The world is moving into a new era filled with political, economic and social instability. With reports showing how most countries including the US are running fiscal deficits, capital markets are becoming increasingly volatile as economic uncertainty increases.
Despite the gloom and doom of the current economic shakeup, a group of investors is redefining their strategies by seeking alternative investment vehicles. While traditional banking systems are going through difficult times, investment alternatives such as bitcoin and gold are growing stronger by the day.
Fiat currencies, commonly known as national currencies, will be the first victims of this intensifying global uncertainty simply because they are controlled by the government. Their value is cemented in the policy set by individual governments. Apart from the collective trust that citizens have on the fungibility of a particular fiat currency, there is little tangible value backing most fiat currencies.
This perhaps explains why investors and market experts are assuming a conservative independent position as interest towards gold and bitcoin intensifies.
The fact that we as humans find gold valuable is a bit bizarre. Not only is gold chemically uninteresting, but its value (just like fiat) is also dependent on those who choose to trust in it. However, unlike fiat, gold is rare and impossible to duplicate.
With gold prices at their highest, it’s clear that there’s a looming global economic crisis. Andreas Kalteis, CEO of Novem Gold says, "Economic uncertainty is again driving people looking for a way to store wealth that is safe and independent of the state. [These] conditions have led to a rise in gold and cryptocurrency prices."
The fact that it’s chemically uninteresting means it can last for thousands of years without going through drastic chemical changes. Also, unlike fiat currencies, the value of gold is not controlled by any single jurisdiction, thus giving gold a decentralized value system.
Cryptocurrencies like bitcoin mimic the characteristics of gold. They operate on a decentralized peer-to-peer network that cuts out the banks, effectively reducing costs and maximizing profit for the users. With most people having little or no access to credit from traditional financial institutions, cryptocurrencies come as a welcome reprieve. All one needs is a fast internet connection and a working knowledge of cryptocurrency to start.
Positive impact on gold and bitcoin prices
So, we have determined that the possibility of an economic crisis is pushing people towards much safer stores of value, free from the influence of world governments. But why are bearish investors holding more of crypto and gold?
According to David Sneddon, a Credit Suisse technical analyst, there are “more conclusive signs of the USD starting to materially weaken. With the DXY removing pivotal support from its 200-day average to complete an important bearish 'wedge' reversal, which should provide a fresh and significant catalyst for gold to extend its gains.”
Other reports also show that bearish investors are currently weighing the risks and opportunities in gold and cryptocurrencies as the dollar weakens and global uncertainty increases.
Increased uncertainty in Venezuela’s macroeconomic outlook, for instance, has driven most citizens to abandon their national currency and look towards the dollar. Now that the dollar is also weakening, the rest of the world is looking to gold and bitcoin as a safe haven.
Factors that lead to a conservative independent position among investors
According to the Washington Post, “France has hit Google, Apple, Facebook, Amazon and other mostly U.S.-based firms with a 3 percent “digital services tax,” and the Trump administration could hit back with tariffs following an investigation into whether the move violates international rules”.
If European nations continue to aim at US companies, a trade war could be set off adding to the ongoing tension between China and the US. With the imposition of higher import tariffs that are characteristic of trade wars, the common man is left to contend with an unpleasant financial atmosphere. Prices go high, productivity decreases, and the quality and viability of various products go down as well.
In this kind of environment, getting affordable capital financing is virtually impossible. Trade wars cause a high level of financial stress resulting in a significant fall in a country's GDP. Dealing and trading in cryptocurrency cushions users from these effects, since the restrictions that come with fiat currency in a volatile economy do not apply.
A currency war is a stealth battle that is just as effective as a real war. They are characterized by a situation where a country deliberately lowers the value of its national money. With currencies of less value, a country's exports are cheaper in foreign markets. This raises the cost of basic goods and commodities which make up the bulk of these countries’ exports.
Currency wars benefit the country which lowered its currency value by lowering export prices which in turn leads to economic growth. The inverse is that imports are more expensive, spurring on inflation and further infringing on the consumer.
With growing concerns over the US and China's trade war turning into a currency war, cryptocurrencies and gold provide a much more stable alternative. Unlike fiat currency, these two cannot be devalued in quite the same way.
The rate at which the price of goods and services increases over a while is called inflation. With the current high rates of inflation, the value of fiat currencies continues to decline with the number of goods that can be purchased.
Even as the purchasing power of these currencies goes down, in most cases the wages remain constant, and the consumers can feel the squeeze. The non-fiat currency means that the person trading doesn't have to worry about cryptocurrency or gold’s stability and its ability to withstand inflation without being affected.
Changing economic policy
By cryptocurrency being free of restrictions of regulatory bodies like banks and governments, any changes in economic policy hardly affect the supply and demand cycle of currencies. However, with fiat currencies, the changes in economic policy have a profound effect. And as reports show, regulatory changes are set to be even more common in the foreseeable future.
Where will the average investor find a safe harbor?
While Libra has positioned itself as a cryptocurrency in that it works quite similarly to bitcoin, there are obvious differences. Libra is more of a stablecoin that is exchangeable with national currencies making it less volatile than most cryptocurrencies.
Cryptocurrencies like bitcoin are decentralized, which means that no government or entity runs or regulates it. Libra, on the other hand, will be regulated and controlled by a consortium of companies including Facebook. The greatest fear is that these custodians could turn foe as well and create an oligarchy not dissimilar to that of bitcoin.
In the 19th Century, the East India Company which was largely owned by wealthy merchants and aristocrats was making inroads into China, importing Opium into China and exporting tea to Britain. They eventually cut China's tea trade-off at the knees by sending in a spy to learn their methods and bring back seeds so they could grow their own tea.
Furthermore, Facebook’s checkered history with user data fuels a lot of distrust in the transparency of the project. Even some members of the US Congress have openly expressed their reservations on the matter. With over 2 billion users, some fear that Facebook’s Libra could prove to be today’s modern world version of the East India Company. What do you think?