Is Bitcoin the Answer to U.S. — China Financial Wars?
We are hearing about currency devaluation a lot these days thanks to the Game of Financial Thrones being played by China and the U.S. There is even some sentiment that the potentially self-defeating moves being made by these two sovereigns might be helping Bitcoin and other digital currencies.
While the long-term results of these moves are yet to be known, there is history to analyze about this strategy.
BIENVENIDO A MEXICO, 1976
The first time I heard the words “currency devaluation” came in 1976. With a friend, I was backpacking through Mexico and Guatemala, climbing mountains and volcanoes, eating street tacos for pennies a piece, staying in hostels that charged us less than $2.00 U.S. per night, taking cold showers, and brushing our teeth with Cokes because no one had thought of bottled water yet.
Staying a couple of nights in Mexico City in preparation to climb Iztaccihuatl, we went to the bank to change travellers’ checks to pesos. Inexplicably, the banks had all closed early with no warning. Confused, the next morning I got on line at the bank to change $50 and received $19 dollars worth of pesos more than I would have the day before.
That night, we didn’t eat from the cart outside the hostel. We ate rabbit at the French restaurant.
That great devaluation event in 1976 was the culmination of a long period of complicated economic issues that included a shift from a farming economy to an oil economy, hockey-stick growth partly funded through massive foreign borrowing, and mismanagement and corruption by the nation’s leaders. While it briefly allowed me to fill my belly with tender bunny, it was not a solution to Mexico’s ills, but rather the beginning of a series of disastrous decisions that continue to plague the Mexican economy.
WHEN LEADERS COLLIDE
The lesson to learn is, when a nation’s leaders put their fingers on the scale, chaos can follow.
The recent currency devaluation in China is seen as a move in retaliation for tariffs imposed by President Trump. Tariffs make Chinese goods cost more for people buying them in the U.S. Devaluating the Chinese yuan vs. the U.S. dollar means the dollar goes farther and buys more. Of course, it can wreak havoc in China if you hold a lot of foreign debt or need to import goods. And what if Trump unleashes his tariff dragon to further burn China to the ground?
What makes this interesting to people who follow digital currency is the continued rise in value of Bitcoin this week as all this news has swirled. As nations issue edict by twitter that monkey with the value of their money, is there less reason to look at Bitcoin’s volatility and see it as a negative when measured against fiat currencies? And does digital currency start to look like a reasonable hedge against fiat?
In China especially, where Bitcoin is banned as currency but where a lot of it is exchanged and mined, the yuan’s decline is quite possibly being counteracted by large purchases of BTC. Bullish investors say the yuan is in trouble, and are buying up Bitcoin, driving up the price because it is convertible and likely to appreciate in value. There is a bearish case to be made as well. And of course the truth is, nobody knows.
DIGITAL CURRENCY AS A SAFE HAVEN
Some analysts look at the rise in Bitcoin’s value as a result of investors looking for anything that could bring long-term growth better than what low interest investments today are offering. Still risky, but worth a shot. But as long as the market keeps seesawing, the value of currency inflates and collapses, and uncertain leadership is in control, it will be difficult to make the argument that Bitcoin is a bad bet because it is volatile. With markets running wild, Bitcoin and other currencies might be used as a safe haven for investors.
If anything, a currency out of our leaders’ shaky hands might be just the ticket. Especially if you want to have your lapin a cocotte, and someday eat it too.
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