The quick changes and volatility of Bitcoin’s prices have long puzzled economists. There are many reasons why Bitcoin’s price movements can’t be analyzed like a normal asset, one of which is its unofficial status. To date, there are no clear classifications on what Bitcoin truly is, whether it’s a safe haven asset or a stock. While it’s true that Bitcoin investors call it a new type of currency, its unregulated nature makes it difficult to officially classify, so we must take this opportunity to add another tool to our financial fluency toolbox.
There are, however, clear factors that affect Bitcoin’s prices. Apart from supply and demand, the president of a powerful country can influence the prices of the cryptocurrency in the short term. Historically, the U.S. President’s individual role in affecting macroeconomic health is quite limited. However, a study we pointed to here on Rapunzl Investments shows that the commander in chief’s party affiliation is a strong predictor of economic health. Let’s use our financial fluency toolbox to dive deeper.
In December 2017, Coinwire reported that a $700 billion military spending bill was signed into law by President Donald Trump. The bill included a study for blockchain’s use for assessing foreign powers, cybersecurity research, criminal networks, and an evaluation of the technology’s planned use by the government.
After President Trump signed the bill, Bitcoin’s prices jumped significantly. From $17,000 prior to the announcement, it went past the $19,500 mark several days after.
There are several ways a government’s direct intervention can affect the prices of Bitcoin. The government has the right to regulate the prices of their national currency through buying and selling in international markets. In addition, they also have the ability to downplay enthusiasm for an asset class by slapping it with regulations that increase the cost of trade. Governments can also make an asset scare by limiting access to it. A prime example of this is oil, which has import and export restrictions in many nations.
Bitcoin regulation is now being considered in many U.S. states to prevent crime associated with cryptocurrencies. States would require safety bonds or an equivalent amount of cash for cryptocurrency trades to happen in order to avoid tax evasion.
Government actions could influence Bitcoin’s prices through regulation. However, since cryptocurrencies have decentralized ledgers, it would take a careful and well-coordinated approach across all markets for regulation to happen. The task will be difficult since there are different levels of interest regarding Bitcoin, and its impact on markets.
In a write up by economics professor and Bitcoin analyst Kenneth Rogoff, he stated that Bitcoin will never succeed regulated cash because that would make it really difficult to collect taxes or fight criminality.
However, he did observe that even if Bitcoin was heavily regulated and stripped of its anonymity, the new currency could still survive: “Would the price of Bitcoin drop to zero if governments could perfectly observe transactions? Perhaps not. Even though Bitcoin transactions require an exorbitant amount of electricity, with some improvements, Bitcoin might still beat the 2% fees the big banks charge on credit and debit cards.”
That being said, Bitcoin is a completely different asset class that cannot be regulated completely. The market would need to classify Bitcoin properly first, and governments would need to write clear laws about its distribution and trade in order to properly gain direct influence on its prices.
Unfortunately, initiatives that indirectly affect Bitcoin like the U.S. bill that would allow the government to study blockchain are not enough to influence the price of Bitcoin in the long term. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.