A perfect storm with permanent inflation, Bitcoin, and the future of the UK economy
The global financial landscape is undergoing significant changes, with various factors converging to create a perfect storm of economic challenges and opportunities.
During these turbulent times, we must be aware of permanent inflation on the UK public and in Bitcoin. This article will consider the upcoming Bitcoin halving in 2024, rising interest rates, the role of ETFs, regulatory actions, liquidity concerns, increased cold storage usage, the growth of Lightning channels, and BlackRock’s shifting stance on environmental issues.
Permanent inflation refers to a sustained increase in the general price level of goods and services in an economy over time. In the context of the UK, higher inflation can have several effects on the public. Firstly, it erodes the purchasing power of the British pound, diminishing the value of savings and income. Reduced real wealth can lead to decreased consumer spending and lower living standards. When inflation rates drop, this does not mean prices drop; it simply means prices rise less fast.
Bitcoin as a hedge against inflation
Bitcoin is a decentralised digital currency and has often been touted as a potential hedge against inflation due to its limited supply. The upcoming Bitcoin halving, set to occur in 2024, will reduce the rate at which new Bitcoin are created, further limiting the total supply. In contrast to traditional fiat currencies, Bitcoin’s fixed supply ensures that it cannot be subject to arbitrary inflationary policies implemented by central banks.
As inflation rates rise, the value of the British pound will decline relative to Bitcoin. This shift can prompt individuals to seek alternatives to traditional currencies. The finite supply of Bitcoin and increasing demand may lead to a supply crunch and significant price appreciation, benefiting early adopters and those who have allocated a portion of their assets to the cryptocurrency.
Institutions are stacking
Institutions are heavily buying Bitcoin proxies, eagerly awaiting the approval of a spot ETF. Retail is out of the market. Once Institutions have sufficiently ‘stacked some sats’, the narrative will change in the mainstream media, and retail buyers will feel comfortable entering the market.
The emergence of exchange-traded funds (ETFs) provides institutional investors convenient entry into the cryptocurrency market, leading to increased demand for Bitcoin. If just 1% of assets under management (AUM) were allocated to Bitcoin, the price could rise quickly.
Assuming BlackRock allocated 1% of it’s approximate $8.5T – $9T AUM, this could cause a supply shock: According to InvestAnswers the BlackRocks impact would be:
BlackRock allocating just 1% of its $8.5T – $9T AUM could create a supply shock, propelling prices higher. InvestAnswers states that $63b is sufficient to absorb all Bitcoin on exchanges, while a 1% allocation would need around $100b. Due to these constraints, BlackRock and other institutions would struggle to achieve a 1% allocation.
According to Glasnode, Bitcoin left on exchanges is at an all-time low. If Bitcoin continues to be removed from exchanges and held in cold storage, there could be less than a million Bitcoin left on exchanges by the time of the next halving.
The “HODL Model Hypothesis” from The Rational Root also backs up this thesis. The illiquid supply of Bitcoin has begun to outpace the rate at which new supply is issued.
Regulatory actions play a vital role in shaping the cryptocurrency landscape. While the Securities and Exchange Commission (SEC) has scrutinised alternative cryptocurrencies (altcoins), Bitcoin has often enjoyed more favourable treatment as it is recognised as a commodity, not a security. This differential regulatory attention could enhance Bitcoin’s perceived stability and value, bolstering its position as a reliable store of wealth.
Liquidity concerns and exchange volatility have been ongoing challenges in the cryptocurrency market. Advancements and the increased adoption of cold storage solutions have improved security and reduced the risk of exchange hacks. The growth of Lightning channels, which allow for faster and cheaper Bitcoin transactions, has increased the viability of Bitcoin as a medium of exchange.
BlackRock’s changing stance and environmental concerns
BlackRock, one of the world’s largest asset management firms, has recently shifted its position on the environmental impact of Bitcoin mining. Previous concerns over the carbon footprint of mining operations have prompted a call for greater transparency and adoption of sustainable practices. As the industry adapts to these challenges, initiatives aimed at reducing the environmental impact of Bitcoin. In Q2 2022 the Bitcoin Mining council reported 59.9% of Bitcoin mining was from renewables, further strengthening the narrative around Bitcoin as a sustainable asset.
Conclusion
The convergence of permanent inflation, the upcoming Bitcoin halving, regulatory dynamics, liquidity improvements, and shifting perceptions of Bitcoin’s environmental impact create a perfect storm of opportunities and challenges for the UK public.
While Bitcoin’s potential as a hedge against inflation may attract those seeking to preserve their wealth, the evolving landscape necessitates careful consideration of risks and rewards.
As the financial ecosystem transforms, staying informed and adopting a well-informed approach is crucial to navigating these turbulent times.