Investing

What if Central Banks Accumulate Bitcoin?

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Bitcoin was the first decentralized network of payment between individuals that has been driven through users and most importantly, without the presence of a central monetary authority. The lack of a central authority is the main reason governments fear the evolution of cryptocurrencies.

The possibility of integrating Bitcoins and other crypto-currencies has been studied by central banks with caution due to the doubts that this type of asset can generate in the global financial system. This approach would be a reality if the value added in the market of Bitcoins surpasses the $500 billion dollar market cap figure, a figure that is far from its current 42,000 billion dollar value.

The target figure will not be reached. Bitcoin’s growth rate has fallen by more than half in the last year, from 9.3% to 4.4%. With the reduction of mining, Bitcoin will not reach its theoretical maximum number of units until 2045 or later.

Central Banks fear Crypto Currencies

We currently live under the Fiat pattern which is a term to describe those conventional currencies that are issued by the Central Banks. The official currency has value for the simple reason that governments say it has value, but that promise is gradually generating more doubts, as they are not backed by tangible assets such as gold or silver.

The fiat currency is backed by the faith and credit of the government issuing the currency through its monetary authority. Central banks emit and destroy money out of nothing, using what is termed monetary policy to exert a certain economic influence.

There is a basic aspect in the role of the fiat currency and it is the control, a greater facility to follow the movement of this currency, to examine who is the beneficiary of each movement, to collect taxes and also, to trace any type of criminal activity. All this is lost when “non-governmental” coins emerge.

Bitcoin users do not need the current banking system because the currency is created when so-called “miners” use their time to solve complex algorithms that serve as verification to expand Bitcoin’s transactions.

Faced with this new reality, the Central Banks would seek to defend themselves by hoarding large amounts of cripto currencies, such as the Bitcoin, in order to subject them under iron control for the fear that someday they may weaken their own control of the money supply of any economy.

The different economic agents that intervene in the activity, for now, are not very exposed to the virtual currencies. However, if it increases substantially in the future, it could affect central bank control over the money supply. However, it must be said, that to date, this risk is limited.

 

Current situation of the Crypto Currency Market

A few years ago the crypto currencies were considered a technology lacking in development and serving only a few. But the use of cryptocurrencies like Bitcoin and Ethereum has become increasingly widespread.

However, these currencies are not being adopted by a rise in private demand to compensate for inflationary or deflationary instability, but rather, for pure financial speculation.

Seeing how their prices behaves with a great deal of volatility, it is very difficult to think that they can really be considered as an alternative means of payment, because they experience sudden swings in price session after session, which entails a high degree of uncertainty about this asset, which is more typical of commodities than foreign exchange.

The market for crypto currencies has its appeal when a monetary authority develops ultra-expansive policies that evaluate the value of the currency. However, if central banks develop a much more aggressive monetary policy with increases in interest rates and monetary control, the market for crypto currencies will be severely affected.


For example, we have the Federal Reserve’s interest rates up to 1.25% last month. After this news was announces, Bitcoin sank by 16% of its value and other crypto currencies fell more than 25%.

In spite of everything, during those first months of the year,  Bitcoin appreciated more than 115.19% to reach $2,147, but since June 12, has seen a 27.3% fall in price.

Over the past year, Bitcoin has been up 264%. Perhaps this is only short term volatility. Perhaps this is only the beginning of the crash. Stay tuned for more.

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