Is It Bitcoin’s Time to Shine? British pounds fall to record lows against the dollar

On September 26, the British pound hit a record low against the US dollar following the announcement of tax cuts and further debt increases to cushion the impact of a possible economic recession. The volatility simply reflects investors’ doubts about the government’s capacity to withstand the rising cost of living across the region.

The US dollar has been the clear winner as investors seek refuge in the largest global economy, but the British pound’s weakness could be a net positive for Bitcoin. The GBP, or British Pound, is the world’s oldest currency still in use and has been in continuous use since its inception.

Fiat currencies are a 52-year-old experiment

The British pound, as we currently know it, began its journey in 1971 after its convertibility with gold or its equivalent effectively ended. Since then, the currency issued by the Bank of England has not had a fixed valuation.

Inflation has been at the center of economic debates throughout 2022 after central banks injected liquidity into markets over the past two years to stimulate economies. As a result, in August 2022, the UK saw a 9.9% increase in consumer prices compared to the previous year.

On 22 September, the government announced an unprecedented tax cut, the largest since 1972, sending the British pound to an intraday low of $1.038 against the US dollar on 26 September. Analysts concluded that government bond issuance would increase to pay for lower taxes, and interest rates would need to be raised aggressively.

While the GBP’s loss of value is shocking, one needs to analyze exactly how important the global currency market is and how relevant the British pound is to cryptocurrencies. The first part is relatively easy to answer, but it depends on whether or not bank deposits, savings and certificates of deposit are accounted for. If we stick to the definition of base money, which solely measures cash in circulation and deposits with the central bank, the pound sterling stood at GBP 1.05 trillion in June 2022.

In US dollar terms, the British currency represents $1.11 trillion of the global $28.2 trillion in fiat base money, or about 4%. On the other hand, the euro, the eurozone’s single currency, leads the ranking with $6 trillion, closely followed by the US dollar with $5.5 trillion. Therefore, the importance of the GBP remains high, supported by the region’s gross domestic product of $3.19 trillion in 2021, the fifth largest in the world.

In October 1990, the British government decided to peg the GBP based on the Deutsche Mark because Germany was the leading economic power in the region. However, the country was forced to withdraw from the link in September 1992 after Britain’s weak economic performance made the exchange rate unsustainable. As a result, during “Black Wednesday”, interest rates suddenly increased from 10% to 15% and the GBP currency devalued by 25% overnight.

Related: GBP follows Euro; The pound-dollar rate hits an all-time low

Supply caps and scarcity could give crypto a chance to shine

Very few assets can compete with fiat money in terms of relevance. Gold, at roughly $6 trillion in value, excluding jewelry and non-financial assets, is a clear contender. Tech giant Apple also leads the market valuation with a capitalization of $2.45 trillion, followed by oil producer Saudi Aramco at $2 trillion.

It is not easy to estimate the relevance of the British pound on cryptocurrencies, but according to data from Nomics, out of the global Bitcoin fiat trade, the US dollar is the absolute leader with 89%, followed by 4% from the Japanese yen, 3 % for euros and 2% for pounds.

Consequently, the direct impact on Bitcoin trading seems relatively small, but the fact that the oldest fiat currency hit a low against the US dollar could be a game-changer for cryptocurrencies.

According to Porkopolis Economics, the average rate of issuance of sterling since 1970 has been 11.2% per annum. This figure compares directly to Bitcoin’s issuance of 900 coins daily or 1.7% annually.

As the general population realizes that their savings and investments are being more aggressively devalued by central bank stimulus measures, the benefits of a decentralized form of money may become apparent. But for now, the US dollar has been the clear winner, reaching its highest level in over 20 years against other major global fiat currencies.