Central Banks Move on Cryptocurrencies?

Dear Reader,

Will 2018 be the year central banks start buying cryptocurrencies?

A scandalous proposition, until recently unthinkable — and officially denied at present.

Are not central banks the sworn enemies of cryptocurrencies?

But our agents report strange murmurings… and illicit rumors begin to swirl…

G7 central banks cannot presently trade cryptocurrencies.

These are the shabby dregs of the financial world. They are unwashed behind the ears… and lack the official aroma of respect.

But that may soon change…

“In 2018, things will be different,” says Eugéne Etsebeth, formerly of the South African Reserve Bank.

“G7 central banks will start buying cryptocurrencies to bolster their foreign reserves,” he affirms, concluding:

“Central bank money will pour into cryptocurrencies.”

Here is a voice not of the bitcoin glee club or the moon-mad fringe… but a former central banker… a totem of the establishment.

Our agents have also forwarded us the following dispatch, by way of Peter Smith, CEO of Blockchain:

I think this year will be the first year we start to see central banks start to hold digital currencies as part of their balance sheet.

Perhaps the rumors have authentic juice in them.

Consider…

The world’s central banks hold currency, gold, bonds, stocks, even IMF special drawing rights (SDRs).

Is bitcoin — which has now attained respectability on the futures market — any less an asset than SDRs?

SDRs, we note, may bulk large in central banks’ deliberations.

Establishment totem Etsebeth:

A turning point for G7 central banks will be when the bitcoin market capitalization exceeds the value of all SDRs that have been created and allocated to members (approximately $291 billion)…

In 2018, G7 central banks will witness bitcoin and other cryptocurrencies becoming the biggest international currency by market capitalization. This event… will make it intuitive to own cryptocurrencies as they become a de-facto investment [of central banks].

At writing, bitcoin’s market cap is $318 billion.

If SDRs’ combined value is $291 billion… has not that turning point already arrived?

Furthermore, one bitcoin currently fetches $16,703.

No stock… no bond… no ounce of gold… no other tradable asset comes within miles of it.

Which leads us to a related reason central banks could adopt cryptocurrencies in 2018…

Depreciating national currencies vis-a-vis cryptocurrencies.

Etsebeth:

Another tipping point will be the realization that the values of G7 currencies are devaluing against cryptocurrencies. The SDR and G7 country currencies will be forced to alter their foreign reserve weightings and eventually include a basket of cryptocurrencies.

Yes, just so.

But now comes your objection:

Cryptocurrencies are beyond all things else… volatile.

Bitcoin can swing — has swung — thousands of dollars in a single day.

“Stable” institutions like central banks cannot abide that whisker-whitening volatility.

Your objection is noted… and your objection is sustained.

But as noted above, bitcoin now trades on the futures market.

And the futures market often wrests order out of chaos.

James Angel of the famed Wharton School of Business:

If history is any guide, organized futures will reduce the wild volatility in bitcoin. Historically, the introduction of futures contracts has generally led to a decrease in the volatility of the underlying asset…

Futures contracts provide efficient means for purely financial players who buy when they perceive the price to be low and sell when they perceive the price to be high. This helps to stabilize market prices.

Also, a functioning futures market will attract heaps of institutional money to bitcoin.

And an expanding bitcoin market brings a stability all its own.

There’s a reason why a Coca-Cola or an Amazon or an Apple doesn’t swing hundreds of dollars per day.

Besides, if central banks add bitcoin to their reserves, powerful people have ways of… looking out for their interests.

According to the New York Post’s John Crudele, phone records from the 2008 financial crisis revealed several calls between Treasury Secretary Hank Paulson and Wall Street banks.

These calls “seemed to coincide nicely with stock market rallies.”

Assume for the moment the Federal Reserve purchases bitcoin next year or beyond.

In the event of a price collapse, might the Treasury secretary privately “suggest” that his Wall Street henchmen buy large amounts of bitcoin futures… as they likely bought S&P futures in 2008?

We speculate, of course.

And let us add that we are no bitcoin drummer.

We merely report the news… connect the dots… and try to make sense of the picture that emerges.

We will gladly take correction if our picture distorts reality.

Of course, central banks’ adoption of cryptocurrencies “will happen in the dark,” returning to our former central banker Mr. Etsebeth.

“Old habits die hard,” he concludes.

And that is precisely why nothing central banks do would surprise us… including buying cryptocurrencies… while denouncing them publicly…

Regards,

Brian Maher
Managing editor, The Daily Reckoning