Bitcoin’s Connection To Global Events
Like all currencies, Bitcoin is affected by the economies it is used in. Due to the globalized and decentralized nature of Bitcoin, it is impacted by the macroeconomic events of nearly every country in the world. Demand for the currency fluctuates as macroeconomic events affect Bitcoin’s ability to add value.
Periods of wealth accumulation and economic growth may cause individuals to allocate to alternative assets like Bitcoin at higher rates. Additionally, investor attitudes towards risk may affect how Bitcoin is treated compared to traditional assets, such as bonds or equities. Bitcoin’s demand also depends on the appeal of alternative currencies, and can rise in countries where the local fiat currency is volatile or less useful.
Expansion and Recessions
The health of the global economy is one of the largest factors in the price of most assets, and Bitcoin is no exception. During expansions and other times of economic prosperity, people have more wealth to allocate to financial assets. The greater demand generally increases prices.
Conversely, recessionary periods force people to use more of their money for immediate consumption, lowering demand for assets like equities or Bitcoin. Recessions and expansions also reshape the type of assets investors are willing to hold as their perceptions and tolerance of risk evolve.
Risk-On Vs. Risk-Off Conditions
During risk-on conditions, investors are more willing to make riskier investments if the potential reward is higher. Risk-on markets generally see more investment in equities. Conversely, during risk-off conditions investors attempt to minimize risk by investing in assets with more predictable returns. Risk-off assets include bonds and currencies, such as the Yen or the U.S. Dollar.
Bitcoin has experienced a lot of volatility and price appreciation since its inception in 2009. This has made the currency more aligned with investor goals during risk-on market conditions. However, this may not always be the case. As Bitcoin becomes more established and its price stabilizes, it could eventually become a risk-off asset like gold. Both Bitcoin and gold have great characteristics to act as a store of value, largely due to scarcity which protects against inflation.
Weak Fiat Currencies
In most countries the value of goods and services is measured by a government issued currency, such as the Dollar or Euro. When the local currency experiences inflation, all of the goods in that country require more of that currency. This makes holding an inflationary currency detrimental to someone’s purchasing power.
Every major economy uses a fiat currency which is prone to inflation, but the rate of inflation varies by country and time period. A primary driver of inflation is an increase in a currency’s supply. Bitcoin’s supply rate is predictable, and has a hard cap of 21 million, making it resistant to inflation. Bitcoin’s use case as an inflationary hedge increases in countries where the fiat currency has high levels of inflation. Both Turkey and Nigeria saw disportionate Bitcoin adoption in early 2021 due to high inflation and lack of faith in the Lira and the Naira, respectively.
Government Regulation
Bitcoin is also affected by the actions of local governments. Although no government can control Bitcoin, they can create laws or incentives that change their citizens’ desire to use the currency. For example, both Turkey and Nigeria banned Bitcoin transactions out of fear that their citizens would ultimately abandon the local fiat currency for the decentralized one. This certainly did not stop people from using Bitcoin, but it did make using Bitcoin more difficult.
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Alternatively, countries can encourage the use of Bitcoin by facilitating its access on public markets. Brazil and Canada both encouraged Bitcoin investment by authorizing Bitcoin ETF’s to trade on their public markets. Many expect the United States to make a similar decision in the near future. More broadly, countries can encourage citizens to use Bitcoin through tax policies that allow people to realize larger portions of their capital gains.
Bitcoin Mining Resources
In addition to people buying and transacting in Bitcoin, the network requires miners in order to operate. These miners require energy and high powered computers. The availability of these resources will affect the hash rate of the Bitcoin network, ultimately changing Bitcoin’s transaction fees, security, and short-term confirmation times.
For example, a blackout in Xinjiang, China forced large mining operations to temporarily shut down. This resulted in higher fees for Bitcoin transactions for over a week and was blamed for a decrease in Bitcoin’s price.
The availability of Bitcoin mining equipment depends on large technology companies producing computers and other necessary hardware. Additionally, external demand for these products affects the prices miners will need to pay for their equipment. External demand is driven by other industries that also need the equipment.
Weather can also affect how easy it is to mine Bitcoin. The mining process causes computers to heat up substantially, and they must be cooled in order to continue operating. Cooling this equipment can introduce additional costs, so is it easiest to handle this issue in regions with a colder climate.
Conclusion
Bitcoin is becoming deeply ingrained in global economic patterns. As the currency becomes more regularly used in general economic activity, there will be new interactions with other macroeconomic events. No individual event can destroy Bitcoin, but external forces will certainly affect how appealing Bitcoin is to use. Ultimately, Bitcoin’s success is determined by how much desire there is to use the currency, both for saving and spending.
Key Takeaways
- Bitcoin becomes more appealing as a primary currency in countries where the local currency is failing.
- Governments cannot control Bitcoin, but they can influence their citizens' decisions about the currency.
- Bitcoin mining is affected by energy prices and the availability of mining equipment.
