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What The Future Might Hold For Bitcoin?

By: A Sweeney, Feb 21st, 17.55 GMT

Unless you have been living under a rock in recent years, you have likely heard of Bitcoin, the supposed future of the new monetary age, or is it? The start of 2021 has seen large institutional adoption of Bitcoin helping the price rally into $57,000 today, another new high, and by association results in a market cap of $1trillion. However, the exponential growth raises question surrounding the nature of this market and wether there is really a future for Bitcoin (or other cryptos alike) as a future backbone to our monetary system. Several MNE's have announced they will accept Bitcoin as a form a payment for goods or services in the future including Tesla's CEO Elon Musk, announcing at the start of February that the company has just added $1.5Bn of Bitcoin to the company balance sheets ans will also be accepting this cryptocurrency as a form of payment for purchases.

How would that work? What exactly is Bitcoin?

Well without indulging too much in the tech side, plainly put, Bitcoin is a digital currency that supports international money transfers and can be sent to a persons digital wallet as a form of payment. Sounds simple, but its supported by clever technology that many people believe will revolutionise the industry, hence the popular demand for the currently limited supply of Bitcoins.

Everything seems very pro crypto at the minute as the hype continues to grow, but could it really replace our currency system? The answer is a big NO. Amongst the hype, some crucial factors have been overlooked here about our current form of currency exchanges and the implications in the different economies the represent. Valuations of a currency is a byproduct of several economic factors like supple/demand (results of trade balance), inflation, GDP and the labour market; with each country being unique to their own. Independent monetary and fiscal policies are set in accordance to the economic data in an attempt to hit targets set by the Central Bank of that country. This very brief overview shows a dynamic complex system with a-lot of moving parts which truly is the foundations of any economy. So how could it be possible to replace all this with a decentralised digital currency which has no store of value or utility. 

However, with that being said, that's not the only flaw with Bitcoin. The biggest problem is that Bitcoin is a decentralised form of payment which is out of the control of any central bank. Hypothetically, if 20 independent governments adopted Bitcoin as their main domestic currency, they would completely lose autonomy with manipulating currency valuations in order to fall in line with their broader economic plan, as any changes would have implications for every country that has adopted Bitcoin as their primary unit of exchange. Furthermore, the consequence of having no control is the volatility, which as proven, is dramatic to say the least. Imagine one day you could buy new car using one Bitcoin, but a week later you cant even buy a new pair of shoes. The valuation of global assets around the world would move in a similar fashion unless there is some form of controls implemented.

This theory on Bitcoin is supported by Professor of Economics, Nouriel Roubini, who appeared on Bloomberg TV calling out Bitcoin a 'self fulfilling bubble'. Roubini states that Bitcoin cannot be classed as a currency nor an asset as it does not share the characteristics of either; where the main function of Bitcoin is to support buying other cryptos for speculation only.

When the initial covid panic hit the markets, Equities across the globe dropped 30/40%, which in traditional sense would mean investors move into a risk on mindset and seek out safe-haven assets, however in this same period, Bitcoin and other cryptos fell as much as 60% when Gold was rallying. Even now with new found interest of institutions, if Bitcoin was a hedge against future inflation/US Dollar collapse (which what is claimed), other assets would also be pricing in a hedge; something we are not currently seeing in the markets. 

The hype in Bitcoin is poorly supported at the minute as there is no place for it in economics or finance; however thats not to say the use of a centralised digital currency wont find a use in future monetary systems. But will it be Bitcoin or any other crypts currently trading, only if they are surrendered to a central bank so the necessary measures needed in order to control economic stability can be implemented. 

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