The ECB, Bitcoin and Gresham’s Law.

This week is key in macro-economics with the pending interest rate decision from the European Central Bank. The market is asking how much (not if) central bank liquidity (QE) will be further injected into a languishing global economy. The prospect of impending QE is hanging over global markets like the sword of Damacles. The ECB and other Central Banks are hoping that more QE will instill confidence in the markets in that cheap credit (money printing) will spur economic growth through consumer activity.

Ten years after first launched QE has not led to economic growth but has effectively:

  • Created $17 Trilllion of negative yielding sovereign bonds
  • Led to income inequality
  • Created inflation in most asset classes.

As Michael Lebowitz writes:

Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below

QE has not created economic grow, it has been laggard to say the least. Economic indicators suggest we are heading into, if a not already in, a global recession.

source: The World Bank.

Economics is not a science but an art, yet one of the only irrefutable laws of economics is supply and demand. Excess supply will lead to price suppression, or depreciation of an asst class. Printing ‘money’ will lead to a depreciation in its intrinsic value. Debasing a currency is not a new practice, the Greeks and Romans did it thousands of years ago when they added copper and silver respectively to the composition of their gold coins, the Denarius. People eventually would hoard the gold coins and only spend the newly minted coins; this is know as Gresham’s Law, where bad money drives out good.

The question we’re asking ourselves today specifically is will another introduction of Quantitative Easing lead to a greater appreciation of the virtues of Bitcoin, that include:

  • Finite supply
  • Predetermined and systemic minting that is inflation and deflation proof.
  • Decentralized, it cannot be controlled, influenced or confiscated by governments or their agencies.

Theoretically more QE should see an appreciation in the intrinsic value, and thus the price, of Bitcoin. However these values are yet to be understood by most people. Bitcoin is yet to reach mass adoption due to widespread misunderstanding of its key fundamentals. In the past 18 months we’ve seen economists and hedge fund managers develop an appreciation for bitcoin and launch funds specifically engineered to invest in it. Bitcoin has therefore moved from the stealth phase but is nowhere near adoption stage.

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