Bitcoin’s Next ‘Halving’ Is Right Around the Corner. Here’s What You Need to Know

WYATTE GRANTHAM-PHILIPS wrote . . . . . . . . .

Sometime in the next few days or even hours, the “miners” who chisel bitcoins out of complex mathematics are going to take a 50% pay cut — effectively slicing new production of the world’s largest cryptocurrency in half.

That could have a lot of implications, from the price of the asset to the bitcoin miners themselves. And, as with everything in the volatile cryptoverse, the future is hard to predict.

Here’s what you need to know.

WHAT IS BITCOIN HALVING AND WHY DOES IT MATTER?

Bitcoin “halving,” a preprogrammed event that occurs roughly every four years, impacts the production of bitcoin. Miners use farms of noisy, specialized computers to solve convoluted math puzzles; and when they complete one, they get a fixed number of bitcoins as a reward.

Halving does exactly what it sounds like — it cuts that fixed income in half. And when the mining reward falls, so does the number of new bitcoins entering the market. That means the supply of coins available to satisfy demand grows more slowly.

Limited supply is one of bitcoin’s key features. Only 21 million bitcoins will ever exist, and more than 19.5 million of them have already been mined, leaving fewer than 1.5 million left to pull from.

So long as demand remains the same or climbs faster than supply, bitcoin prices should rise as halving limits output. Because of this, some argue that bitcoin can counteract inflation — still, experts stress that future gains are never guaranteed.

HOW OFTEN DOES HALVING OCCUR?

Per bitcoin’s code, halving occurs after the creation of every 210,000 “blocks” — where transactions are recorded — during the mining process.

No calendar dates are set in stone, but that divvies out to roughly once every four years. The latest estimates expect the next halving to occur sometime late Friday or early Saturday.

WILL HALVING IMPACT BITCOIN’S PRICE?

Only time will tell. Following each of the three previous halvings, the price of bitcoin was mixed in the first few months and wound up significantly higher one year later. But as investors well know, past performance is not an indicator of future results.

“I don’t know how significant we can say halving is just yet,” said Adam Morgan McCarthy, a research analyst at Kaiko. “The sample size of three (previous halvings) isn’t big enough to say ‘It’s going to go up 500% again,’ or something.”

At the time of the last halving in May 2020, for example, bitcoin’s price stood at around $8,602, according to CoinMarketCap — and climbed almost seven-fold to nearly $56,705 by May 2021. Bitcoin prices nearly quadrupled a year after July 2016’s halving and shot up by almost 80 times one year out from bitcoin’s first halving in November 2012. Experts like McCarthy stress that other bullish market conditions contributed to those returns.

This next halving also arrives after a year of steep increases for bitcoin. As of Thursday afternoon, bitcoin stood at just over $63,500 per CoinMarketCap. That’s down from the all-time-high of about $73,750 hit last month, but still double the asset’s price from a year ago.

Much of the credit for bitcoin’s recent rally is given to the early success of a new way to invest in the asset — spot bitcoin ETFs, which were only approved by U.S. regulators in January. A research report from crypto fund manager Bitwise found that these spot ETFs, short for exchange-traded funds, saw $12.1 billion in inflows during the first quarter.

Bitwise senior crypto research analyst Ryan Rasmussen said persistent or growing ETF demand, when paired with the “supply shock” resulting from the coming halving, could help propel bitcoin’s price further.

“We would expect the price of Bitcoin to have a strong performance over the next 12 months,” he said. Rasmussen notes that he’s seen some predict gains reaching as high as $400,000, but the more “consensus estimate” is closer to the $100,000-$175,000 range.

Other experts stress caution, pointing to the possibility the gains have already been realized.

In a Wednesday research note, JPMorgan analysts maintained that they don’t expect to see post-halving price increases because the event “has already been already priced in” — noting that the market is still in overbought conditions per their analysis of bitcoin futures.

WHAT ABOUT MINERS?

Miners, meanwhile, will be challenged with compensating for the reduction in rewards while also keeping operating costs down.

“Even if there’s a slight increase in bitcoin price, (halving) can really impact a miner’s ability to pay bills,” Andrew W. Balthazor, a Miami-based attorney who specializes in digital assets at Holland & Knight, said. “You can’t assume that bitcoin is just going to go to the moon. As your business model, you have to plan for extreme volatility.”

Better-prepared miners have likely laid the groundwork ahead of time, perhaps by increasing energy efficiency or raising new capital. But cracks may arise for less-efficient, struggling firms.

One likely outcome: Consolidation. That’s become increasingly common in the bitcoin mining industry, particularly following a major crypto crash in 2022.

In its recent research report, Bitwise found that total miner revenue slumped one month after each of the three previous halvings. But those figures had rebounded significantly after a full year — thanks to spikes in the price of bitcoin as well as larger miners expanding their operations.

Time will tell how mining companies fare following this next looming halving. But Rasmussen is betting that big players will continue to expand and utilize the industry’s technology advances to make operations more efficient.

WHAT ABOUT THE ENVIRONMENT?

Pinpointing definitive data on the environmental impacts directly tied to bitcoin halving is still a bit of a question mark. But it’s no secret that crypto mining consumes a lot of energy — and operations relying on pollutive sources have drawn particular concern over the years.

Recent research published by the United Nations University and Earth’s Future journal found that the carbon footprint of 2020-2021 bitcoin mining across 76 nations was equivalent to emissions of burning 84 billion pounds of coal or running 190 natural gas-fired power plants. Coal satisfied the bulk of bitcoin’s electricity demands (45%), followed by natural gas (21%) and hydropower (16%).

Environmental impacts of bitcoin mining boil largely down to the energy source used. Industry analysts have maintained that pushes towards the use of more clean energy have increased in recent years, coinciding with rising calls for climate protections from regulators around the world.

Still, production pressures could result in miners turning to cheaper, less climate-friendly energy sources. And when looking towards the looming halving, JPMorgan cautioned that some bitcoin mining firms may also “look to diversify into low energy cost regions” to deploy inefficient mining rigs.

Source : AP

---

Read also at Coin Telegraph

5 things you didn’t know about Bitcoin halvings and BTC price . . . . .

Gold vs. Bitcoin: Comparing the Top 10 Monetary Characteristics

Nick Giambruno wrote . . . . . . . . .

Gold or Bitcoin

Given the characteristics of gold and Bitcoin, which is best suited for sending value through time and space?

Below, I’ll analyze the ten most decisive monetary attributes and see whether gold or Bitcoin has an advantage.

Monetary Attribute #1: Scarcity

The World Gold Council estimates there are 6.8 billion ounces of mined gold globally, and annual production averages around 118 million ounces.

That much is what is known. However, we don’t know how much gold will be discovered and mined in the future.

For example, how many mined ounces of gold will be available on June 1, 2031?

We can probably make a pretty accurate projection, but nobody can know.

What will the Bitcoin supply be on June 1, 2031?

It will be around 20,589,121 Bitcoins.

With Bitcoin, the current and future supply is finite and known to all.

There will never be more than 21 million Bitcoins, and there is nothing anyone can do to change that.

Today, the Bitcoin supply is about 19.6 million, meaning the vast majority—over 93%—of the total Bitcoin supply has already been created.

The remaining 1.4 million BTC will come onto the market at a preset, ever-decreasing rate until the last Bitcoin is created 116 years from now, in 2140.

In other words, Bitcoin’s supply will only grow about 7% in the next 116 years.

The supply of Bitcoin won’t grow much at all from here.

By 2030, over 98% of all Bitcoins will have already been created.

Bitcoin_apex, a German Bitcoin advocate, describes Bitcoin’s scarcity like this:

8 billion people, 21 million Bitcoin.

That is proportionally as if:

80,000 people had to share $210.

8,000 people spread out on a bus with 21 seats.

800 people would share 2.1kg of bread.

80 people sharing 0.21 liters of water.

8 people would have to live in an apartment with 0.021 square meters.

Here’s another way to think of it.

Owning 1 BTC is like owning 324 ounces of the global gold supply; each would give you ownership over about 0.00000476% of the overall supply.

Owning 1.236 BTC is like owning a 400-ounce Good Delivery gold bullion bar; each would give you ownership over about 0.0000059% of the overall supply.

Here’s the bottom line.

Gold is scarce, but only Bitcoin is absolutely scarce.

Verdict: Bitcoin Wins

Monetary Attribute #2: Hardness

In my view, hardness is the most important monetary attribute.

Hardness does not mean something that is necessarily tangible or physically hard, like metal. Instead, it means “hard to produce.” By contrast, “easy money” is easy to produce.

The best way to think of hardness is “resistance to debasement,” which helps make it a good store of value—an essential function of money.

All other monetary characteristics are meaningless if the money is easy for someone to produce.

What is desirable in a good money is something that someone else cannot make easily.

For example, imagine the price of copper going 5x or 10x.

You can be sure that would spur increased production, eventually expanding the copper supply. Of course, the same is true of any other commodity.

That’s why there is a famous saying in mining: “The cure for high prices is high prices.”

The dynamic of higher prices incentivizing more production and ultimately more supply, bringing prices down, exists with every physical commodity. However, gold is the most resistant to this process.

That supply response is why most commodity prices tend to revert around the cost of production over time.

This dynamic is even more profound with money.

When an asset obtains monetary properties, the natural reaction is for people to make more of it—a lot more of it.

This is known as the easy money trap.

Historically, gold was always the hardest asset, the one most resistant to the easy money trap… until Bitcoin.

Bitcoin is the first—and only—monetary asset with a supply entirely unaffected by increased demand.

That is an astonishing and game-changing characteristic.

That means the only way Bitcoin can respond to an increase in demand is for the price to go up. Unlike gold and every other commodity, increasing the supply in response to increased demand is not an option.

The stock-to-flow (S2F) ratio measures an asset’s hardness.

S2F Ratio = Stock / Flow

The “stock” part refers to the amount of something available, like current stockpiles. It’s the supply already mined. It’s available right away.

The “flow” part refers to the new supply added from production and other sources each year.

A high S2F ratio means that annual supply growth is small relative to the existing supply, which indicates a hard asset resistant to debasement.

A low S2F ratio indicates the opposite. This means that new annual production can easily influence the overall supply and prices, which is not desirable for something that functions as a store of value.

Before I move on, it’s important to clarify that hardness is not the same as scarcity. They are related concepts but not the same thing.

For example, platinum and palladium are scarcer than gold but not hard assets. Current production is high relative to existing stockpiles.

Unlike gold, stockpiles of platinum and palladium have not built up over thousands of years. It’s the primary reason why new supply can easily rock the market.

Because of their low S2F ratios, platinum (0.4x) and palladium (1.1x) are not suitable as money. Their low S2F ratios indicate they are primarily industrial metals, corresponding to how people use them today. Almost nobody uses platinum and palladium as money.

Gold has an S2F ratio of 60x. That means it would take about 60 years of the current production rate to equal the existing gold supply.

Today, Bitcoin’s S2F ratio is about 57x, slightly below gold’s.

According to its fixed protocol, we know precisely how Bitcoin’s supply will grow in the future.

A key feature is that the new supply gets cut in half every four years, which causes Bitcoin’s hardness to double every four years. This process is known as the “halving.”

The next time Bitcoin’s supply growth will be cut in half will be in April 2024.

But this coming halving will be very different…

That’s because Bitcoin’s hardness will be almost twice that of gold’s when that happens.

That’s how Bitcoin will soon become the hardest money the world has ever known. And it will keep getting harder as its S2F ratio approaches infinity.

For thousands of years, gold has always been mankind’s hardest money. That is all set to change in a few weeks, and most people have no idea.

Verdict: Bitcoin Wins

Monetary Attribute #3: Liquidity

Having a large global pool of buyers and sellers—liquidity—is critically important for any serious money.

With a market cap of around $14.6 trillion, gold has a large pool of global liquidity.

At around $1.3 trillion, Bitcoin has a much smaller pool of global liquidity.

However, it is growing quickly.

If the Bitcoin price goes up 10x—which it has done many times in its history, and I expect it will do again soon—Bitcoin’s pool of global liquidity will be within spitting distance of gold’s.

If Bitcoin’s market cap and pool of liquidity continue to grow faster than gold’s, it will erode gold’s advantage. But for now, gold wins.

Verdict: Gold Wins

Monetary Attribute #4: Portability

If you send $1 billion worth of physical gold from New York to Beijing, complicated and expensive logistics are required.

$1 billion of gold weighs about 14,300 kilograms (or about 31,500 pounds). Transporting that much gold would likely involve multiple cargo flights and then armored trucks moving it from the destination airport to the destination vault.

It would also require insurance, navigating regulations, paying import or export taxes, clearing customs, and thorough verification of the gold’s purity, among other things.

It would also take considerable time; It wouldn’t happen overnight.

Transporting smaller amounts of gold is also problematic. For example, going through airport security with gold coins and bars will likely generate unwanted attention.

These are some of the issues with gold’s portability.

Physical gold is vulnerable to seizure in part because of the problems with transporting it.

Bitcoin, on the other hand, is the most portable asset in the world.

It is a digital bearer asset that can achieve final international settlement in 10 minutes for pennies.

You can send $1 billion worth of Bitcoin from New York to Beijing for less than $10 in fees. It will arrive in around 10 minutes.

The transaction has no credit risk and no counterparty risk. You don’t need to get anyone’s permission or need to use—or trust—any third party whatsoever. And there’s nothing anybody can do to block, freeze, reverse, or censor the transaction.

The recipient can instantly verify the Bitcoin’s authenticity at no cost.

Going through airports and crossing borders with Bitcoin is also much more practical than other forms of wealth.

If you hold Bitcoin on your phone, laptop, or flash drive, it can be accessible to border agents if they search you and you reveal your password. However, those things are much less conspicuous than physical gold.

Further, many popular Bitcoin wallets use a 12-word phrase to recover your funds. If you can memorize the 12-word phrase, you can potentially store billions of dollars worth of value just in your head with nothing else.

When it comes to portability, Bitcoin isn’t just slightly better. It’s an upgrade orders of magnitude better than gold.

It’s an even more profound upgrade than when mankind moved from using horse carriages for travel to using Boeing 747 airliners. It’s more like going from horse carriages to futuristic teleportation machines that can instantly beam you from one location to another.

Verdict: Bitcoin Wins

Monetary Attribute #5: Verifiability

Do you really know that the gold you own is authentic?

It could look something like this on the inside.

Chances are the gold you own is indeed authentic… but you can never know for sure unless you test it yourself with specialized equipment. Otherwise, you’ll have to trust a third-party auditor and appraiser.

If you want 100% certainty, you’ll probably need to melt the gold down and recast it.

No matter how you do it, verifying gold’s authenticity is infrequent, slow, people-intensive, costly, and potentially unreliable. It also doesn’t scale.

With Bitcoin, counterfeiting is practically impossible. Simple mathematics can instantly verify a Bitcoin transaction’s authenticity at no cost.

If you doubt it, try to send some fake Bitcoin and see what happens.

I don’t see any reason to believe Bitcoin’s resistance to counterfeiting would be eroded.

Further, imagine if the average person could instantly audit and verify the entire global gold supply’s authenticity—without relying on any third party. That’s what anyone can do with Bitcoin.

In short, Bitcoin users have a level of certainty that has never previously existed for any other monetary asset.

Verdict: Bitcoin Wins

Monetary Attribute #6: Fungibility and Privacy

Anyone can go to a website with details of the public Bitcoin blockchain to analyze and view the entire transaction history.

The information on Bitcoin’s blockchain doesn’t explicitly show your name, address, and other personal information. However, suppose it became known that a particular Bitcoin address was associated with you. In that case, outsiders could track your balance and every transaction you make.

Particular Bitcoins could also become “tainted” through transactions that governments don’t like. For example, suppose you received a Bitcoin with a transaction history linking it to someone in North Korea, Iran, or another sanctioned entity. It might cause complications.

All of this raises a fundamental question.

How do you obtain privacy on Bitcoin’s public blockchain?

It’s a good question that confuses many people.

The answer involves hiding in crowds.

Obtaining privacy on Bitcoin has been likened to the scene in the movie V for Vendetta in which thousands of masked people marched in the street. They were all engaged in a public act, but their identities were concealed because they all wore the same mask, allowing them to hide in a crowd.

Privacy in Bitcoin works similarly.

Several excellent privacy tools are available to anyone right now on Bitcoin, and they are getting better every day.

For example, you can find a typical JoinMarket transaction, a special Bitcoin transaction optimized for privacy, at the link below.

Can you tell who the sender and receiver are?

https://mempool.space/tx/a56d23da7df68eb49d3665452bf7085c07a79be62f29f19e588240f02eb94c76

On the other hand, physical gold doesn’t retain a transaction history for anyone to view at any time. Further, you can always melt down a gold bar or coin and recast it to destroy any previous associations.

I expect developments in the next few years to significantly increase Bitcoin’s fungibility and privacy for all users.

In the meantime, gold has an advantage.

Verdict: Gold Wins

Monetary Attribute #7: Durability

Gold is indestructible. It doesn’t decay or corrode. That’s why most of the gold people produced even thousands of years ago is still around today.

With Bitcoin, all aspects are genuinely decentralized and robust.

Even if the US and Russia engaged in an all-out nuclear war, destroying most of the Northern Hemisphere, Bitcoin wouldn’t miss a beat in the Southern Hemisphere.

Barring an inescapable, global return to the Stone Age that lasts into eternity, Bitcoin is durable… but not as durable as physical gold.

Verdict: Gold Wins

Monetary Attribute #8: Divisibility

Physical gold is generally inconvenient and impractical to use for small transactions.

A one-gram bar—around the size of a pushpin—is about the smallest practical size. As of writing, one gram of gold is worth about $65. Transactions worth anything less than that will be problematic.

Each of the 21 million Bitcoins can be divided into 100,000,000 units called satoshis (or sats). Each sat is worth 0.00000001 of one Bitcoin.

As of writing, it takes about 1,500 sats to make a dollar, which means a penny is worth 15 sats, and each sat is worth 1/15 of a penny.

In short, Bitcoin’s extreme divisibility allows for transactions of any size—from fractions of a penny to billions.

Verdict: Bitcoin Wins

Monetary Attribute #9: Scalability

If gold or Bitcoin becomes the world’s dominant money, how can it be scaled to billions of people?

That’s a key question.

With gold, settling all transactions in physical payments—especially small ones—is not practical.

Trusted third parties, like mints, vaults, banks, transportation companies, and others, are necessary for gold to function as a practical medium of exchange at scale. These entities must follow all laws and regulations, or governments will quickly shut them down.

In short, trusted third parties are centralized vulnerabilities. Governments can capture and coerce them.

This is exactly how governments used the gold standard to bootstrap the fiat currency system into existence.

First, people used physical gold as money. Then, to scale, they necessarily turned to third parties, like banks, that stored gold and issued gold IOUs to facilitate trade. Governments captured those third parties and gradually removed the gold backing from the IOUs until they were nothing more than confetti. In short, that is how the fiat currency system was born.

Here’s the bottom line.

Gold’s biggest flaw as money is that for it to function at scale, it requires IOUs and third parties beholden to governments.

With Bitcoin, anyone can send and receive value—from fractions of a penny to billions—worldwide without relying on any third party and achieve final international settlement within minutes, 24/7/365.

However, the base layer of the Bitcoin network can only process about 576,000 transactions a day.

Every day, there are over 2,000,000,000 consumer transactions around the world. That means Bitcoin can only process about 0.029% of them. That’s why recording every Starbucks or McDonald’s transaction on the Bitcoin blockchain was never possible.

It was also never desirable.

If Bitcoin needed to record every consumer transaction on its blockchain—or even a fraction of them—it would require an industrial-scale operation with expensive data centers. The average computer would no longer be able to run the Bitcoin software.

In this scenario, Bitcoin might as well be another PayPal, Visa, or another centralized financial service where you need to ask for permission to do anything.

Remember, Bitcoin’s entire value proposition depends on it being neutral, censorship-resistant, accessible to everyone, and controlled by nobody.

To have these properties, it’s essential that the average person can run the Bitcoin software. That’s why Bitcoin has a hard limit on the transactions it can handle each day. It needs to be this way so that the average computer—and soon the average smartphone—can easily handle running Bitcoin. That makes Bitcoin genuinely decentralized and incorruptible, giving it unique monetary properties.

It’s crucial to emphasize that Bitcoin, without decentralization, would be worthless.

Scaling Bitcoin by compromising its decentralization would defeat its entire purpose.

Does that mean Bitcoin will never be able to scale and achieve widespread adoption?

Absolutely not.

Numerous scaling solutions for Bitcoin will inevitably emerge. However, the Lightning Network is the most dominant one.

The Lightning Network is an open, peer-to-peer network built on top of Bitcoin.

Anyone can use the Lightning Network, and nobody can be prevented from using it.

On the Lightning Network, people can perform an unlimited number of transactions without needing to add them to the Bitcoin blockchain. Delegating custody of funds to a third party is unnecessary—you can always remain in control.

The Lightning Network can eventually allow Bitcoin to scale up and handle every consumer transaction in the world.

Verdict: Bitcoin Wins

Monetary Attribute #10: Recognition

While gold is an established money, Bitcoin is an emerging one.

Gold has over 5,000 years of history as money. You can take gold to any country in the world, and most will instantly recognize it.

Bitcoin doesn’t have this established history and recognition. It’s only been around since 2009.

It took gold centuries to achieve monetization. Bitcoin has a good chance of undergoing monetization in a much shorter period—and it’s already well on its way.

In the meantime, gold has the advantage.

Verdict: Gold Wins

Source : International Man

Chart: Bitcoin Near Record Highs Intraday on 2/28/24

Source : Bloomberg

Infographic: Bitcoin Returns vs. Major Asset Classes

See large image . . . . . .

Source : Visual Capitalist

Chart: Bitcoin Bounced in 2023

Source : Chartr

Infographic: Top 10 Bitcoin Mining Countries & Their Renewable Electricity Mix

See large image . . . . . .

Source : Visual Capitalist

Gold vs. Bitcoin vs. CBDCs

Nick Giambruno wrote . . . . . . . . .

International Man: For over 2,500 years, gold has been mankind’s most enduring money.

However, with the emergence of Bitcoin there is a new hard money option.

How do you see the two as governments worldwide continue to engage in rampant currency debasement and are rolling out central bank digital currencies (CBDCs)?

Nick Giambruno: First, I am all for free-market competition in money.

I say let the best money win.

Having a handle on the basics is crucial to understand what is happening here.

Money is a good, just like any other in an economy. And it isn’t a complex notion to grasp.

It doesn’t require you to understand convoluted math formulas and complicated theories—as the gatekeepers in academia, media, and government mislead many folks into believing.

Understanding money is intuitive and straightforward.

Money is simply something useful for storing and exchanging value. That’s it.

The way I see it, three primary monetary goods are competing against each other today: Bitcoin, gold, and fiat currency.

Fiat currency is currently the dominant form of money in the world. But that status is fleeting as central banks are debasing their currencies at breathtaking speed.

CBDCs are a desperate, last-ditch effort to keep the fiat currency scam going—a Hail Mary.

To escape the collapsing fiat system and CBDC enslavement, many millions—soon billions—of people are turning to monetary alternatives like gold and Bitcoin.

Fiat currency is a fraud of historic proportions that causes incomprehensible damage. So I am rooting for both gold and Bitcoin in this three-way war for monetary supremacy.

International Man: Can you explain Bitcoin’s monetary qualities?

Nick Giambruno: Bitcoin shares many of gold’s monetary characteristics. They’re both durable, divisible, consistent, convenient, scarce, and most importantly, “hard assets.”

“Hardness” does not mean something that is necessarily tangible or physically hard, like metal. It means “hard to produce.” By contrast, “easy money” is easy to produce.

The best way to think of hardness is “resistance to debasement,” which helps make it a good store of value—an essential function of money.

The most important characteristic of a good money is that it is credibly “hard to produce.”

All other monetary characteristics are meaningless if the money is easy for someone to produce.

Like gold, Bitcoin does not have counterparty risk.

In other words, Bitcoin and gold are the only primarily monetary assets that aren’t simultaneously someone else’s liabilities.

Gold has established itself as money over thousands of years. Bitcoin is a new and emerging money.

Bitcoin is like hard money with a call option based on its further monetization, which is an excellent bet.

A lot more can be said on this topic, but this sums up the essential points.

International Man: What about CBDCs?

Nick Giambruno: Despite all the hype, CBDCs are nothing but the same fiat currency swindle on steroids.

It’s doubtful CBDCs can save otherwise fundamentally unsound currencies—as I believe all fiat currencies are.

If the current fiat system is not viable, then CBDCs are even less viable as they enable the government to engage in even more currency debasement.

Would a CBDC have saved the Zimbabwe dollar, the Venezuelan bolivar, the Argentine peso, the Lebanese lira, or the Nigerian naira?

I don’t think so. And a CBDC won’t save the US dollar or the euro from their fates either.

There are a lot of bad things that come with CBDCs. But there’s a silver lining…

CBDCs are going to introduce and familiarize people with using digital currencies. It’s then only then a matter of time before they discover Bitcoin.

CBDCs and Bitcoin share some characteristics.

For example, they are both digital and facilitate fast payments from a mobile phone. But that is where the similarities end.

The reality is that CBDCs and Bitcoin are entirely different in the most fundamental ways.

You need the government’s permission and blessing to use a CBDC, whereas Bitcoin is permissionless.

Governments can (and will) create as many CBDC currency units as they want. With Bitcoin, there can never be more than 21 million, and there is nothing anyone can do to inflate the supply more than the predetermined amount in the protocol.

CBDCs are centralized. Bitcoin is decentralized.

Governments can censor transactions and freeze, sanction, and confiscate CBDC units whenever they want. Bitcoin is censorship-resistant. No country’s sanctions or laws can affect the protocol.

There is no privacy with CBDCs. However, with Bitcoin, if you take specific steps, it is possible to maintain reasonable privacy.

CBDCs are government money that are easy to produce and give politicians a terrifying amount of control over people’s lives. On the other hand, Bitcoin is non-state hard money that helps liberate individuals from government control.

In short, CBDCs are a pathetic attempt to compete with Bitcoin.

CBDCs make an inferior form of money even worse, but at the same time, they are an excellent Trojan Horse for Bitcoin.

It doesn’t take much imagination to see that once governments inevitably inflate their CBDC units, censor transactions, freeze people’s accounts, and confiscate funds, it will push people to look for better digital alternatives, first and foremost Bitcoin.

That’s how, contrary to conventional wisdom, CBDCs could be an enormous catalyst for Bitcoin adoption.

International Man: Couldn’t governments simply ban Bitcoin?

Nick Giambruno: Bitcoin threatens a major source of the government’s power—the power to create fake money out of thin air and force everyone to use it. There’s no question they’ll try to protect this racket from Bitcoin. The question is whether they’ll be successful.

Remember, the powerful Chinese government has banned Bitcoin numerous times with little to no long-term effects as adoption grows.

That’s because it’s entirely impractical for governments to ban Bitcoin. They’re no match for the economic incentives that attract millions—soon billions—of people, and increasingly, corporations, and even nation states to a harder and superior form of money.

Further, all aspects of Bitcoin are genuinely decentralized and robust. The best that governments can do is play an endless game of global whack-a-mole.

Governments in Argentina and Venezuela have laws restricting their citizens from accessing US dollars. However, these laws have little effect on their citizens’ desire and ability to use them. These actions just create a thriving black market, or, more accurately termed, a free market.

Similarly, governments have tried to ban cannabis for decades, which hasn’t worked out very well for them.

Bitcoin would be infinitely more challenging for governments to ban than US dollars or a plant.

I would like to see governments try to ban Bitcoin because they’ll fall flat on their faces.

It’s doubtful any government will be more successful in banning it than the Chinese government was.

A failed attempt to ban Bitcoin will reinforce its value proposition as a superior form of money nobody controls.

International Man: Where do you see the Bitcoin price going?

Nick Giambruno: What we have with Bitcoin is an entirely new asset that millions worldwide are adopting as money because of its superior monetary properties, namely its total resistance to debasement.

The monetization of the new monetary good is genuinely unlike anything anyone alive has ever seen.

It took gold centuries to achieve monetization. Bitcoin has a good chance of undergoing monetization in a much shorter period.

The market cap for Bitcoin today is around $600 billion.

The market cap for all the mined gold in the world, which took thousands of years to accumulate, is about $12.7 trillion.

That means Bitcoin has a market cap roughly equal to 5% of gold’s and is already well on its way to monetization.

Assuming gold stays flat and Bitcoin goes up 20x, it would have a market cap roughly equal to gold. At that point, a single Bitcoin would be worth over $620,000. I think that’s a real possibility in the next ten years, though it could happen much sooner.

If that sounds outrageous, consider this…

Ten years ago, the Bitcoin price was around $100. Today, it’s roughly 310x that.

Bitcoin has made numerous breathtaking moves to the upside in the past. I think it can do it again, especially as corporations, institutional investors, and even nation states start buying Bitcoin for the first time. Of course, it’s important to remember that past performance does not indicate future results for any investment.

Source : International Man

The Danger of Paper Bitcoin

Capitain Sidd wrote . . . . . . . . .

Are you keeping bitcoin on an exchange?

Let me tell you a story about what happens when you, and others, leave your bitcoin on exchanges. You might be surprised to hear what that means for your holdings. It might sound a lot like your own.

Let’s call our character Bill. Bill has been cautiously watching bitcoin for years, hearing about it in passing and reading a few articles. After inadvertently saving a lot of cash due to lockdowns, he decided to dive into bitcoin at last. A friend told him to check out Coinbase, Binance or another popular and “trusted” exchange in order to buy his first chunk of bitcoin.

So, Bill created an account and uploaded his face, ID, social security number, address and every other relevant detail about his life until he finally reached the “Buy Bitcoin” screen. He picked up a fraction of a bitcoin, but after all that trouble, he thought to himself:

“I don’t need to learn all these complicated technical details about hardware wallets and self custody — I just want my bitcoin safe.”

Bill reviewed the exchange’s website and decided that the security experts at the exchange, with their wiz-bang cold storage and state-of-the-art encryption, would be better at securing his bitcoin than he himself would be.

Bill was very pleased with himself after making that decision — not only did this exchange make investing in bitcoin simple, it gave him peace of mind knowing that someone else was responsible for keeping his assets safe from any kind of theft or malicious activity. After all, why should he have to worry about such things when there were professionals available who could handle them instead?

Bill has since become quite comfortable with the idea of trusting exchanges with his bitcoin — his coins are now safe from his own mistakes!

WHEN TRUST DISAPPEARS: THE FALL OF FTX

When Bill turned on the news one morning and found out that the massive crypto exchange FTX had just paused withdrawals and seemed to “accidentally” lose $10 billion, roughly a third of its market cap, he was shocked.

How could a firm with its logo on the side of a major sports stadium and a CEO who appeared on CNBC, Bloomberg and in front of the U.S. Congress(!) to talk about digital assets and regulation have lost — or likely stolen — so much from right under everyone’s nose?

The potential of losing your funds isn’t the only reason to secure your own bitcoin. It also ensures the price cannot be manipulated.
Source

Now Bill was stuck between a rock and a hard place. He was suspicious of his own exchange, but setting up his own hardware wallet seemed so difficult and scary. It would require him to invest in a physical device, acquire the necessary knowledge to secure it properly and keep track of his seed phrase backup. Even if he figured out the basics, there was still the risk of misplacing his device or improperly storing his backup and losing access to his bitcoin.

FTX was shocking, but surely Bill’s exchange would never conduct itself the same way. People would see it before it was coming, and he’d have time to get out, right?

REASONS TO TAKE YOUR BITCOIN OFF EXCHANGES

It’s clear that trusting your bitcoin to an exchange brings with it the risk that you’ll log in one morning to find that your bitcoin just isn’t there. If you hold your bitcoin yourself using a hardware wallet, this can’t happen.

However, there’s another big reason it’s important to take your bitcoin off exchanges: the bitcoin price.

How could self custody affect bitcoin’s price? Everything in economics says that buying and selling affect the market price for a good, not who holds it. However, self custody is very important to price — and it has to do with something I’ll call “paper BTC.”

INTRODUCING THE NEXT BIG THING: PAPER BTC

Let’s look at how an exchange works by considering a hypothetical exchange called ExchangeCorp, owned and operated by a jolly entrepreneur named Bernie. ExchangeCorp built an uncomplicated way to buy bitcoin, and hired a team of security experts to make sure hackers are kept at bay. Over time and through great marketing campaigns, ExchangeCorp built trust with traders and investors, drawing many in to store their bitcoin on the exchange.

When users keep their bitcoin with ExchangeCorp, the CEO Bernie and his team maintain control over those coins. Customers simply have a claim on their coins: they can log in and see their balance as well as request to withdraw their coins. However, if Bernie wants to transfer those coins owed to his customers to other Bitcoin addresses, he’s technically able to do so without any customer’s permission.

When Bernie kicks up his feet and looks at the balances in ExchangeCorp’s vault, he’s pleased to see tens of thousands of bitcoin that his customers have deposited sitting pretty. Since ExchangeCorp is doing well, more bitcoin are always coming in than going out.

So Bernie gets a wise idea. He could lend out some of those customer coins, earn some interest, and get the coins back without anyone noticing. He would get richer, and the risk of enough ExchangeCorp customers asking for withdrawals at one time to draw its vault’s massive balance down to zero is miniscule. So Bernie loans out thousands of coins here and there to hedge funds and businesses.

Now there’s another set of claims to consider. Customers have a claim on their bitcoin at ExchangeCorp, but ExchangeCorp no longer has the actual bitcoin — they only have a claim on the coin they lent out. What customers now have is a claim on Paper BTC held by ExchangeCorp, with the real bitcoin in the hands of borrowers.

This is where things get weird. All of ExchangeCorp’s customers still think they have a direct claim on real bitcoin held safely by ExchangeCorp. However, that real bitcoin is in fact in the hands of those who borrowed from ExchangeCorp, and those entities are selling it out in the market.

What happens when ExchangeCorp lends out a large quantity of the bitcoin its customers deposited? A lot of extra bitcoin starts to float around in the market, because investors who think they’re holding actual bitcoin are only holding paper BTC. All of that extra supply of bitcoin in the market absorbs buy pressure, which suppresses the price of bitcoin.

Let’s look at simple supply and demand.

When paper BTC comes into the market, because market participants are unaware that this new supply is not real bitcoin, it has the same effect as increasing the supply of real bitcoin — until the fraud is uncovered.

Does this hypothetical story sound anything like the recent news around FTX?

THE PAPER BTC AT THE CENTER OF THE FTX FRAUD

The story of ExchangeCorp and Bernie is exactly the story of FTX and its founder Sam Bankman-Fried, with some save-the-world complexes, study drugs and polyamorous orgies redacted.

By lending out customer funds, FTX essentially inflated the supply of bitcoin by taking advantage of the trust users placed in FTX to safeguard their funds. FTX created tons of paper BTC.

Just how much paper BTC might FTX have created? We cannot be sure of the exact amounts given its absolutely horrid bookkeeping, but the estimate below suggests FTX had 80,000 paper BTC on its books — bitcoin owed to customers that is not backed by real bitcoin.

That would represent a staggering 24% of the roughly 330,000 new bitcoin that were created over the past year through the predictable mining issuance process. That is a ton of extra bitcoin entering the market that nobody — aside from a small group of insiders at FTX — knew about!

It’s impossible to tell where the price would have gone without that extra bitcoin supply entering the market, but we can be almost certain that the price would have climbed higher than it did in 2021.

While the FTX collapse is recent and still unfolding, history has a few cautionary tales to tell about the dangers of paper assets and price manipulation. The story of gold’s failure to resist centralized capture, for instance, can tell us where Bitcoin is headed if we continue to trust exchanges and third parties to hold our bitcoin for us.

THE FALL OF GOLD

Gold was once used in daily transactions — it takes no more than a visit to a museum of ancient history to see the collections of old gold coins once circulating in local markets. The traditional view of the demise of gold as a transactional currency was that it became too cumbersome or too valuable to continue to function well as a means to buy groceries and beer.

However, this story omits a few key components that only reveal themselves when we trace the evolution that societies took from gold coins to paper bills and digital bank accounts.

Centuries ago, banks started taking customer’s gold in exchange for bank notes — giving customers a measure of security for their gold and a more convenient means of transacting. However, entrusting a bank with your precious metal meant the bank was able to lend it out or make bad investments without the depositor’s consent. When a bank was caught between bad loans and a high rate of depositor withdrawals, they had to declare bankruptcy and shut down — leaving many depositors penniless, holding paper claims on gold now worth nothing at all.

Then central banks came along to “fix” the problem of bankrupt banks leaving depositors penniless. Central banks held gold for people and commercial banks, giving them banknotes from the central bank as receipts for their gold. By 1960, central bank official holdings accounted for about 50% of all aboveground gold stocks, with their banknotes circulating freely. Commercial banks and individuals didn’t mind, since each note was convertible to a set weight of gold by the central bank that issued it.

The potential of losing your funds isn’t the only reason to secure your own bitcoin. It also ensures the price cannot be manipulated.

This would have worked well, except that central banks — especially the Federal Reserve in the U.S. — started creating more bills than they had gold to back. Creating more bills than the Fed had gold to back was essentially creating paper gold, since each bill was a claim on gold. Doing this in secret meant the Fed was manipulating the price of gold, given the extra circulating supply which the market was not aware of. When many depositors of gold at the Federal Reserve — like the French government — started questioning the Fed’s gold holdings and creating the threat of a run on gold in the U.S., the U.S. government had to intervene.

In 1971, this came to a head with the Nixon shock. One night, President Nixon announced the U.S. would temporarily stop allowing depositors to trade in their Federal Reserve notes for the gold they promised.

This temporary halt in withdrawals was never lifted. Since all currencies were connected to gold through the U.S. dollar under the Bretton Woods agreement, the Nixon Shock meant that the entire world went off the gold standard at once. All currencies were now just pieces of paper, instead of notes giving the holder a claim on a quantity of gold.

This was only achievable because gold, over time, was deposited into commercial banks and then to central banks. Once central banks held most of the gold, they could manipulate the price of gold and remove it entirely from daily commerce. Everyday people chose the convenience of paper notes over the security of holding gold, and paid the price.

Instead of a neutral money backed by a precious metal that is difficult to dig up and impossible to synthesize, currencies became easy to print and thus highly politicized. Keeping the dollar at the top of the food chain no longer required restraint and good stewardship to ensure its backing in gold. Instead, it required military expeditions and strong policing to ensure global governments and citizens continued to use the dollar to transact.

A return to gold at this point would be impractical — the world’s commercial networks span too great a distance with transactions happening at too high a speed. With paper currency and eventually digital banking systems, what we gained in speed and convenience we lost in soundness and neutrality. We lost our savings, our social cohesion and our political institutions as a result.

PREVENTING BITCOIN’S FALL

Taking your bitcoin off of your exchange is not just good practice for your own security, it’s protecting the price of your bitcoin as well. Our freedoms depend on individuals having control over their own wealth. When we entrust our wealth to companies or states, we go down the path we witnessed with gold.

Thanks to bitcoin’s divisibility and digital nature, it overcomes the hurdles that held gold back from supporting our modern, interconnected economy. Bitcoin can support a global marketplace, but it will only get there if we each hold our own bitcoin.

Don’t let the banksters and bureaucrats manipulate the price of your bitcoin: take it off the exchange and get it on your own hardware wallet.

Source : Bitcoin Magazine

The Debate Between Gold and Bitcoin in 2023

Alasdair Macleod wrote . . . . . . . . .

The FTX scandal has thrown the future of cryptocurrencies into doubt. Supporters of bitcoin, which has proved to be remarkably robust at a time when the whole cryptocurrency ecosystem is threatened by scandal and a systemic collapse, are still asserting that it is the future money.

This article addresses a number of issues that next year will make or break bitcoin’s claim over gold. Besides the interest of governments to prevent it having any monetary role, hodlers ignore the legal status of gold as money, and the different treatment likely to be accorded to bitcoin in criminal law. Furthermore, bulls of bitcoin are mainly only that: speculators hoping for a profit measured in their fiat currencies.

This is not to deny bitcoin’s virtues: only to question its monetary future relative to gold at a time when the period of declining interest rates, which played a large part in fuelling the cryptocurrency phenomenon, appears to have ended. Furthermore, the financial considerations in the geopolitical context centre on the dollar’s relationship with gold, leaving cryptocurrencies as wallflowers in the financial conflict between east and west.

Introduction

If there is one uncontroversial fact in the science of economics, it is that the central issue is the inflation of currency and credit and has been increasingly so since the First World War. The debasement of the circulating medium has always been western governments’ principal monetary policy. The last British attempt to stand in the way of the inflation steamroller ended in 1931, when economists, such as Keynes, pointed out that a gradual and automatic lowering of real wages that results from a reduction of the currency’s purchasing power would be less strongly resisted “than attempts to revise monetary wages downwards”.

This statement was economical with the reality. The error was found in the difference between pre-war and post-war gold standards. It should be remembered that the UK’s 1925—1931 gold standard was a bullion standard, as opposed to the sovereign coin standard which existed prior to 1914. From 1925 when the new standard was introduced, the issue of sovereign coin was no longer at the option of banknote holders, but at the Bank of England’s. The Bank was not interested in redeeming its own notes for coin. Therefore, only the very wealthy would be able to redeem currency and credit sufficient to obtain 400-ounce bars, which valued in today’s sterling is about £586,000 ($714,000). The ordinary person was disenfranchised by this arrangement, compared with the pre-war coin standard when a single sovereign could be obtained for a single paper pound. The result was that abandoning the bullion standard in 1931 was the political option of least resistance.

Instead of a bullion standard, if the British government had resurrected the pre-war coin standard, public opposition to inflationism would have most probably ruled against monetary debasement; and crucially, the government’s room for economic intervention would be severely restricted. But so entrenched is the ideology of interventionism that no British economist today would agree with this analysis.

Not only can inflationism not be easily refuted today, it is lionised as being an essential policy. Nearly a century of inflationism has conditioned establishment economists to reject the restrictions of gold as money and as the sheet anchor for the valuation of credit. But the few of us conscious of the true cost of monetary debasement are increasingly aware that the commitment to inflation of fiat currencies and credit is rushing us all towards a final crisis. It is this awareness that has also fuelled speculation in cryptocurrency alternatives to gold. But as interest rates began to rise thereby expected to stabilise fiat currencies, the cryptocurrency bubble has deflated.

An interesting debate is whether cryptocurrencies, particularly bitcoin, can secure advantage over government currencies if their purchasing power continues to diminish at an accelerated rate. Bitcoin and those of its stablemates claiming a currency role will have to overcome the consequences of a reversal of falling interest rate trends towards higher levels in future. The debate will almost certainly intensify between parties for and against, none of which have a life experience of sound money, of its role as a stabiliser of credit values, and how this might be achieved under a cryptocurrency regime.

Assuming the reader of this article is aware that after a near four-decade decline to the lower bound, interest rates may have entered a new phase of rising rates, we should address the gold versus cryptocurrencies debate first, before looking at the consequences of rising interest rates for currencies, and therefore gold and bitcoin in 2023.

The problem with bitcoin as money

The supreme cryptocurrency standard is widely acknowledged to be bitcoin. It is bitcoin which is currently promoted as the private sector replacement for government currencies. But even to talk of bitcoin as a currency is to mislabel it. A currency is a form of credit, where there is a counterparty risk. This risk is absent when a bitcoin is both owned and possessed by a person or business. It is therefore a competing form of money, which legally is physical gold and silver coin, the international legal position for which is laid out in the Appendix to this article. If it is anything, then bitcoin is not currency but a competing form of money.

Theoretically, as opposed to the legal position, it is not up to an economist to choose what is money. Ultimately, it is the public that decides. Undoubtedly, for some enthusiasts, bitcoin might be money to be hoarded, and spent as a last resort. This is precisely the established role which gold coin fulfils. But there is good reason to believe that the majority of devotees are in it for speculative profits. In other words, they do not intend to ever spend bitcoin, but to sell it for national currency. Now that interest rates have risen from the zero bound, the test will be whether bitcoin turns out to be no more than a speculative counter, aping the performance of high-flying technology stocks, and correlating more with the Nasdaq index instead of discounting the inflation of state currencies and associated bank credit.

To its credit, through all the cryptocurrency scams and collapses, bitcoin has retained its integrity. There is no doubt that in its construction bitcoin is remarkably robust. And for the international traveller it retains the advantage of not yet being subject to extensive regulations and restrictions on capital transfers. But the belief that it is a realistic form of money must be based on either the ability of bitcoin to work alongside the fiat currency system or in the event of a total breakdown of the monetary system that it will be replaced by bitcoin. And supporters seem to think that the established international legal definitions of money can be ignored.

Where this is a particular problem is in the different property rights accorded to money and currency from other forms of property. In criminal law, if, say, a painting is stollen from you and you manage to trace it to a new owner, you can reclaim it as your property, even if the current possessor acquired it in good faith. This is what allows Jewish families to recover artwork stolen from them in the Second World War.

If, however, someone steals money, currency, or access to your bank account and transfers your property in them to another party, so long as that party was not acting in concert with the criminals, you cannot reclaim this form of property. But when we consider the case of bitcoin, it does not appear to fall into the categories of money and credit for the purpose of the law. Through the blockchain, the trail of previous owners is recorded pseudonymously, so property rights can be established.

This means that the authorities can also trace the ownership of bitcoin. If you have left them on an exchange wallet, they can be identified as having come into your possession. Even if you have moved them into your own wallet (pseudonymous ownership) the know-your-client and anti-money laundering regulations which would have been completed by you before you opened an account on an exchange would trace possession to you.
If the authorities know or suspect that at an earlier stage of its ownership, your bitcoin were the proceeds of crime, then they can be confiscated. This means that unlike the possession of money, cash, or bank credit you cannot be certain that you do indeed own your bitcoin acquired in all innocence.

It might not be beyond the bounds of possibility for the state to use this criminal law to attack bitcoin as a rival to its own currency. So far, this form of attack has not been deployed, but the threat remains.

In addition to ignoring its legal status, bitcoin enthusiasts do not appear understand the implications of entire economies operating on credit, being central bank credit in the form of banknotes and bank deposits in the commercial banking system. If bitcoin is to act as money, it must support the existence of related credit, and in doing so it will have to provide price stability to goods and services over the long term. But bitcoin’s hard limit of issue makes it more likely that its purchasing power would increase significantly if commonly adopted as money. Furthermore, so far it has proved to be extremely volatile valued in fiat currencies. Both the hard limit to its quantity and its volatility makes it unsuited as a reference point for credit, which is the lifeblood of every economy. It would be impossible for businesses to calculate financial returns for commercial investment, a problem made more acute by today’s borrowers used to their miscalculations being rescued by continual credit debasement and suppressed interest rates.

Even if they were permitted to do so — which is difficult to envisage ¬– banks will almost certainly not wish to extend credit based on bitcoin. A bitcoin anarchist might respond that the entire banking system should fail with the end of fiat currencies. But this assumes that in this extreme event, the state will not come up with a solution which allows it to maintain control over credit. The best we can hope for in these extreme circumstances is that central banks and the political class learn the painful lessons of inflationism and vow to return to a credit system based on sound money — which is legally, and always has been gold.

Gold and rising interest rates

It has been pointed out above that bitcoin’s value has declined along with rising interest rates. In derivative markets, rising interest rates are also seen as being disadvantageous to gold and favourable to fiat. Indeed, for most of 2022 rising dollar interest rates have seen gold decline, at least until recently, when expectations for higher interest rates softened. It has been that way for gold because the dominant players in derivative markets believe it to be so, and they account for their financing costs in fiat currencies. But while admitting to the accounting issue, the belief in the relationship between interest rates, gold, and currencies is based on a common misconception.

Both Keynesians and monetarists claim that interest rates are the price of credit, so if interest rates are raised, they say that demand for credit will be reduced. It is on this understanding that central bank interest rate policies are based. But empirical evidence shows that this relationship is incorrect. The explanation is simple. As a reflection of time preference, interest rates compensate creditors for loss of possession of currency or credit in the form of bank deposits. To the loss of use value and a risk that the borrower might default must be added the expectation of any changes in the currency’s purchasing power.

Unless this last factor is recognised by rate-setters who lean towards suppressing rates, a currency will suffer on the foreign exchanges accordingly. And if policy makers for other fiat currencies are similarly supressing interest rates below their time preference values, then it will be reflected in higher gold prices rather than exchange rate adjustments. With respect to gold, it is not the fact that gold yields a low interest rate on loan: that is a function of gold’s stability relative to that of a fiat currency. Therefore, what matters in the relationship between gold and a fiat currency is the degree to which the interest rate demanded in the market for the currency reflects the prospects for its purchasing power.

However, traders account in fiat currencies. So understandably, they are more interested in maximising nominal interest rates and view the lower rate on gold as a cost. But as we can see from the chart below, in the 1970s official rates (in this case the Fed funds rate) rose and at the same time the gold price rose as well.

The day the Bretton Woods gold peg was finally abandoned in 1971, the dollar price of gold was $43. Between 1971—1972, the Fed funds rate had varied between 3.3% and 5.5%. By the end of the decade, on 21 January 1980 at the PM fix gold was priced at $850, an increase of nearly nineteen times. At that time, the Fed funds rate was at 14%, clearly forced higher by the markets in accordance with time preference theory. Chairman Volcker subsequently increased the funds rate to 17.5% by April, and then to 19% in January 1981 to slay the inflation dragon. At that rate, the Fed’s dollar was yielding more than warranted by time preference, which in effect was Volcker’s policy objective.

For derivative speculators, the condition which breaks the accounting relationship between gold and dollar interest rates is when markets begin to take the inflation threat seriously. Today, that does not yet appear to be the case. We can say this because derivative markets impose a relationship between fiat currency interest rates and that of gold which denies the existence of time preference. It is an important conclusion which begs the question: will 2023 see a return to time preference considerations for the relationship between gold and fiat currency values, and how will bitcoin’s price behave in these circumstances?

To affirm its status as money, bitcoin will have to obey the laws of time preference. In other words, its current relationship with interest rates must change, so that rising interest rates reflecting fiat currencies’ loss of their purchasing power should become reflected in rising values for bitcoin. We will not try to guess this future. But we can say confidently that if the debasement of currencies accelerates, gold’s relative value will increase accordingly while that of bitcoin might not.

The geopolitical wildcard

To the extent that there is a financial war between the American-led western alliance and the Russian Chinese nexus, gold plays a far greater role than any cryptocurrency. Since the early 1980s, China has embarked on a policy of secretly acquiring unknown quantities of bullion none of which has been permitted to leave the nation’s territory. It has financed gold mining, so that for over a decade it has become the largest national producer in the world. And when it was decided that the State in various accounts had accumulated sufficient bullion, it set up the Shanghai Gold Exchange and encouraged its own citizens, previously banned from gold ownership, to accumulate large quantities —so far, totalling over 20,000 tonnes.

And Russia, implementing gold accumulation policies more recently, has declared that between reserves and holdings in other state accounts it has about 12,000 tonnes. Legislation has been passed in the Dumas which will allow some or all of this gold to be transferred into official reserves, when they could easily exceed the reserves declared at the US Treasury. Moscow is setting up a new bullion exchange. Other Asian central banks have been accumulating gold as well. And tellingly, European central banks refuse to admit to any reduction in their reserve positions.

The battlefield in this financial tussle is over the US dollar. Russia and China, with the members of the Shanghai Cooperation Organisation, the Eurasian Economic Union, and BRICS (shortly to be joined by Saudi Arabia) either want to dispose of the dollar for the purpose of trade settlement entirely or want to become less dependent upon it. How is that to be achieved? The actions of Asian powers and their central banks are signalling to us that they will do so with gold.

This could become increasingly relevant in the months ahead. With Europe entering a continental winter, fuel and food shortages risk splitting the western alliance. The ascendency of gold-backed Eurasia over a divided western alliance can be expected to lead to further dollar weakness, reflected in the value of true money, which legally is only gold.

Source : Goldmoney

Bitcoin Traded Below US$17,000

Source : Trading Economics