Financial markets are now behaving extraordinarily in many respects. The policies of the Fed and other leading central banks, which last year "restarted" the global financial system by issuing large amounts of money, have made them so. Never before in history has the ratio of central bank balances to GDP been not only so high, but also so fast. The bond market is no longer yielding, and the large-scale monetary issue provokes "risk aversion," when money "burns hands," and the retail investor, fearing the specter of impending hyperinflation, buys, buys, buys anything that seems capable of maintaining the purchasing power of his savings.
By the way, no extreme increase in inflation is observed in this case, for the simple reason that in parallel with the growth of money supply the velocity of money circulation decreases. For this reason, for example, "printing money" in Japan for more than thirty years does not lead to inflation, moreover, the issue of combating deflation all these years remains a headache for the Japanese government and the Bank of Japan.
The growth of monetization of developed economies is a long-term trend, the consequence of which is the growth trend of Warren Buffett's favorite indicator - the ratio of stock market capitalization to GDP.
Bitcoin, like many cryptocurrencies, is traded on cryptocurrency exchanges. Its price is determined there, which depends on the specific marketplace, and prices can diverge quite a bit between marketplaces. At times of high volatility, there can be divergence of about 5% even between major exchanges, which, generally speaking, indicates a high level of market fragmentation and low global liquidity.
All crypto exchanges can be conditionally divided into two categories:
"White" - regulator-licensed crypto exchanges in reputable jurisdictions such as the US, EU, Japan, Korea, Singapore. These exchanges work under the supervision of regulators, strictly follow AML/KYC procedures, pass account information to tax authorities. Naturally, these exchanges have a smaller share of all cryptocurrency buy/sell transactions due to the relative difficulty of opening accounts there and their exposure to taxation. Representatives of the "shadow" sector of the global economy do not trade on these exchanges, but that is where law-abiding investors invest in cryptocurrency, and they have no problems with getting into the money. If they want to close their positions, they are guaranteed to get the dollars, euros or yen for which they sold their investments.
"Offshore" - registered in offshore jurisdictions where AML/KYC procedures are formal or non-existent, and the actions of the platforms are no more closely supervised than those of notorious offshore FOREX "kitchens."
Because bitcoin was originally developed as an ecosystem serving the "shadow" sector of the global economy, for which the possibility of anonymous cross-border payments was very attractive, it was offshore exchanges outside the control of key regulators that initially played a key role in determining the price of bitcoin.
In the "white" economy, any cryptocurrency both lost and still loses to regular national money as a means of legal day-to-day payments. Given that in the "white economy" for cryptocurrency payments there is the reporting of cryptocurrency transactions to regulators, the payment of cryptocurrency revaluation taxes, and exit fees from crypto to money, the transaction costs are greater for cryptocurrency payments than for payments in national currencies. It is naive to think that anything will change in this respect in the future, and that governments and central banks will loosen their control, voluntarily stripping themselves of much of their power.
In a "white" economy, cryptocurrency can only exist as an investment. This fact was more or less realized by investors after the rise and fall of bitcoin in 2017, when the myth of cryptocurrencies as future global money faded into oblivion. That's when it was replaced by the myth of cryptocurrencies as the perfect investment vehicle of their kind, and of bitcoin as "digital gold." The paradox is that, in fact, these are investments associated with business activity mainly in the global "shadow" sector. Because of this specificity, offshore venues have played, and still play, a key role in determining cryptocurrency rates.
The largest of the offshore crypto exchanges is the scandalous Bitfinex exchange, originally registered in Hong Kong in 2012. After several scandals with losses of investors' funds (allegedly as a result of hacking), the site re-registered in the British Virgin Islands, retaining, however, its headquarters in Hong Kong.
Curiously, the scandals began in 2015, when the first "stabelcoin," i.e., a cryptocurrency that is "secured" by a common currency, was issued, a landmark event for the cryptocurrency market. It was the token Tether (USDT), which was issued in 2015 by Tether Limited and immediately integrated by Bitfinex. Soon there were rumors in the cryptocurrency community that Tether Limited was affiliated with Bitfinex. Later, thanks to an investigation known as the "Paradise Papers" (an array of materials concerning the activities of offshore companies registered in "exotic" offshore zones, which were made public in early November 2017 following an investigation organized by Germany's largest newspaper, Suddeutsche Zeitung), this connection was confirmed.
Between January 2017 and August 2018, the total issuance of Tether tokens rose from $10 million to $2.4 billion. After the collapse of the crypto market in 2017, the NY Times published an investigative journalism that claimed that manipulation of the bitcoin price on this exchange gave a 50% price hike in 2017 and was done by pumping liquidity into the price through the issue of unsecured Tether tokens.
In early 2018, USDT accounted for about 10% of bitcoin transaction volume, but by mid-2018 that figure had risen to 80%.
Bitcoin itself is a curious IT phenomenon and an interesting financial and even psychological-financial phenomenon, clearly showing that value is simply the result of people agreeing to regard something as valuable. In this sense, bitcoin is no different from gold: gold is valuable simply because it is historically valuable. Gold is valuable traditionally because it is part of the established financial culture. It is a "noble" metal that used to be available only to the "noble" class. Drawing an analogy with gold, bitcoin could be described not only as "electronic gold," but also as "criminal electronic gold.
"Hacker gold" - this term would better capture the essence of the crypto market and those in whose hands it is now. Can an asset subject to such influence be considered defensive? Perhaps in communities and countries that have fallen into anarchy, or close to where it is, it does become popular, just as it has already become popular in Venezuela and is becoming popular in permanently unstable Argentina. But it is not these communities that determine the face and dynamics of the global marketplace.
For now, it seems better to remain a conventional conservative. And if to prepare for new crisis and fall of the stock market, it is better to stockpile gold and cache in funding currencies. Perhaps the cryptocurrency market will change in the future. But we have yet to live up to that.
