mardi 12 décembre 2017

Bitcoin (and Swiss Franc) manias

Currently there is a crypto-mania (mostly around Bitcoin), no doubt about it.
But let's put things into perspective.

The following chart compares two monetary bubbles - the central money bubble of the Swiss Franc (CHF) and the Bitcoin, represented by its market capitalization in US Dollars (USD). Since currently 1 CHF is almost 1 USD, we can put both market capitalizations on the same chart:

Click to enlarge

Let's compare some similarities and differences between Bitcoins and Central bank francs.

Similarities:

- Counterparty: none for both - only fame and trust. Both are purely virtual!

- Why hoarding Bitcoins or Swiss francs ? Because other people do! If speculators begin to spend or sell BTC's or CHF's, their value will collapse.

- The trigger to inflate those bubbles is the mistrust about EUR, USD and other currencies following different crises of the last decade, ballooning government debt, currency debasing, negative real interest rates (ironically the buyers of CHF are naive enough to ignore that, for the two last points, the same is happening with the CHF!).

Differences:

- Money creation:
  • BTC: Bitcoins are "mined" on computers, using lots of electricity
  • M0 CHF: Central bank francs need a mouse click and a few keystrokes for ~95% of them; ~5% are printed. So the effort of creating money is minimal compared to Bitcoin (a bit scary if you are living in Switzerland...)
- Storage:
  • BTC: 100% electronic
  • M0 CHF: ~95% electronic, ~5% paper
- Control of money supply:
  • BTC: Limited by design to 21 Million; but forks (Bitcoin Cash, Bitcoin Gold) and creation of other cryptocurrencies (1340 currencies so far) challenge that limit.
  • M0 CHF: Unlimited, but reversible: theoretically the Swiss National Bank (SNB) could repurchase the extra 450 Billion francs by selling its reserves in foreign currency stocks and bonds, and could "destroy" those francs. However, now that the SNB reserve fund has the size of a massive worldwide hedge fund, such a selling would have a significant downward effect on prices, or could even trigger a selloff. That could complicate the reduction of money supply: finally, the SNB could be left with a disturbing gap between reserves and money supply...
- How the bubbles inflate:
  • BTC: due to limited supply, the exchange rates soar explosively
  • CHF: the SNB augment the supply explosively in order to control the exchange rate

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