Is Bitcoin the New Gold?

MV Global
9 min readApr 21, 2023

How the Federal Reserve, Financial Markets, and Interest Rates Play into Bitcoin’s Hands.

Introduction:

In recent years, the concept of Bitcoin and other cryptocurrencies has disrupted traditional financial systems, sparking debates about their role in the future of money. As the world grapples with ongoing economic challenges and uncertainty, the question of whether Bitcoin could emerge as a viable alternative to traditional fiat currencies has gained increasing attention. In this article, we delve into the role of the Federal Reserve in managing inflation, interest rates, and financial markets, as well as explore the potential for Bitcoin to become a world reserve currency amid growing crises. We’ll examine the challenges and obstacles to Bitcoin’s adoption as a reserve currency, as well as the unique benefits it could offer, such as enhanced global financial stability and reduced reliance on any single nation’s currency and its inherent resistance to inflation due to its fixed supply of 21 million. By the end of this article, readers will gain a deeper understanding of the complex interactions between central bank policies, financial markets, and the rise of cryptocurrencies like Bitcoin. And be able to decide for themselves if bitcoin could be the next gold.

Inflation and Interest Rates: Bitcoin as a Solution to Traditional Monetary Challenges

Inflation and interest rates are critical factors affecting the economy, and understanding their relationship and the role of central banks, such as the Federal Reserve, in managing these factors is essential for grasping their impact on financial markets. In this chapter, we will discuss the complexities of interpreting inflation indices, the Federal Reserve’s role in managing inflation, the effects of interest rate decisions on financial markets, and how Bitcoin presents itself as a solution to the problems inherent in traditional monetary policy.

Inflation indices are commonly misunderstood. They are simply constructed measures that rely on various assumptions and methodologies, making them subject to potential biases and inaccuracies. Moreover, the reporting and interpretation of inflation indices can be influenced by political considerations. Governments and central banks may emphasize particular aspects of the data to support their policy goals or to influence public sentiment. (Remember when the US government said inflation was low if you excluded beef, pork, chicken, and fuel?) Inflation indices often reflect economic conditions from several months prior, leading to a lag in the data. This delay can make it challenging for policymakers and investors to accurately assess current and future inflation trends.

The Federal Reserve employs various tools to influence inflation and economic growth, including adjusting interest rates, conducting open market operations, and implementing quantitative easing programs. These actions impact the money supply and the overall cost of borrowing in the economy. The Federal Reserve aims to maintain price stability while promoting economic growth, which often requires balancing the competing goals of controlling inflation and supporting job creation.

However, there is a darker side to these policies. The ‘magic money tree,’ also known as quantitative easing, refers to how governments print more money when they need it. The US, for example, has printed $4 trillion in 2021. The impact of this is soaring inflation, which could lead to a catastrophic financial situation for ordinary citizens. If an average person attempted such actions, they would be imprisoned for fraud and counterfeiting.

Interest rate decisions by the Federal Reserve have a significant impact on financial markets. Market participants closely watch and anticipate the central bank’s moves, pricing in expected interest rate changes into various financial instruments, such as equities and bonds. Consequently, the timing and magnitude of interest rate adjustments can lead to significant shifts in market sentiment and asset valuations. Financial institutions, such as SVB, Credit Suisse, and First Republic, have experienced their downfall due to their involvement in and exposure to equities and bonds. This was caused by the aggressive increases in interest rates by the Fed and the inverse relationship between the price and yield of bonds. In an attempt to generate a profit, these banks used customer deposits to buy government bonds. When interest rates increased, their investments lost value. Ironically, the safest asset turned out to be nothing but ‘safe’ and is the underlying reason for the cracks in the global financial system.

In circumstances like this, Bitcoin emerges as a potential solution to the problems inherent in traditional, trust-based monetary systems. As a decentralized digital currency with a limited supply, Bitcoin resists inflationary pressures and operates independently of central banks. This means that its value is not directly influenced by their monetary policy decisions. Bitcoin’s independence from centralized control appeals to those who believe that central banks’ actions may contribute to economic instability or inflation. Unlike the fiat currency, which is trust-based, Bitcoin is a trustless system, meaning that

By addressing the problems associated with traditional monetary systems, Bitcoin offers a viable alternative for those seeking protection against inflation and financial instability. As awareness and adoption of Bitcoin grows, it could emerge as a key player in shaping the future of global finance, providing a secure, decentralized, and stable foundation that reduces the reliance on any single nation’s currency and mitigates geopolitical risks.

Could Bitcoin be the New Gold?

The Genesis block, also known as Block 0 or the first block in the Bitcoin blockchain, contains a secret message embedded by its creator, Satoshi Nakamoto. The message is a text included in the Genesis block, which reads:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

This message refers to a headline from The Times newspaper on January 3, 2009, and serves as a timestamp to prove that the Genesis block could not have been created before that date. The message also carries a political undertone, suggesting that the creation of Bitcoin was at least partly motivated by dissatisfaction with the traditional banking system and the government’s handling of the financial crisis of 2007–2008.

Bitcoin is a decentralized digital currency, also known as cryptocurrency, that allows for peer-to-peer transactions without the need for a central authority, like a bank or government, to oversee or regulate it.

The Bitcoin network operates on a public ledger called the blockchain, which records all transactions transparently and securely. Bitcoin transactions are verified and maintained by a network of computers, called nodes, which solve complex cryptographic problems in a process known as mining. The mining process also serves to create new Bitcoins, until a predetermined cap of 21 million coins is reached.

Bitcoin, as a decentralized digital currency, offers an alternative to traditional monetary policy. One of its key features is its resistance to inflation, as its supply is limited to 21 million coins of which 19 million are in circulation. This characteristic makes Bitcoin an attractive option for investors seeking protection against inflationary pressures. Additionally, Bitcoin operates independently of central banks, meaning its value is not directly influenced by their monetary policy decisions. This independence from centralized control appeals to those who believe that central banks’ actions may contribute to economic instability or inflation.

In recent times, Bitcoin has been considered the new gold due to its limited supply and resistance to inflation. The price of Bitcoin has risen 47% during this financial crisis (March 2023), indicating that it is increasingly being seen as a safe asset.

Prominent figures in the crypto world, such as Strike founder and CEO Jack Mallers and Balaji Srinivasan, have expressed their belief in Bitcoin’s potential as a hedge against inflation and an alternative to traditional financial systems. Balaji Srinivasan has even gone as far as predicting that the USD will hyperinflate in the next 90 days, and the Bitcoin price will skyrocket to $1 Million. Predicting it is one thing, but he has taken it a step further, placing two separate 1 million dollar bets on it. That’s putting your money where your mouth is.

III. Printing Money aka Quantitative Easing aka Fraud for Ordinary Citizens

The banking system and financial markets play a crucial role in the global economy and are often impacted by government policies and decisions. One area that has been a source of concern is the practice of quantitative easing, also known as the “magic money tree” or, more colloquially, “money printer go brrr”. Quantitative easing is a policy where central banks inject liquidity into the financial system to stimulate economic growth. For context, during the covid pandemic, QE led to $4 trillion of new money being printed by the Fed. In the last three weeks, 4.4 trillion has been printed in the BTFP.

Quantitative easing has its drawbacks, however. Printing trillions of dollars leads to rampant inflation. If an ordinary citizen were to attempt something similar, they would be sent to prison for fraud and counterfeiting. The impact of quantitative easing on financial markets and inflation raises questions about the sustainability and fairness of such policies. This why we see the ‘petrodollar’ being threatened as the global reserve currency with the recent oil deals between China, Russia, Saudi Arabia and others. It’s why there has been an increase in the number of trade deals between countries being settled in their native currencies rather than the dollar. If price is determined by the relationship between demand and supply, ie, higher demand = higher price, higher supply = lower price, then the decreased demand globally for dollars coupled with its increased supply due to The US FED’s money printing would have an outcome hinted at by the Kenyan President’s recent bit of “advice”.

Regional Banks Versus Central Banks

The potential impact of the current financial crisis on regional banks is another area of concern. Close to 200 regional banks might be materially affected in the same way as larger banks. The exposure of these banks to the crisis and the risks associated with it are something that regulators must take into account. Systemic risk and contagion concerns must be addressed to prevent a widespread banking crisis.

The banking system is a fractional reserve system, meaning that banks only need to keep a fraction of their deposits on hand and can create loans with the rest of it to generate profits. This system creates an inherent risk of a ‘bank run’ which is when all the depositors request their funds at the same time. The entire global financial system revolves around trust. We trust these institutions with our funds. That trust is being eroded as we speak and every bank failure contributes to it.

We have seen significant outflows from smaller banks into larger banks as depositors seek a safe haven. This creates more centralization in the US banking system, which might be by design as the Fed prepares to roll out its FedNow system, a potential prelude to its CDBC. Would you trust a CBDC?

For a system based completely on trust, an erosion of that trust has become the very issue leading to the crisis being faced right now. In layman’s terms, the Federal Reserve told banks that interest rates would remain low, the banks, in turn, made financial decisions based on that information and bought long-term government bonds (the safest asset class) to generate yield. The Fed went back on its word and started to aggressively raise rates from 0 to 4,75%. The Banks lost money on their investments as the market value of those bonds plummeted. In many ways it was a self-inflicted injury the financial establishment had forced on itself. In the internet age, where information moves at the speed of light, bank runs happen in an instant. The question of who to trust becomes vital.

Do you trust your bank if at any time the central bank can change its policy decisions? Do you trust the politicians? Are they acting on your behalf or on behalf of lobbyists whose campaign contributions put them in power? Is a ‘trust me, bro” really better than verifiable proof of funds when it comes to the safety of your life savings and the security of your children’s future?

Conclusion

The idea of Bitcoin becoming a world reserve currency has gained traction in recent years, with some proponents viewing it as a solution to the challenges faced by traditional monetary systems. Several catalysts could lead to Bitcoin’s rise as a reserve currency, including financial crises and the loss of confidence in traditional financial institutions. Additionally, as more people recognize Bitcoin’s unique properties, such as its decentralization and security, it may become increasingly appealing as a store of value and medium of exchange.

However, there are significant challenges and obstacles to overcome before Bitcoin can become a widely accepted reserve currency. Regulatory concerns and resistance from central banks are just a few of the hurdles that must be addressed. Scalability and transaction speed issues also need to be resolved to enable Bitcoin to handle the high volume of transactions required for a reserve currency.

Despite these challenges, there are potential benefits to adopting Bitcoin as a reserve currency. Enhanced global financial stability is one potential benefit, as Bitcoin’s decentralized nature reduces the risk of systemic failures that can arise from centralized control. Additionally, a transition to a Bitcoin-based global financial system could reduce reliance on any single nation’s currency, which could mitigate geopolitical risks and enhance financial security.

Bitcoin’s unique properties as an inflation-resistant, decentralized currency have positioned it as a potential alternative to traditional monetary policy. While there are obstacles to its adoption as a world reserve currency, such as regulatory concerns (often politically driven via self-interested financial institutions that feel threatened), the current financial crises may be the catalyst needed for Bitcoin’s emergence.

Has the inexorable attitude of the banking industry been the catalyst for accelerating its own demise or at least a revolution? Only the next few weeks, months or years will tell. But ask yourself this; if you were investing for your future or your children over the next 10 years, would you invest in the dollar, gold or bitcoin? We’re going Bitcoin all the way.

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