Central Bank Easing Helps Drive Demand for Cryptocurrencies, Says FT Reporter

Neil Dennis

Cryptoasset enthusiasts who have long argued that the decentralized nature of the asset class makes it a pure supply and demand play - immune from the vagaries of the economy, central banks and markets - may have to rethink their investment approach.

Some investors have already argued that the increasing dovishness displayed by several of the world's central banks in the face of slowing economic growth has been one of the reasons for the spike in crypto prices seen during the first half of this year.

Adding her voice to this growing chorus is Hong Kong-based newspaper columnist Henny Sender who says in this week's issue of the Nikkei Asian Review that in the last few months the volume of purchases of bitcoin and other cryptoassets in China is up as much as 50%.

Capital Flight Concerns

She says that Beijing's concerns about capital flight are lending urgency to the easing policies of the People's Bank of China. Investors are now seeing haven value in cryptocurrencies. Sender says:

There is a certain double irony in the fact that central banks regard cyber as a threat to their monopoly over fiat currency, yet they themselves have driven demand for it - and are now trying to issue such currency themselves.

The more traditional haven assets have also seen some interesting activity in recent weeks. Yield curves on US and UK government bonds inverted recently: this means that investors are buying more longer-term debt - which is slightly riskier - than short-term bonds, a sign that people believe the greatest economic risks lie immediately ahead of us.

Gold has also seen a strong pull higher since the end of May, rising 18% to $1,509 as global economic conditions worsen and geopolitical tensions - caused by the China-US trade standoff and, to a lesser extent, Brexit - tighten.

Digital Gold

Grayscale, which manages the flagship Bitcoin Trust, first looked at bitcoin as "digital gold" in its August 2019 paper Hedging US-China Trade Risk with Bitcoin. Bitcoin, the paper said, is displaying an ever-more reliable store of value. Michael Beck, the paper's author, said:

With continued adoption, Bitcoin represents a transparent, immutable, and global form of liquidity that can provide both wealth preservation and growth opportunities.

Beck displayed the strong correlation between tariff hikes against China, announced by President Trump in May, and the rise in bitcoin during the first half: a cumulative return of nearly 105%. He added:

The challenges faced by politicians and policymakers will be difficult to manage given the complexity of our global financial system. Bitcoin could be a useful tool in helping investors insulate their portfolios from any failure to manage these problems effectively.

Nigel Green at financial advisory group deVere Group also sees the "digital gold" benefits of bitcoin. He said earlier this month that as global stocks have withdrawn sharply from their highs, bitcoin has largely retained its value.

"This is not a coincidence," he says. "It reveals that consensus is growing that bitcoin is becoming a flight-to-safety asset during times of market uncertainty."

Crypto Havens

Sender, who is also a regular columnist in the Financial Times, says that the developed world's central banks - thanks to their efforts to maintain their easing biases - have turned cryptocurrencies into safe-haven assets. She concludes:

This is a dramatic transformation from just two years ago. At that time bitcoin was considered a speculative investment that moved in tandem with tech stocks, rather than with assets like gold.