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What interests inflate the price of Bitcoin?

Published at: 14-03-2021

Posted on: March 14th, 2021 by RaduC No Comments

This post will fuel conspiracy theorising. But I cannot help noting an effort, apparently concerted, to drive the price of Bitcoin up and prevent its spectacular falls as it happened on more than one occasion in the past.

Since investor excitement (or naivety?) needs to be continuously spurred on, here comes the heavy artillery. To start with, many entrepreneurs and well-known tech companies have announced buys in Bitcoin: the business intelligence company MicroStrategy in December, Elon Musk and Tesla in February and more recently, through its CEO Twitter made the announcement that it is looking into buying Bitcoin. It is not without interest that the Twitter CEO already owns a sizeable portfolio in Bitcoin that grew at a rate of USD10,000 a month over the last years.

And if things had been confined to an arrangement between world class tech companies and Bitcoin, the question marks would have been modest, if any at all. But when large financial institutions are seen to come up with flimsy arguments about the appeal of the cryptocurrency, these concerns increase significantly, and explanations are not easy to find. Along the same lines, a Financial Times article also noted the unconvincing manner and shallow arguments that Citibank and Bank of America used when turning into Bitcoin advocates. As for me, I would like to refer to an article published by Marketwatch, looking at the research note by Citibank which prompted the bank to say that “Bitcoin is at a tipping point and could become currency of choice  for global trade” .

The note purports that more and more businesses will take up Bitcoin, given its potential “global reach, neutrality and lack of forex exchange exposure”. Global reach – that remains to be seen given the high number of competing cryptocurrencies, neutrality – maybe, but the currency risk is definitely there and it very much resembles the existing forex risks when using traditional currencies. Why a bank would make such misleading statements is beyond me.

One thing should be clear, though. Any company that has revenues in one currency and pays expenses in another has a forex position. And a forex position brings by default a foreign exchange risk. The only way to avoid it is either by using the same currency for both accounts payable and receivable or use forex risk hedging instruments.

This is why, Bitcoin is far from being risk-free as long as wages, electricity, rents or any other expenses are not paid in Bitcoin. Unless this happens, Bitcoin’s wild bouts of volatility will lead to higher forex risks for businesses that intend to charge for their goods and services in Bitcoin but pay wages in USD, EUR or RON.

A similar collection of nonsense is provided by a “global economist” and best-seller author, in an FT article entitled “There are good reasons for business leaders to invest in Bitcoin” where he brings a series of reasons that contradict his final conclusion. We are told that Bitcoin may be the digital gold of the future as a store of value, while saying in the same article that Bitcoin’s volatility is six times higher than that of the golden metal. What a store of value it turns out to be…

It is also mentioned that as it is not subject to inflation, Bitcoin preserves its real purchasing power. Again, this is true only if most things bought are expressed in Bitcoin. As we are clearly not there, Bitcoin’s volatility causes the opposite effect. I believe that we must care whether the value of Bitcoin in our accounts remains at USD50,000 or whether it drops to USD40,000 or even USD20,000.

Stances difficult to make sense of…

Have a nice weekend!

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