- After COVID-19 the economic setup is directed to either an inflation or disinflation period.
- Bitcoin can be used to generate the alpha that financial industry is looking for years to come.
- Bitcoin can capture the current gold market cap and reach $10T of capitalization.
The current economic setup might end up far from the price stability and the occupation central banks wish to reach, but either in a risk of inflation or disinflation.
As a consequence of COVID pandemic, fiscal and monetary policies flooded a huge amount of liquidity in the economic systems all around the world. In the USA the total amount made available in response to COVID-19 is $4.5 Trillion, whereas federal funds rate were lowered, discount window lending costs were lowered, purchase of treasury and agency securities increased and repo operations have been expanded. And these are only a part of the operations put in place by FED. In Europe the response was €2.3 Trillion whereas ECB put in place €1.8 Trillion of operations. In the USA, for instance, such an amount of intervention has been seen during WWII where the expansion of GDP was followed by spikes in inflation rates of 10% and even more.
High inflation rates hurt mainly fixed incomes. The first markets to be hit in this case are bond markets both treasury and corporate because of less attractiveness of fixed incomes during inflation times. The lack of demand in the treasury market for high expected inflation pushes yield rates up resulting also for correction in stock market. Discount factors that use yield curve to discount future corporate earnings weight more and consequently resulting in minor firm intrinsic values. This concept is exacerbated in particular for growth stocks but it is well known that during inflation periods stock market in general does poorly.
Instruments to hedge against inflation are considered to be: TIPS, REITs in some measure, and gold even though the hedging power of the precious metal is controversial. But while TIPS are taxable, REITs can hinder returns, and gold is very inefficient with its insurance and deposit costs, Bitcon can play the major role here as an alternative instrument to store value and a way of seeking alpha.
Although central banks argue that they can monitor inflation and taper their ease policies, it can conversely cause concerns of deflation given a strong rebound in the economy followed by a reduction of monetary supply. Global real GDP growth will jump from 3% of the 2019 to 6% of the 2021, and then it is forecasted to be at 4.4% in 2021, still above the 3% level of 2019.
Deflation is generally considered to have a negative impact on stocks since lower prices tend to hurt corporate net income. Also, it can encourage consumers to save money and reduce spending, negatively impacting revenues, and eroding shareholder value. Regarding the bond market, it can have a positive impact on some of them. Government debt is worth more because fixed payments become increasingly more valuable. Interest rates tend to decrease during a deflationary period, which leads to increases in bond prices and profits for bondholders. Deflation isn't necessarily positive for corporate bonds, especially those in companies that are not value stocks. Deflation makes debt payments more difficult each year since they become more expensive. This puts companies at risk because they eventually will be unable to pay their debts.
In this case, instruments to hedge against deflation are considered to be: investment-grade bonds, very defensive value stocks and cash. But while a rush to buy investment-grade bonds can erode returns, very defensive value stocks can be riskier right now given the high multiples that cause anxiety in investors and doubt about the amount of future returns, and cash that cannot generate as much alpha in money market as in stocks or bonds, Bitcoin once again can absolve to the need of returns.
Therefore, the fact that Bitcoin does not have a specific link to any underlying such as earnings or interest rates can turn out being a pro. It might acquire the status of asset to preserve alpha when economic conditions hit conventional financial markets. In fact, the current economic setup has the potential to spotlight Bitcoin as an alpha generation asset under uncertainty. Clearly Bitcoin brings other different pros that can speed up this function and at the same time different cons that can slow it down.
Among the pros: 1. Bitcoin is dominant in comparison with gold in terms of return-volatility. On the period that goes from 2014 to 2021, Bitcoin shows greater average daily returns and a smaller volatility; 2. Bitcoin is already used to offset capital gains from ahter asset classes selling it in a loss during corrections and buying it an instant later without the traditional provision in stock market, for example, where the loss can lower taxation only if the asset was bought 30 days before the sell and not re-bought before 30 days after the sell; 3. Bitcoin can be used to keep the electric grid in equilibrium acting on demand side makìng it more flexible. Mining can help the massive introduction of renewable resources such as solar and wind energy. The massive introduction of these technologies has showed, in an increasing numerous cases, that it can create conditions where energy markets are pushed toward negative prices resulting in a switching off of renewables themself in favour of conventional energy plants whose costs of switching off and switching on are greater than selling energy at negative prices. in other words, mining during excess of energy supply can increase demand avoiding the formation of negative prices. Moreover, in conjunction with renewable energy providers, miners can forecast when the grid might be in surplus of energy and increase operations profiting not only from mining but also from the incentives coming from transmission system operators.
Among the cons: 1. Competition with other cryptos and offical digital currencies; 2. Ban to trading or mining; 3. Strengthening of crypyo market regulation and taxation; 4. Economy does not enter neigher in inflation nor in deflation, but it slowly goes with disinflation toward long term target.
Conclusion
In conclusion, the Bitcoin market cap forecasted by Cathie Wood seems to be plausible if Bitcon replaces gold. The current gold cap is around $12T. If Bitcoin is capable of attracting most of the speculative transactions on gold, with 19 million of digital coin already in the market, it can easily reach $500K.
Submitted June 08, 2021 at 09:04AM by Low-Faithlessness743 https://ift.tt/3cqhx0p
