Debt is often compared to being a double-edged sword. Countries can borrow money to stimulate growth and large internal projects, affording their citizens a better economy to accumulate wealth and a higher quality of living. However, this debt comes with interest, and many countries end up in a vicious cycle of borrowing or printing more money to pay off their debts.
The more money a country borrows, the more it has to pay back in the future. This means future generations will end up having to pay off the interest of debt borrowed in the past, reducing their ability to spend money on things they really need.
The more of its own currency a country prints, the less purchasing power that currency will have (inflation.) The U.S. annual inflation rate rose to 2.1% in 2019.
While large economies such as the U.S. can borrow in their own currency, small-medium sized economies are oftentimes forced to borrow in foreign currency. This makes the debt problem even worse, since, while the U.S. can print more USD to service the debt, medium-small foreign countries cannot print more USD/EUR/CHF. Therefore their currencies generally suffer even larger depreciations in case of rising debt levels.
How serious are increasing debt levels?
The rapidly growing national debt has been a hot topic of conversation for the past decade, and Satoshi Nakamoto actually created BTC as an escape from the too-powerful influence of centralized financial organizations and central banks on people’s livelihood.
With a total population of about 32 million people, the impact of a minority of Venezuelans flocking to Bitcoin likely won’t have an immense effect on the price of the asset. However, if a country with a larger population with citizens willing and capable of purchasing significant quantities of BTC, the impact would be much more substantial
In a Joint Economic Committee in November 2019, the Chair of the Federal Reserve, Jerome Powell, noted that U.S. national debt is growing faster than U.S. nominal GDP, a strong indicator that there may be an economic downturn ahead.
U..S. debt is north of $23 trillion, roughly $70,000 per citizen, and the debt-to-GDP ratio is at 106%, trying the previous highest debt-to-GDP during WW2.
Debt Levels and Bitcoin’s Price
It’s relatively difficult to draw any final and direct conclusions of how any specific variable, such as increasing debt levels, will impact Bitcoin’s price. However, it’s worth mapping (albeit simplifying) any relationship as a function of supply and demand.
The demand for any currency alternative tends to skyrocket in the wake of rampant inflation of a local fiat currency. Most countries in the West haven’t experienced extreme capital flights, but it’s not an uncommon occurrence in more economically turbulent countries.
For example, the overall inflation rate has increased to a staggering 53,798,500% since 2016, and many Venezuelans have sought cryptocurrency as a means to protect their fiat assets from essentially evaporating.
The more people that want to purchase Bitcoin, especially so for the sake of holding onto the digital asset, the more the price will increase, provided the supply of sellers stays consistent.
With a total population of about 32 million people, the impact of a minority of Venezuelans flocking to Bitcoin likely won’t have an immense effect on the price of the asset. However, if a country with a larger population with citizens willing and capable of purchasing significant quantities of BTC, the impact would be much more substantial.
For example, Bitcoin lingered around $4,000 for the first few months of 2019, but then swelled towards the $13,000 range in July. This growth happened in parallel to China devaluing its yuan as a response to U.S. tariffs amid the backdrop of the rising tension of the US-China trade war.
Bitcoin also saw a 10% jump in price within the week following the US assassination of Iranian military commander Qassem Soleimani. This jump was credited to international uncertainty, but also to many Iranians purchasing BTC as a hedge for the risk of the US imposing severe economic sanctions on Iran.
Final Thoughts
Since Bitcoin is a relatively nascent asset class, we don’t have the benefit of a wide range of historical data to understand how debt levels impact its price. However, given the recent history and Bitcoin’s fundamental properties, we can hypothesize how Bitcoin markets could respond to the future potential rising of sovereign debt levels.
There can only be 21,000,000 Bitcoin, 18,155,012 of which are already in the market. The stable supply and fixed hard cap make it an asset that shines in comparison to malleable fiat currencies, which are prone to political risk.
Debt levels are expected to increase across the board, and higher inflation will inevitably tag along for the ride. Bitcoin, however, will remain stable in its supply and offer a digital alternative to the millions of fiat holders around the world. It’s no surprise Bitcoin has a reputation for being “the people’s” currency, emerging store of value, and hedge for large global economic risks.
Sources:
- https://cointelegraph.com/news/got-bitcoin-us-fed-warns-national-debt-growth-is-not-sustainable
- https://www.investopedia.com/arti)cles/investing/052014/why-bitcoins-value-so-volatile.asp
- https://www.cmegroup.com/education/featured-reports/an-in-depth-look-at-the-economics-of-bitcoin.html
- https://www.barrons.com/articles/bitcoin-is-up-us-iran-tension-haven-assets-51578331260
This article is originally published in Albaron Ventures
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