Bitcoin: Where Next For Crypto’s Darling?

THE soaring price of Bitcoin has been the crypto story of the last few weeks.

What are we to make of the crash that wiped 12% off its price between Wednesday and Saturday? Was it just traders banking some profit? Or was it something more sinister?

There is no doubt there was a lot of profit taking – even within the so-called ETF mafia – and good luck to them. But there also must be a nagging doubt that interest rates aren’t about to be pushed down rapidly, as many have been hoping.

There are several reasons for this, one being the less-than-inspiring inflation figures over the last month or so. Inflation remains sticky for several reasons – not least the ongoing and previously unimaginable sums being forced into defence spending. Then there’s the West’s reluctance to bring sanity to government expenditure. But my view is we are starting on a structural change in inflation and economic activity.

No one seems to believe we are going back to sub-1% interest rates. Arguably, the fact that we had these for so long – and even negative rates at some points – has done more harm than good.

The USA, in particular, is facing a complete meltdown in commercial property values as the results of Covid-19 and working from home take their toll. The latest figure I saw suggested that some $5 trillion of commercial property loans needed refinancing someway, somehow. This with practically no rent coming in to pay them.

That alone will make money more expensive. I’m quite certain the Fed is looking nervously at burgeoning defaults not only in the property sector. As well as in some other industries too. Many countries, including the USA and UK, are struggling with a workforce that stubbornly refuses to go back into the office. Many  just decided during the pandemic they were going to earn much less and just get by. With help from the state.

So, government budgets remain under increasing pressure, which itself will force either more borrowing or more taxes. The former requires higher interest rates to enable it to be funded. The latter acts as a permanent drag on enterprise, growth, and employment.

All these macro factors might elicit a shrug of the shoulders as far as Bitcoin maximalists are concerned. Gold continues to go north, and the ‘Bitcoin is digital gold’ narrative will help for a while. But, eventually there has to be some use. If Bitcoin is only going to be a store of value that’s great, but its volatility suggests otherwise. In fact, the current feeling is that it could go very far south – even to $30,000-$35,000. God forbid that should happen…

Perhaps looking to El Salvador, in principle the biggest potential use case of Bitcoin, can shed some light on whether it is a practical means for transaction. In a country mandated to accept Bitcoin in every business from coffee shop to heavy industry, less than 1% of transactions last year were in Bitcoin.

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As Peter Howson, an assistant professor in International Development at Northumbria University, put it in 2022: “The failure of El Salvador’s experiment with cryptocurrency was inevitable. It is inefficient, unreliable, and prone to scams. It is unregulated, meaning refunds and chargebacks are impossible.”

Additionally, the numbers from El Salvador’s central bank indicate that only 1.7% of the Salvadorans who sent money from abroad in 2022 did so via cryptocurrencies. That’s not just Bitcoin, but ALL cryptocurrencies. When it was adopted as a national currency, this was one of the key arguments for El Salvador’s move into Bitcoin.

Crypto is still trying to distance itself from the ‘used by crooks and scammers’ soubriquet. That will be hugely important if it wants to maintain the market momentum of 2024. But it will be a long time in the present climate before it escapes that reputation. Particularly if it can’t find a way of being used in any mainstream sense of the word.

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