Economic data and other indicators, including the upbeat mood in financial markets, suggest that the US Federal Reserve (Fed) may succeed in a soft landing for the US economy, contrary to initial expectations. .
If so, investment advisors recommending Bitcoin (BTC) will have to go back to the drawing board on how to explain this difficult-to-classify asset as something that beginners can understand and hold in their portfolios. became.
Here’s my advice:
No need to worry about that. I am not saying that Bitcoin has no value. Any attempt to explain Bitcoin within the terms and frameworks of traditional financial markets will fail. Bitcoin’s true value (and its explanation) lies elsewhere.
Here are some of the stories being told on Wall Street that encourage people to buy bitcoin.
- “inflation hedgewas once a common explanation. Last year, when consumer prices were soaring, bitcoin fell, spoiling this story.
- Related to the above, but with a slightly different nuancedigital goldThere was also a story called “. Think of Bitcoin as a scarce digital asset that provides a long-term store of value in the face of political and economic uncertainty. But this is also not working very well. Most institutional and individual investors who entered the market after 2021 are suffering losses.
- Finally, prepare for the possible collapse of the dollar-based international monetary systeminvestment vehicleThere is a long-term idea that Bitcoin should be held as Confidence in the central banks that control the current financial system will eventually disappear. Again, recent economic indicators are unconvincing, at least for now.
The story of the collapse of the dollar
Let’s take a closer look at the third story.
I see the economic conditions of late winter 2022 as the time to test the hypothetical worst case scenario that could lead to the end of US economic and currency hegemony, and Bitcoin as an option in the event of a currency (=dollar) collapse. some people
Nuclear-armed Russia is at war with Ukraine. Supply chains have been disrupted by the new coronavirus and war. Inflation was at its worst level in 40 years. There was widespread concern that the Fed, which had begun aggressive rate hikes, would not only fail to contain inflation, but also create serious difficulties and be forced to backtrack under overwhelming political pressure.
Some believed that such a failure would ultimately lead to a loss of confidence in the world’s most powerful central bank and, by extension, the dollar. Bitcoin, on the other hand, was touted as a reliable, code-driven alternative that wasn’t subject to such human failures.
reality in 2023
But in 2023, such dismal predictions have not materialized. The unemployment rate hit a 53-year low of 3.4% in January, despite hundreds of thousands of layoffs in the IT, tech and financial industries. The increase in employment in the same month was 513,000, far exceeding the previous forecast of 187,000.
Inflation is still high, but has stabilized. The US consumer price index rose 6.5% annually in December, down from 7.1% in November. A January survey of purchasing managers by the Institute for Supply Management found the manufacturing sector contracted more severely than it did in December, suggesting a possible recession. But other forecasts are becoming more optimistic.
The International Monetary Fund (IMF) recently revised its global economic forecast for 2023 upwards to 2.9% growth, 0.2% higher than the October forecast. In addition, the fast-recovering stock and bond markets present a good-for-nothing scenario in which inflation subsides and the economy slows to a manageable rate of growth without a severe economic meltdown. As you begin, your convictions seem to grow.
That view was reinforced by the relatively optimistic outlook on inflation and interest rates that Fed Chairman Jerome Powell displayed in his press conference following the decision to raise rates by 0.25%.
If such predictions are correct, Fed Chairman Jerome Powell and other FOMC members criticize them for realizing too late that high consumer prices are not a “temporary” problem related to the coronavirus. It will regain some of the respect it lost in 2021. Of course, the Fed will continue to receive a lot of criticism, but it would be an overstatement to say that there has been a fundamental loss of confidence in the Fed and the dollar.
So, justifying buying bitcoin as an alternative to the collapse of the dollar, at least this time, seems difficult.
Greater value proposition
So what to make of Bitcoin’s best month of the year, briefly surpassing $24,000 last week?
The simple answer is that investors around the world have regained their appetite for risk, and as economic conditions ease, money is pouring into risky assets, including Bitcoin.
But this is also a less than satisfactory answer. We just saw at the beginning of this article that various arguments for investing in Bitcoin have not been proven correct.
Why is Bitcoin worth it? Just because people have money to spend doesn’t mean they spend it on worthless things. What is the underlying value proposition that keeps people buying Bitcoin?
Away from Wall Street
The answer, I believe, lies far from Wall Street.
Bitcoin is currently proving its worth in developing countries where financial freedom is threatened, including:
- Nigeria: Implemented a strict policy to ban cash in order for the government to force the spread of digital currency. People reportedly flocked to Bitcoin to protect their assets. One indicator of the high demand is that the price of bitcoin in Nigeria has almost doubled compared to its dollar-denominated price in the United States.
- Lebanon: The banking system is on the verge of collapse, and it is said that wine prices are often denominated in Bitcoin. Some make their living from hastily constructed mining facilities spread across the country.
- Vietnam: In 2022, it topped the Chainalysis crypto asset penetration ranking. One reason is that the country has one of the lowest levels of financial inclusion in the world, with just over 30% of Vietnamese adults having a bank account.
- Other Countries in Chainalysis Top 10 Cryptocurrency Adoption: All emerging economies, except the United States, which ranks fifth. Philippines, Ukraine, India, Pakistan, Brazil, Thailand, Russia and China.
If you feel that the economic climate is reviving investment appetite, and if you want to justify adding Bitcoin to your portfolio, consider the risks common in traditional Western financial markets. Don’t try to think in terms of opportunities.
Instead, look at the many places in the world where financial systems are inadequate due to general failures of politics, instability, institutions and infrastructure. Bitcoin has proven useful in such places. If it’s convenient in those places, it should be worth it.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Rachel Sun/CoinDesk
｜Original: Fed Policy Win Could Harm Bitcoin’s Wall Street Narrative