[Insight] The U.S. Government and Bitcoin
“Bitcoin and gold are in danger. The U.S. government will try to suppress Bitcoin and gold by any means necessary, which are potential competitors to the USD.”
A Hollywood movie, Big Short, is a story of a young trader who has earned a huge amount of money around billions of dollars due to the Subprime Mortgage Crisis in 2008. And the model of the movie’s main character, Michael Burry, made such a grim diagnosis for Bitcoin lately. When he was working as a hospital’s resident, Burry witnessed the bubble forming around the U.S. estate market and bet on the house price will go down. The investment brought him good fortune, and Burry later founded a hedge fund management company known as Scion Asset Management.
He expressed his opinion about the soaring stock of GameStop recently by saying, “It is unnatural, unusual, and dangerous.” He also warned that there will be a ‘huge market bubble.’ And he was right. The stock price did fall in reaction drastically. Plus, Burry warned about Tesla by saying, “The stock price may show a drastic drop rate of 90% this year,” and stated that he will take part in short stock selling. And after that, Tesla’s stock price is going down. Since he is one of the geniuses in counter-betting, his mention of Bitcoin indeed makes us uneasy.
Here is a summary of his arguments. “After the COVID-19 Pandemic, there can be high inflation due to the additional pump-priming for economic recovery. As for Germany in the 1920s, the country has overissued the money to finance its war, resulting in hyperinflation. The same goes for the current situation. We need to prepare for inflation. In such cases, investors usually invest in Bitcoin and gold, which are well known as methods for hedging inflation. But these can’t be the safe haven. In order to prevent the depreciation of the USD, the U.S. government will try everything they can to suppress its competitors: Bitcoin and gold.”
His statement has brought a lot of debates. The main focus of the counter-argument about his statement is this: Bitcoin’s market cap is remaining around USD 1 trillion, and only a few financial firms and companies are choosing Bitcoin as a payment method. How can it pose a threat to the USD that has been the dominant currency for decades? And why would the U.S. government contain and suppress Bitcoin?
Unfortunately, three days after his comment, the U.S. Secretary of the Treasury, Janet Yellen, who is in charge of overall economic policies in the U.S., left some barbed comments towards Bitcoin in an interview with an economic media. This made a huge impact on Bitcoin’s price, lowering it down. And now, the concerns like ‘That could be possible’ is rearing its head again.
About Tesla’s announcement of making the purchase of electric vehicles with Bitcoin possible, Secretary Yellen commented, “I don’t believe that Bitcoin can be a major mechanism for trades,” depreciating the function of Bitcoin as a method of value exchange. She also warned, “Bitcoin is a very speculative asset, and everyone should know that it is highly volatile.”
Yellen was not the only one. After the day, Eric Rosengren, President of the Federal Reserve Bank of Boston, also insisted in an interview and stated, “If digital currencies (CBDC) will be in circulation, no one will use Bitcoin except for those who are in the underground economy.” After a slump caused by the negative comments recently, Bitcoin attempted a rally and succeeded in exceeding KRW 55 million on the 2nd of this month.
Whenever the depreciation of USD comes, the U.S. government has been controlling the gold market which is considered as a ‘substitute for USD.’ The market cap of gold has already grown to USD 10 trillion, which is more than ten times compared to Bitcoin’s. So, when the gold price was rising in trend, the value of the USD was depreciated. And we can see that clearly from our experiences. In 2013, Federal Reserve introduced a policy called ‘Operation Twist,’ which means the selling of short-term national bonds and buying of long-term national bonds. According to this, the Department of Treasury raised the deposit required for investing in gold sharply, dropping the gold price by more than 20% at once.
In the latter half of last year, Goldman Sachs advised buying gold by saying, “The end of the era of USD hegemony draws near,” for the value of USD will drop due to the quantitative easing unprecedented. However, the price of gold is still going down, from the end of last year to the beginning of this year. Even the concerns related to inflation are growing recently, the price of gold that has been the iconic method for hedging inflation is still in a downtrend.
As we can see from the example of gold, there may be some containments by the U.S. government on Bitcoin. The government will try to control Bitcoin by justifying itself under the banner of protection for investors. And when it comes to Federal Reserve to issue digital USD for real, the government may take some actions that can daunt Bitcoin further. In such a process, it seems the increase of volatility to some degree will be inevitable.
However, even the U.S. government cannot end the entire line of an investment asset that the market wants, just like an example of gold. However, Bitcoin and other digital assets should secure some various uses in advance. Just like gold did raise its value through its functionalities as jewelry or electronic component. It is a time for some active attempts for expanding demand basis are required: developing products that can increase the base of institutional investors, payment services for Bitcoin, or Decentralized Finance (DeFi).
*This research and analysis document has been prepared for the purpose of providing information that can be used as a reference based on our reliable data and information, but we cannot guarantee its accuracy or completeness.
*The document has reflected the individual’s opinion, and it may not be consistent with the company’s official point of view.