Bitcoin Enthusiasts Can't Escape the Fed's Influence

Putting aside for a moment the latest evidence that the too-big-to-fail banks are increasingly confident that they can separate the technology behind bitcoin from the currency itself, this will be an interesting week for those whose enthusiasm for bitcoin includes a belief in the potential and practicality of the actual currency. This week, the financial media is consumed with speculation as to what the Fed will announce on Thursday, and what the effect of any such announcement will be on the stock market. Bitcoin enthusiasts will no doubt be looking on with a kind of bemused frustration as they watch Yellen, et al wrestle with a problem of their own making.

It was always known that at some point the ultra-low interest rate policy that the central bank has been pursuing since the recession would have to come to an end, but continuing until this point has made an exit much harder to execute. Markets have become accustomed to all of that free cash and could throw a hissy fit for a while if it is taken away. What will puzzle the bitcoin community, however, is why people allow the Fed’s deliberately inflationary policies, and their attempts to extricate themselves from them before it is too late, to affect to such a degree the value of their money and investments.

We should be careful, however, not to have too smug an attitude when it comes to this kind of thing. Like it or not, what the Fed decides to do this week will also have a bearing on the value of the bitcoin that you hold, at least in the short term.

The main reason for that is the most basic one of all: pricing. If U.S.-based holders of the virtual currency wish to spend the bitcoin that we hold, then the purchasing power of each unit is inextricably connected to the relative strength of the dollar, and interest rates are the main fundamental mover of currency strength. Put simply, if rates go up on Thursday then the dollar will become more attractive and its relative strength will increase. That means, by simple logic, that anything that is principally priced in dollar terms, other currencies, commodities etc., will be relatively weaker; their price in dollar terms will fall.

If, on the other hand, the Fed stands pat and leaves the zero interest rate policy intact, it is reasonable to expect some dollar weakness as a result. In fact, if this is the case, then the beneficial effect on the price of bitcoin could well be exaggerated. At some point, even with increases in demand for U.S. currency and a growing economy, loose monetary policy is bound to create some inflationary policy. Indeed, that is the stated aim of the Fed, to produce some “moderate” inflation.

The problem, as those of us old enough to remember the 70s and early 80s all too well can attest, is that inflation is harder to control than to induce. I am not painting a picture of runaway hyperinflation and people with wheelbarrows full of dollars, but the prospect of your cash devalued by even, say, 3.5 percent each year is unappealing to many. It would come as no surprise if at least some of those people educated themselves as to the disinflationary nature and inherently limited supply of bitcoin and decided to hold some as a hedge against the possibility of inflation in the future. Again, let’s not get carried away here. There will be no sudden surge in bitcoin ownership this week no matter what the Fed does, but reinforcing the value of bitcoin as inflation protection cannot be a bad thing for those that already hold the currency.

Despite the possibility of an increase in the relative value, however, I am sure that some bitcoin enthusiasts will be frustrated that even the price of their holdings will be influenced this week by the Fed’s actions. Many turned to virtual currency in an attempt to get away from the Fed and Wall Street controlling their wealth, but until there is a realistic market in goods priced in bitcoin, that influence cannot be avoided. For mow, therefore, even those attempting to hide from Fed influence would do well to pay attention to Thursday’s announcement.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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