Bitcoin And Central Banks
By Nullius on ALTCOIN MAGAZINE
(follow on from https://medium.com/@RSP123/bitcoin-the-next-wave-an-evolutionary-perspective-e2d53d53c71f)
First thing each morning, I sit down with a cup of tea and add the previous day’s market data into a couple of charts I’ve been running for the last few years. I enter the USD values of Bitcoin and Ether (the only cryptos that really matter in my view), the number of new ETH wallets opened, transactions, BTC outputs per day, and the ranking of some apps and websites such as Square and Binance.
I’m a psychologist, not an economist. I think market behavior is a reflection of human psychology — a kind of social psychology. People employ reason (sometimes) in their decision making, but mostly we act on instinct and desire and fear. I’m interested in the mood of the crowd and there is quite a lot of data that captures this. These data streams help to build an overall picture of the ebb and flow of market sentiment. One takeaway of this exercise is to realize that despite the drubbing we had in 2018, the market is in a surprisingly healthy state. The ETH price has recovered rapidly to where it was just 8 months ago, and Bitcoin is at the level it was 10 months ago. Other indicators are almost all glowing green. People are still edgy and nervous — last year’s trauma has left scars that have yet to heal — but optimism is back. This looks like a sector with a future. Again.
Thinking of the future, I wonder if one day soon I’m going to come down in the morning to find that some of the numbers I watch have gone ballistic and the markets are convulsed in a buying frenzy. Why do I wonder this? Mostly because of landslide theory (more of that anon). Here I simply want to ask: what might cause such an explosion? Only one thing can: a surge of new money into the market — either millions of people suddenly keen to buy BTC or ETH, or else news that one or more organizations with massive capital are buying. The organizations with the most capital in the world — the backstops for all markets — are central banks.
Would a central bank really get into this market?
This is a question that a lot of people are wondering about, and the answer matters because if it happens it’s going to make some people stupendously rich. Why? Because if central banks start accumulating BTC (or any other crypto), then hundreds of commercial banks and other institutions would undoubtedly follow suit, as would an army of private investors, and the resulting transfer of value into BTC would be very substantial. It might also happen in a very short period of time.
Rumors about central banks quietly buying Bitcoin have been circulating for the last year or two — the latest ones concern Russian commercial banks buying on behalf of the Bank of Russia, or the creation of the bank’s own cryptocurrency (which may or may not be popular but would presumably be tradable for BTC). This probably isn’t happening yet, but neither is it a totally crazy possibility, in fact, it is probable in some form. Inflation in Russia is again picking up fast, and despite holding a lot of gold, Russia’s frail economy, hobbled legal system, and reliance on a single industry (fossil fuel) for the majority of its export earnings means that the Ruble is under constant pressure. Holding scarce assets that could multiply in value many times over the next few years not only adds diversity to reserves but offers an early-mover advantage that could pay off handsomely, as well as stick one in Washington’s eye (always popular in Moscow). I would be amazed if someone in the Kremlin hasn’t done a briefing on this. (As an aside, Russia is often described as a “kleptocracy” or “gangster state” in which a ruling clique — the so-called oligarchs — controls almost everything, and the separations between the executive, legislature, and judiciary common in western countries is little more than a charade. The distinction between the rulers’ personal domains and state organs is thus opaque. In other words, many BTC may already be residing in Russian wallets, but no one dares say how they were paid for, or whether they are owned by the state or individuals.)
The central banks of many nations are in a similar position when it comes to currency strength, and given the inexorable rise of Bitcoin, these are the ones that have the most to gain from getting in early. It would not be so surprising to find that some central banks are gingerly putting their toes in the water. Just this week, in fact, we learned that the Bulgarian government sold 200,000 BTC that were seized from criminals. Next time they might hang on to them.
Central banks of the bigger G20 nations are in a slightly different position from those of other countries: they have declaration rules and reserve obligations that influence the IMF’s Special Drawing Rights (SDRs) — the central banks’ unit of reserve, composed of many different currencies and assets, all carefully indexed, that the IMF and the big central banks use to shore up the international monetary system (and each other). If a big country’s central bank owned a significant amount of Bitcoin, then the SDR value would have to reflect that. This could only realistically happen with the agreement of the US government and the European Central Bank.
As it happens, this kind of sovereign diversification is not unprecedented. The central banks of Japan and Switzerland, no less, hold enormous amounts of commercial equity (as do various so-called sovereign wealth funds), so the share price of companies like Apple, Panasonic, Google, and others already contribute to the SDR calculations, as do various kinds of debt, gold, art, and other assets. As such, the IMF takes a keen interest in the holdings of central banks — those of lender nations as well as those of borrower countries.
How might a central bank purchase unfold?
Perhaps the first thing to look out for is a rumor that a central bank has begun to buy Bitcoin. In the absence of official denial, the price would probably double on the day. And if a central bank actually confirmed that it was buying BTC, then it would be amazing if others weren’t also, and the price would increase explosively as commercial institutions piled in. It would be a rally the like of which we have never seen. Central bankers are a conservative lot. They would hate to be seen as the cause of a bubble. If they are getting in, expect them to be incredibly discreet.
Another big item of news that could spur developments in this area is that Facebook has announced that it is going to launch it’s own cryptocurrency (indexed against a basket of currencies, similar to SDRs) as part of its messaging app. This will allow people to send and receive money easily and freely with billions of others around the world. We do not know yet whether this will be a private standalone blockchain, whether Facebook will seek to buy out an existing system, or whether it will ride on an existing public chain (Ethereum, or perhaps Polkadot, are the obvious trustless solutions). At a stroke, this makes Facebook a major player in global personal finance, and the banks will be trembling. Moreover, as the new coin will almost certainly be tradable for BTC and ETH (if not at launch then soon after), this announcement acts as a major new on-ramp for crypto more generally. A rush of new interest in Bitcoin is likely, including from the IMF. The man Zuckerberg has put in place to run this project is David Marcus, who is also a board member of Coinbase and ex-president of Paypal. Make no mistake, this is a major development.
In conclusion then, if central banks hold Bitcoin or other cryptos, mass adoption and financial normalization would be upon us. It probably isn’t going to happen this week or even this year, but with every step forward in crypto ownership, development, and resilience, this goal moves closer.
