How market demand for Bitcoin may be affected negatively by failed central monetary policy
Jonathan M. Hazell
What is the future of Bitcoin? Bitcoin's philosophical roots can be described as Libertarian even Anarchist. The Bitcoin white paper famously was released by Satoshi Nakamoto 0n October 31st of 2008. This release was just weeks of the near collapse of the U.S. economy. The $700 billion TARP Program, initiated on October 3rd of 2008, was the largest government bailout in world history. The bailouts went to financial institutions such as Citigroup, Bank of America, Goldman Sachs, etc. It is this enormous bailout that spawned the "too big to fail" slogan and the political movement "against the 1%." According to several legislators they had been threatened with government martial law unless they passed the bill to bail out the financial system. https://www.youtube.com/watch?v=p6KRXnYgu5I. The bailout cemented for many people the deep ties between government and the banking system.
Nakamoto said upon the release of the Bitcoin white paper, "I have been working on a new electronic cash system that is fully peer to peer, with no trusted third party." https://news.bitcoin.com/bitcoin-built-incite-peaceful-anarchy/. The inherent message in this statement is that this new electronic cash system will operate outside of banks and governments. The Bitcoin currency was created to be seen, distributed, and received by the individual not by a bank or a government. The System was "push" financing...not "pull". A Bitcoin user was not pulling funds out of a bank to distribute. They were instead, pushing funds from their own account, which they controlled. This radical financial system was also designed to operate anywhere on the globe. The currency did not gain its authority from a government. It was maintained via the World Wide Web and gained authority from use. Bitcoin's organic system gained traction with the Cyprus financial crisis in 2013, proving true to its anti-establishment roots. The challenge for Bitcoin as it has grown, is wide-scale implementation and using it to build company business models. People cannot use Bitcoin to buy and sell goods and services if the government prohibits such transactions or the price fluctuates to greatly to establish value. Companies meanwhile want to capitalize on the potential of bitcoin and its distribution platform, the block chain. These companies want to build their business model on the global financial system in place. Bitcoin was designed though as a banking alternative. It was proposed during a period of great uncertainty. The world's financial establishment system itself was in question. Many believe that the fundamentals that led to that crisis in 2008 still have not changed. In fact, the bubble may simply be growing. http://www.senseoncents.com/wp-content/uploads/2012/03/Heading-for-the-Great-Repression-Citi-March-20-2012.pdf.
The reality is that the Federal Reserve system here in the U.S. has kept interest rates historically low since 2008. This action is based upon the quantitative easing, economic policies of The Bank of Japan in the early part of the 21st Century. These policies provided liquidity to member banks to facilitate loans to the private sector. The strategy was to buy large amounts of government bonds and other securities. The interest rates would be set at nearly zero in order to buy more bonds and circulate more currency notes. The United States, the United Kingdom and the European Union are now maintaining a similar financial strategy. (Japan continues it as well.) This monetary policy has been credited by the IMF, and other international agencies for the stabilization of the world's economy and an agent for job stimulus. https://www.imf.org/External/Pubs/FT/GFSR/2015/01/pdf/c1.pd.
This financial strategy though relies on the continued high value of Western currency, especially the U.S. dollar. The expansion of more currency into circulation should in theory, lessen the value of the denomination in question. So in order for this system to perpetuate itself, other markets must be severely manipulated in order to maintain the high value. The precious metal system is one of the primary markets that must be manipulated in order for the low interest/quantitative monetary policies to succeed. http://www.paulcraigroberts.org/2014/01/17/hows-whys-gold-price-manipulation/. The mainstream media establishment is finally acknowledging this issue. http://www.bloomberg.com/news/videos/b/a3e3b49d-6d0d-4bfb-b12c-9cd68d597bb2. This acknowledgement is due in part to litigation against major banks on manipulation charges. http://www.bloomberg.com/news/articles/2016-04-13/deutsche-bank-settles-silver-price-fixing-claims-lawyers-say.
So where does Bitcoin stand? Bitcoin is currently rising in value. It has however some very inherit core issues. there is stark divide between bitcoin purists who want to maintain the current system and the bitcoin industry who want to quicken transaction speeds and make Bitcoin a more viable player in the established financial world. An alternative Bitcoin system, Bitcoin XT, has even been developed and touted by most of the industry leaders. https://bitcoinxt.software/onboard.html.
There are many challenges to Bitcoin, no matter what system is determined however. To begin with the majority, nearly 70% of mining activity, the machinery of the Bitcoin platform, goes through Chinese mining firms. http://www.nytimes.com/2016/07/03/business/dealbook/bitcoin-china.html.
The Bitcoin industry now has to recognize and consult Chinese firms and in reality, the Chinese government itself, when proposing changes. Bitcoin is increasingly becoming consolidated in Asia. This consolidation means it is prone to governmental policies, which in China for instance, usually tend to be heavy handed. The technological issues regarding the scaling of the block chain to handle increasing transactions has many predicting bitcoin's demise. http://www.forbes.com/sites/jasonbloomberg/2016/01/18/something-rotten-in-the-state-of-bitcoin/#262438a24650.
Bitcoin therefore has some major challenges ahead. Companies such Circle are using Bitcoin to convert currencies. The Brexit event causes companies like this to pay for more licensing. The expanse of nation-states covered by the EU limits this regulatory expense. The more nations take back sovereign control, the more expense companies like Circle, Coinbase, etc have to incur in order to do business in these countries. http://www.forbes.com/sites/jonathanchester/2016/07/14/how-the-brexit-is-affecting-the-bitcoin-and-blockchain-industries/#6b6d6bcb5235.
In summary, Bitcoin has strayed far from its anarchist/libertarian origins which came about at a time of extreme financial uncertainty. Those inherent financial conditions that caused the crisis back in 2008 still remain. Quantitative easing and the consequent low interest rates, and metal market manipulation are maintaining the current financial system's status quo. The Bitcoin industry is being built upon this system, not as an alternative financial system.
In order for Bitcoin-oriented companies to effectively compete in the established financial system, they must challenge the basic block chain protocol to quicken the transaction process. This process pits these companies against Chinese firms which historically are tied to the central government and its policies. Bitcoin's market demand therefore is being increasingly compromised by Asian consolidation of mining companies and transactions. Bitcoin's success in the future will depend upon Chinese willingness to incorporate Bitcoin XT, and other industry adaptations to the global financial system such as Brexit and other future national regulatory licenses. At this juncture, a spike in interest rates, a complete devaluation of currency, and rapid rise in metal prices will likely negatively affect Bitcoin or at least the Bitcoin-based companies, like Circle, which are betting that the global monetary policies in place since 2008 will prevail. Bitcoin, as configured today, is going down a path far from its Libertarian roots. To succeed, Bitcoin companies will have to learn the game they are in and who already controls the board.