You Don’t Like Central Banks. You Need Them. (So Does Bitcoin)
Central banks may have played a huge role in bitcoin's success - but not for the reason you think
The European Central Bank has spawned so many memes over the years, I can understand why people think it’s a laughing stock. Central banks in general get a bad rap. Have you heard what they’re saying about the U.S. Federal Reserve?
And then there’s this:
If your natural response is “screw them, buy bitcoin,” that’s a pretty good idea.
In fairness, though, take a step back. Central banks have done more for bitcoin’s success than you think.
(PS—still, buy bitcoin.)
Nobody buys bitcoin when they’re scared
The global economy just fell off a cliff and you wouldn’t know it from the news. Perhaps our modern complacency stems from central banks doing too good of a job at keeping the system working? So good that we take our stability for granted?
Maybe bitcoin had the time and space to grow because central banks intervened during the Great Recession? Could it be that saving the financial system gave bitcoin an opportunity to thrive?
When people fear for their jobs and livelihoods, they usually don’t want to experiment with new financial technology. They just want somebody to fix their problems. Central banks fixed their problems.
Was the fix worse than the problem? Good people can disagree on that.
Suffice to say, the system survived, giving people a chance to experiment with bitcoin.
Blame your government, not your central bank
Keep in mind: central banks don’t write laws.
So much of our prosperity depends on spending bills, tax policy, subsidies, trade regulations, and government programs.
For example, take one fairly small program, the U.S. government’s Paycheck Protection Program (PPP). The program was supposed to provide $349 billion in risk-free loans for small businesses to cover payroll costs. It ran out of money in 13 days.
While the news raged about the 0.2% of funds that went to huge, publicly traded companies, nobody realized most small businesses got no money from the program. The little guy got screwed. On top of that, all the money came from bonds, not actual tax revenue. Pure deficit spending.
Central banks had nothing to do with that. They just do bailouts.
Municipal bonds, corporate debt, auto loans, mortgages, you can run down the list. Messari already did, and it’s a lot to scroll through. Everybody got bailed out, even poor people.
When it comes to spending, that’s the government’s job.
Consider the alternative
Yes, when central banks buy debt, they encourage lenders to make bad loans. “Privatize profits, socialize debt” as the saying goes.
These actions create moral risks and drive capital away from productive, efficient activities.
Central bankers understand the moral hazards and market risks of bailouts. When you weigh those hazards and risks against a global financial meltdown, they don’t seem so bad.
Thanks to COVID-19, the world has lost at least 5% of its GDP. Trillions of dollars, and that’s just the start. How do you make up all that loss?
But you can try to staunch the bleeding before the patient dies, in the hopes the patient can recover. No doctor refrains from giving the Heimlich maneuver because he or she doesn’t want to “reward” another person for careless eating.
I very much doubt central banks want to nationalize the debt markets. They know each new program makes it harder to get back to normal, healthy economic activity.
What’s the alternative? Let everything fall apart?
In 2008, the Fed bailed out lots of debt (albeit six months too late). By 2014, it had unwound all that debt. Central banks trade cash for debt when times are bad, then trade debt for cash when times are good.
Interventions don’t have to last forever.
Ok, Mark. Get back to bitcoin!
Professional money managers and Wall Street executives know how the game works. They know central banks will do whatever it takes to make sure they succeed.
Only hurts people who depend on labor and cash.
For people with fixed debts and lots of assets, inflation’s a winner. Their debts get easier to repay and their asset values go up.
As they gain equity, they can borrow more money or sell their assets for cash. Bonus if those assets give them income or dividends.
Property owners get richer. Everybody else? Not so much.
As Robert Kiyosaki explains in Rich Dad, Poor Dad, rich people use their money to get assets. Poor people use their assets to get money. Money loses value. Assets do not.
What do you think rich people are buying?
A “safe” speculation?
Grayscale Bitcoin Trust saw over $1.5 billion in new investment this year, almost all of it from institutional investors. New funds New York Digital Investment Group and 3iQ saw combined $250 million inflows, with more on the way.
These numbers don’t include possibly billions of dollars in bitcoin acquired through brokers and private deals.
Rich people can do this because they trust central banks will keep the system afloat long enough for that bitcoin to go up in price. A safe bet, since the world’s bankers already pledged to do “whatever it takes” to prop up the value of their property.
As a result, they don’t fear for their jobs and livelihoods. Taking a flyer on bitcoin isn’t much of a risk.
After all, you can only buy so many shares of companies that have no profits and bonds that yield no interest. At some point, you have to look for a better deal.
Without central banks rigging the game, smart money would not have the right incentives to buy volatile, “risky” assets like bitcoin.
Twisted? Yes. It’s pretty shitty when you think about it.
Yet, this is reality.
“Retail” isn’t driving this car
For everybody who still thinks normal people are buying bitcoin, let’s look at facts. Most of the new money comes from the investor class.
What about U.S. taxpayers spending their stimulus checks on bitcoin?
The day after everybody got their $1,200 payments from the U.S. government, Coinbase reported only 0.4% of its bitcoin purchases matched that amount. Based on normal daily activity, that totals about 500 people who bought bitcoin with government money. Coinbase makes up about half the U.S. market, so you would guess maybe 1,000 Americans bought bitcoin with their checks, for a total of $1.2 million in new money for bitcoin.
Let’s assume the actual number of people is actually 10x higher: 10,000 people. Still, that’s only $12 million into an asset that was worth $170 billion at the time.
Compared to the $2+ billion growth in bitcoin investment funds this year, it’s safe to assume “retail investors” don’t have much sway over the market.
In fact, according to data from research firm Glassnode, whales and older wallets have gobbled up almost all the new bitcoins mined since March. Bitcoin is flowing to smart money and OGs while you’re stressing about whether to save that $100 in your Coinbase wallet because you heard bitcoin might crash.
You’re lucky, though. Most people don’t even have $100 to invest in anything, let alone bitcoin.
If all you care about is seeing bitcoin’s price go up, you need central banks to get more money into the hands of rich people. Everybody else will spend it on rent, food, and “things,” not bitcoin.
Central banks are the only thing standing in the way of global financial ruin.
Why is that good for bitcoin?
Because nobody will buy it if we get financial ruin. People will starve, fight, revolt, and submit to tyrants—but they won’t buy bitcoin.
We need the system to survive. As long as it survives, bitcoin will win.
You may hate the central banks, but they are not our enemy. They may just be our best—and most unlikely—ally.
Mark Helfman is a top writer on Medium for bitcoin. He also publishes the Crypto is Easy newsletter. His book, Consensusland, explores the social, cultural, and business challenges of a fictional country that runs on cryptocurrency. In a past life, he worked for U.S. House Speaker Nancy Pelosi.
Previously published on Voice.com.
I help normal people make the most of crypto markets. Writer of Crypto is Easy, a Top 10 newsletter on Substack (now on Beehiiv). Also the author of three books and a top Bitcoin writer on Medium and Hacker Noon.