Byline: Morgan Reeves
In late September 2022, the Bank of England announced that it would be buying bonds to ease the impact of its financial crisis. This decision comes after the government announced significant tax cuts, and the purchasing of these bonds is meant to stabilise its bond market, and it is to run until October 14, 2022.
The announcement sent the global financial market into a tailspin, and the Bank of England has yet to significantly curb the staggering inflation and a cost of living crisis which led to the pound’s deterioration. This is the U.K.’s most dramatic currency crisis in recent memory; the pound fell to a record low after the government announced unfunded tax cuts. The move has caused an immediate reaction in the U.K.’s market: the pound is losing value while crypto is on the rise. A government bond is a type of debt-based investment where you can loan money in return for an agreed rate of interest. The issued bonds are called Gilts in the U.K. market. Their main goal is to preserve capital.
On September 23, 2002, Prime Minister Liz Truss and Chancellor of the Exchequer, Kwasi Kwarteng, introduced the U.K.’s most prominent tax cuts in 50 years — an estimated £45 billion over five years. The so-called “mini-budget” proposed tax cuts for the U.K.’s highest earners and announced a rollback of corporate tax hikes and a cost increase for national insurance, both intended to go into effect in 2023. Kwarteng and Truss’s plan also slashes the stamp tax — a duty on land sales in England and Northern Ireland, — in a bid to increase home purchases. By Monday, global markets responded by selling off UK-backed assets and pushing the U.K.’s currency to a valuation of £1.03, its lowest-ever value against the dollar, before it inched up later in the week. Investors soundly rejected the new economic plan, dubbed “Trussonomics”, just as previous economists dubbed “Reaganomics” concerning the supply-side economic policies passed under Ronald Reagan in the U.S. in the 1980s.
Bitcoin has outperformed almost every traditional asset. The trading volume between the British pound and the cryptocurrency bitcoin spiked to a record high after the Sterling pound dropped. Bitcoin has stayed resilient in the face of renewed turmoil in the traditional market. The British pound has crashed to an all-time low; however, Bitcoin has remained locked between $18 000 and $20 000. According to James Butterfill, the surge was likely due to traders swapping Sterling for Bitcoin. “There is a high correlation to bitcoin volume growth and political or monetary instability,” he said. Butterfill said spikes have previously occurred in other currencies’ crypto trading volumes, such as the Russian ruble and Ukrainian, but that he had never seen such big moves in the bitcoin-sterling pair’s volume.
The role of cryptocurrency in the economy
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Cryptocurrency has the potential to change how any economy runs. In the case of a traditional financial system failing, if the currency is manipulated and the money doesn’t hold actual value, investors won’t get a return on their investment. During the constant rise of inflation, the cryptocurrency Bitcoin can be considered a hedge. In the pre-COVID scenario, high inflation levels affected the stability of the fiat currency. Post-COVID-19, the adoption of blockchain technology increased. Cryptocurrency enables secure online payment without third-party intermediaries and can boost economic and social status. It leads to an increase in the speed of transactions — since there are no intermediaries, transaction costs are lower. Lower transaction cost means an increase in the volume of transactions. Crypto has the potential to reduce the probability of fraud as the system is decentralised and also provides access to diversified loan portfolios.
Why are investors turning to Bitcoin?
According to data compiled by the Kaiko Research team, the British pound reached a record low against the U.S. dollar, and the increase in Bitcoin volume illustrates investors’ preference for the leading cryptocurrency. The instability of the fiat currency makes a move to Bitcoin easy or the only option as it resembles a stablecoin. The volume against the Euro has increased by 85% during September 2022. In the same period, volume for the USD/BTC pair skyrocketed by 67%. Bitcoin has long-term investment potential due to its high market demand and lower inflation risk than the pound and other global currencies. At one time, the British pound plummeted by nearly a quarter against the U.S. dollar. “When a fiat currency is threatened, investors start to flock to Bitcoin,” James Butterfill noted.
How does cryptocurrency benefit society?
Bitcoin gives corporations, merchants, and individuals the freedom to send and receive payments and invest worldwide. It ensures greater autonomy in financial transactions and wealth management, which the conventional systems do not provide. Banks have been the sole custodians of financial transactions for centuries.
According to a recent Bitalpha AI review, Bitcoin is a highly volatile and unregulated currency. However, those are also some of Bitcoin’s greatest strengths, contributing to increased user autonomy, financial inclusion, and substantial returns on investments to investors. And it could be the critical solution for Britain’s situation right now.
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