Why Bitcoin is a CDS on the Fed – Bitcoin Magazine
This is an opinion piece by Adam Taha, an entrepreneur with two decades of experience in government and corporate finance.
The latest printout of the Consumer Price Index (CPI) came in at a shocking 9.1% (9.8% in cities), and many speculators expected bitcoin’s price to “moon”. What happened was the opposite and bitcoin’s price action correlated with other risky assets. Many had an expected tantrum and asked why? “I thought BTC was a hedge against inflation…when the moon?”
Remember that bitcoin is a 13-year-old robust resource with only 13 years of network effect. How resilient is it? While the dollar, as we all know, has continued its meteoric rise, with new annual highs against the British pound, euro and Japanese yen so far this year, making it a wrecking ball against most foreign currencies and risk assets. But in the last week something incredible started to happen: the price of bitcoin (in USD) has held an extremely strong support level as the dollar rises. This means a hugely important event in my opinion.
Image source: Tradingeconomics.com
Bitcoin’s price action is frustrating some retail investors. That is because the market is not dominated by retail. It is dominated by institutional investors and “big money”. Institutions dominate the market, but are themselves locked in by rules, regulations and guidelines. As such, they view bitcoin as a risky asset and when inflation becomes high (last print at 9.1%), they go risk-off – especially when interest rates are high (“quantitative tightening” (QT) environment). In general, “cash is king” is a common statement in traditional finance and the current fiat system for many investors. Institutions sell their risk assets (risk-off) and buy cash (USD) and cash flow stocks when DXY rises.
Note that gold and silver have fallen significantly in recent weeks. So, what happened to your safe store of value? Nothing. The proposal itself probably still holds. It’s not about the assets themselves, it’s about accumulating dollars right now. Having liquid cash is better for institutions and investors than having a valuable yet illiquid asset. Remember that institutions view cash as king in times of high inflation and QT.
To reiterate, Bitcoin is only 13 years old and it takes time for retail and institutions to understand the true value of bitcoin. For now, institutional investors continue to see cash as king, and many people in the retail industry still don’t understand what kind of money bitcoin is. So for now, we are still stuck in the Federal Reserve Board’s monetary world.
The Fed’s policy is unsustainable. They know it, we know it. They cannot and will not stop printing by adding liabilities to their balance sheets (debts to be paid by future generations). What is the solution? Bitcoin is the solution. Sure, in two months cash will still be king, but in two years cash will revert to its original form: trash. Meanwhile, bitcoin will continue to do its thing and investors (both retail and institutional) will realize its value.
The following statement is relative: “Bitcoin is a hedge against inflation.” I say relative because for someone who bought bitcoin years ago (before 2017) that statement rings true. But for someone who has recently bought, that statement is taken with some skepticism. In the long term, it is certainly a hedge against inflation.
A credit default swap or CDS is an insurance instrument that institutions use when they own a bond issued by an issuer such as a corporate or government bond. They can buy insurance against the bond failing (the issuer defaults). For institutions and investors, Bitcoin can and should be their CDS on the Fed failing. Bitcoin protects your wealth from degradation and it protects you like a CDS on the government. Bitcoin is your insurance against all government monetary policy and its “fraud token” (aka the dollar).
The future is almost completely digitized. Money will be no different. Bitcoin is arguably the only solution for solid, immutable, secure, digital money that gives people their sovereignty. Banks are counterparties. Goldman Sachs, NYSE, Vanguard, Fidelity and others are counterparties. With bitcoin, you own the asset directly and not the underlying asset. In today’s system, the reliance or hope is on the other party to uphold their end of the obligation and provide what is owed to you when you need to liquidate an asset. Bitcoin turns this on its head using an elegant system of incentives, encryption, supply caps, decentralization and a network that anyone can participate in.
Increasing your purchasing power comes second. First, you need to protect that purchasing power. How do you protect your purchasing power? Bitcoin.
This is a guest post by Adam Taha. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
