Recently, the US Federal Reserve System (FRS) for the first time since the financial crisis of 2008 and for the first time in the history of bitcoin lowered its base interest rate by 25 points – from 2.25–2.5% to 2–2.25%.
At first glance, it may seem strange and far-fetched to analyze the effect of lowering rates on bitcoin . It would seem, how can this affect bitcoin, which was created as a response to the imperfection of the policies of central banks and the global financial system as a whole? Moreover, digital gold is almost not correlated with traditional financial assets, therefore, how can the US monetary regulator influence it?
However, empirical evidence suggests that after the Fed’s decision, the price of BTC went up sharply, accelerating after the news of new duties for Chinese goods worth $ 300 billion. Traditionally protective assets such as gold, the Japanese yen and the Swiss franc rose almost simultaneously with bitcoin. and 10-year US treasury bonds. Against this background, more risky assets fell – the Chinese yuan, the Dow Jones Industrial Average, NASDAQ 100, FTSE China A50, WTI crude oil, and the Russian ruble. Thus, many market participants have opted for a “safe haven" instead of risky financial instruments.
A number of reasonable questions arise:
We offer our readers their views on the current state of things.
What gives a reduction in the Fed base rate?
Changing the value of the Fed base rate is an important component of monetary policy. Thus, rate cuts are usually part of a stimulating (soft) policy aimed at expanding credit expansion or, in fact, the money supply.
Soft monetary policy is designed to revive business activity, but it exerts devaluation pressure on the currency, stimulating exports. We emphasize that according to the Fed’s press release , the main macro indicators – inflation, unemployment, household consumption and investment – are normal, which means that there was no special need to lower the rate.
Thus, the recent Fed decision was dictated, apparently, by the desire to make American exports more competitive in the context of a trade war with China. The completion of the latter can hardly be expected in the near future, which is confirmed by the introduction of new duties on China almost immediately after the meeting of the Federal Committee on Open Market Operations.
The response of the Celestial Empire was not long in coming – after the announcement of new duties, the People’s Bank of China allowed the renminbi to fall to 11 years ago.
Obviously, the devaluation of the renminbi is designed to partially offset the losses of Chinese exporters. However, most likely, such a measure will lead to an even greater escalation of the trade war.
Why would this only aggravate the trade war and push the global economy into recession?
By sacrificing some weakening dollar, in the short term the USA can make its goods more attractive at a price in the world market. At the same time, imports from other countries to America will become more expensive, because to buy goods, for example, from Mexico or China, you will need to convert more dollars to pesos and yuan, respectively. Consequently, the US trade deficit may decrease.
The image below shows that the problem of the trade deficit has been relevant for the United States for more than a dozen years and over time the situation only worsens:
The rate cut seems to be clearly a political decision on the eve of the 2020 presidential election, as it can give a fairly quick and tangible effect to the US economy. Thus, the “cheap money” policy stimulates export and business activity within the country. In addition, the increase in protectionist barriers that followed the rate cut may initially help improve employment rates.
However, as history shows, in spite of a possible improvement in the situation on the labor market and a reduction in the trade deficit in the short term, protectionism does more harm than good in a longer period.
In particular, consumers have to buy goods more expensive, often of poor quality, but from a local manufacturer. In various areas, monopolies can arise, which often cause inflation and the preservation of technological backwardness due to a decrease in incentives to introduce innovations, as well as the need to compete in the international arena.
Exports of countries overly concerned with national producers are declining. This leads to a drop in foreign exchange earnings, which puts pressure on the national currency. In addition, exported goods include imported components, therefore, tariffs lead to higher costs for producers, higher prices and lower competitiveness of products at the global level. As a result, indicators of employment and growth in national production are declining, and a recession is beginning.
All this in aggregate negatively affects international cooperation and specialization, slows down the growth of the world economy, limits competition and suppresses scientific and technological progress.
However, some expected results of protectionism in the medium and long term are already evident. So, the chart below shows that global trade has been declining for three consecutive quarters:
Also note that on August 5, shortly after the news of the introduction of duties for Chinese goods, US indices fell another 3%:
Among other things, a decrease in the base rate could lead to a chain reaction – it is possible that the central banks of other countries who do not want to lose in international trade will soon follow the example of the Fed.
As a result, a devaluation fashion can lead to a global increase in protectionism. The latter creates barriers to international trade, because it contradicts the theory of comparative advantages and the laissez-faire principle, suggesting a less efficient distribution of limited resources and an increasing role of the state in the economy.
How will easing the Fed's monetary policy affect the price of bitcoin?
Many analysts are sure that in conditions of low profitability of traditional financial instruments, gradual devaluation of currencies and increasing global uncertainty, bitcoin looks like an alternative that is not inferior in attractiveness to gold and other protective assets.
Thus, Delphi Digital researchers are convinced that the “ideal storm” is brewing in the global economy, which contributes to a steady increase in demand for BTC.
“The first and perhaps most important: global central banks have dramatically changed their mood towards a softer monetary policy. The Fed, the ECB, the Bank of Japan, the People’s Bank of China and many others are now preparing market participants for further cuts in rates and additional incentive measures , ”analysts say.
The report also says that soft monetary policy entails a growing risk of devaluation of national currencies, which is a long-term factor in increasing demand for bitcoin and physical gold. Comparing these two assets, experts find BTC even more attractive, given "emergency measures in monetary policy and increasing geopolitical tensions."
Delphi Digital does not rule out the possibility that over time, having “sovereign properties”, bitcoin will surpass gold in terms of capitalization. In other words, the BTC market could one day exceed $ 7 trillion.
Alan Silbert, Managing Director of the INX security platform, shares the opinion of Delphi Digital:
Interest rate down and further cuts coming. Lower rate = fewer reasons to hold USD. Buy #bitcoin
– Alan Silbert (@alansilbert) July 31, 2019
“The interest rate has fallen, and new declines are already on the verge. The lower the rate, the less reason to keep the dollar. "
UPDATE: Bitcoin is performing as designed during times of global instability.
– Pomp 🌪 (@APompliano) August 5, 2019
“Against the backdrop of global instability, bitcoin behaves as intended,” Anthony Pompliano, co-founder of the Morgan Creek Digital crypto fund, shares his observations.
The fact that in the current situation Bitcoin is an excellent hedging asset , the head of the research department of Bitwise Investment Matt Hogan has no doubt:
“As a hedging instrument against rampant fiscal and monetary policies, bitcoin has become a kind of dominant paradigm.”
Like other market analysts, bitcoin traders will closely monitor the Fed and its statements about future changes in monetary policy, Hogan is sure.
“The continuation of a stimulating monetary policy will be a powerful positive factor for the price of bitcoin. Assets such as bitcoin and gold that are not profitable will become more attractive as interest rates go down, ”the analyst said.
Hogan also has no doubt that in anticipation of the election, Donald Trump “will continue to look for ways to further devalue the dollar as a way to stimulate the economy.”
The former chief strategist of the Donald Trump administration, the well-known conservative Stephen Bannon , expressed a consonant opinion – according to him, the current geopolitical situation contributes to the development and mass adoption of cryptocurrencies .
“I think cryptocurrencies have a great future, especially in the context of today's global populist uprising ,” he said.
Like many experts, Bannon is convinced that the US-China trade war significantly affects many aspects of the global economy and geopolitics.
Circle head Jeremy Allair is confident that investors are increasingly inclined to view cryptocurrency as a safe asset in times of stock market crash:
“Mankind has created an sovereign, secure value storage mechanism that can exist wherever the Internet exists. He is not susceptible to censorship or forfeiture. ”
Alair believes that recent developments in world politics and economics make Bitcoin a “truly attractive asset”:
“The growth of nationalist sentiments, currency and trade wars – all this really positively affects bitcoin”
Circle head added that despite government restrictions, cryptocurrencies are still actively traded in China through offshore platforms. He also expressed confidence that many investors affected by cryptozyme will subsequently return to the market.
Confident in the growth of bitcoin against the backdrop of global instability and Mike Novograts.
The above arguments of analysts are not without common sense, because it is proved that diversification of portfolios through bitcoin can significantly increase their profitability in the medium and long term.
In particular, Raul Pal, the ex-Goldman Sachs manager and founder of Global Macro Investors, is convinced that the potential benefits of investing in BTC far outweighs all possible risks. He is also sure that the first cryptocurrency should be in the portfolio, even if the probability of new "X" is only 1%.
Bitcoin is favorably distinguished from fiat currencies by the predicted issue and a strictly limited offer. So, more than 80% of digital gold has already been mined, while several million coins are simply lost and, therefore, the supply on the market will never reach 21 million BTC.
In addition, the third halving expected in May 2020 will lead to a halving of the reward for the block mined by miners. This will reduce the volume of regular emissions and, thus, make the first cryptocurrency even more scarce. Growing demand with an almost constant supply of the asset, as you know, pushes the price up.
Stimulating monetary policy has two sides to the coin: contributing to the revival of exports, business activity and improving the trade balance, it leads to a weakening of the monetary unit, making imports more expensive. It can also provoke similar measures by central banks of other countries. This leads to trade and currency wars, as can be seen in the difficult relationship between the United States and China.
The Fed’s decision to cut rates is likely to be purely political, given the almost new duties that followed on Chinese products. It is unlikely that the trade war will end soon – retaliatory measures by China may force the Fed to continue easing monetary policy. In general, such actions are unlikely to contribute to the resolution of global problems and the growth of world trade, which, in particular, can be seen from the reaction of financial markets.
Many experts agree that low interest rates encourage consumption and investment, but by no means savings. In such an environment, the yield on traditional financial instruments may not cover inflation, the Fed’s target of 2%.
The soft monetary policy of central banks and the global instability exacerbated by the trade war can positively affect the Bitcoin exchange rate. The latter is characterized by a deficit nature, complete independence from central banks and non-correlation with traditional assets. This makes digital gold not only a potentially super-profitable investment, but also an excellent tool for portfolio diversification.
Therefore, even the most ossified traditional investors can pay attention to bitcoin. The price of the latter is entirely determined by aggregate demand, and not by the policy of central banks. This means that, most likely, BTC will grow in the future, as it is massively accepted and the crypto industry develops.
Publication date 08/07/2019
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Wells Fargo will launch stablecoin for internal settlements
Wells Fargo & Company, an American financial company, will launch Wells Fargo Digital Cash, a pilot blockchain service for internal payments, based on Corda Enterprise. According to a press release, Wells Fargo Digital Cash will provide almost instant international transfers between company branches using digitized funds (tokens). The company has already tested the concept on transfers from the USA to Canada. The launch of the project is scheduled for 2020 […]
Wells Fargo & Company, an American financial company, will launch Wells Fargo Digital Cash, a pilot blockchain service for internal payments, based on Corda Enterprise.
According to a press release , Wells Fargo Digital Cash will provide almost instant international transfers between company branches using digitized funds (tokens).
The company has already tested the concept on transfers from the USA to Canada.
The launch of the project is scheduled for 2020. Wells Fargo Digital Cash will initially provide dollar payments, but then add support for other currencies.
Recall that previously the largest US financial holding company JPMorgan developed its own stablecoin JPMCoin for making international payments to large customers.
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Wells Fargo is going to present its own stablecoin in 2020
Wells Fargo, the fourth largest bank in the US, plans to introduce its own stablecoin in 2020, which will be used in cross-border transfers.
The press release said that the new Wells Fargo platform will create an international payment network based on distributed ledger technology. With the help of this system, as well as the Wells Fargo Digital Cash asset, payments will be made. The stablecoin being developed will be pegged to the US dollar. Initially, the network will be used for internal calculations, after which it will be integrated with other applications.
Lisa Fraser, representative of Wells Fagro, noted that DLT technology has many options for use, the company believes that it can also be successfully applied in banking. In addition, Wells Fargo Digital Cash is expected to enable the company to overcome barriers that still hindered effective cross-border payments in real time.
As you can see Wells Fargo followed the example of the bank JPMorgan Chase, which also introduced its own digital currency. It is noteworthy that back in July, Wells Fargo forbade customers to use credit cards to purchase cryptocurrency and its use in transactions.
In the Bitcoin blockchain, a record of the network hashrate and the share of SegWit transactions
The volume of computing power in the Bitcoin blockchain this Monday reached a record value above 104 quintillion per second, according to Smartbit portal data.
The record was fixed after approaching the level of 100 EH / s last week and the subsequent small rollback. Before the current growth period, which began in December and accelerated in June, the previous maximum was fixed at 60 EH / s in October 2018.
As noted earlier, over the past three months , about 600,000 new ASIC miners have joined the Bitcoin network, which has led to a rapid increase in the hash rate .
Last week, another message appeared that the authorities of one of the provinces of China are taking measures to close mining enterprises on their territory.
Also today, transactionfee portal announced another record – the share of transactions in the Bitcoin blockchain using Segregated Witness (SegWit) technology for the first time exceeded 50%.
On the main Bitcoin network, SegWit was activated on August 24, 2017. The technology is aimed at solving the problems of blockchain scalability, transaction plasticity, and also allows you to implement other optimizations. After the jump to 38% last May, the spread of SegWit slowed down and until recently ranged from 40-45%.
Casa Bitcoin developer and CTO Jameson Lopp previously spoke of the proliferation of technology that responded to the congestion of the cryptocurrency network:
"Reducing the demand for transactions, improving algorithms for calculating commissions, distributing SegWit and grouping transactions have led to more efficient use of space in blocks and reduced competition for this scarce resource."
At the same time, the price of the leading cryptocurrency , having shown a steady rise in the first half of the year, has remained in a fairly narrow range over the past months and amounts to about $ 10,000.
Publication date 09/17/2019
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