institutions with its supply 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 therefore, bitcoin rises steadily;
- When the FED decides to be restrictive, it withdraws liquidity from the financial system and therefore Bitcoin has more difficulty performing.
Here is a chart that represents bitcoin with Central Bank actions.
QE = liquidity injections (increase in money supply)
QT = liquidity withdrawal (contraction of money supply)
Conclusion
When we gather the data, we can still hypothesize that its date of creation is not just the result of chance. Even if bitcoin remains a technological advance via the blockchain system, we can assume that it is also an offensive counter to the failures of our institutions.
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