Sorry, We Don’t Take Cash — Bitcoin Dropped Massively

Bitcoin [BTC] up, bitcoin down.

Bitcoin dropped massively a couple weeks ago after hitting an all-time high of over $84,000.

I won’t go too much into it, you’ve probably heard all about it already, but driving the drop was a bunch of tweets from Elon Musk and a crackdown from China.

As I write this today (Friday), bitcoin is slightly up, with one coin at $49,385. But that number will most likely have changed by the time you read these lines.

That’s the nature of bitcoin, it’s very volatile.

It also didn’t help matters for bitcoin either, that last week the US Treasury flagged they want transfers of US$10,000 or more to be reported to the IRS.

Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,’ the Treasury said.

Cryptos are becoming much more common, and so has the chatter against them.

Cryptos are used by criminals for tax evasion…for illicit purposes…

The same arguments we used to hear for the war on cash are also supporting the war on cryptos, as money becomes digital.

Cash has all but disappeared from the streets since the pandemic. It’s not easy to use cash for everyday transactions.

Still, cash is cash.

Banknotes are a promise from the bank, payable to the bearer on demand. Originally, banks were obliged to redeem them for legal tender, like gold and silver. While this is not the case anymore, banknotes are still backed by the government.

It is a promissory note that you can physically hold in your hands…

And cash is still very much still on demand. There’s US$50 billion worth of banknotes in circulation, up from US$40 billion only five years ago, according to the US Federal Reserve. US$100 bill amounts have increased from US$14.2 billion to US$16.4 billion between 2019 and 2020.

It’s a similar phenomenon here in Australia. As the RBA notes:

Demand for banknotes was extraordinarily high over 2020, despite a sharp decline in the use of cash in day-to-day transactions. The pandemic has accelerated trends in banknote demand that had already been occurring for many years. Namely, the use of physical currency as a means of payment has continued to decline, while demand for cash as a store of wealth has grown.

Even with interest rates at record lows and fears of inflation, demand for cash is up. So is demand for cryptos which are outside the system…maybe this demand is not all about criminal activity after all…

Meanwhile central banks are fast-tracking their plans for central bank digital currencies.

In a video message last weekend, Chairman Jerome Powell confirmed the Fed is moving ahead to develop their own digital currency and said they will be releasing a research paper this summer on it. As he said:

The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis.

Bingo!

Maybe all this cash and crypto hoarding is also about confidence.

For one, we have seen central banks coordinating policies and debasing their currencies…for years, not just during the pandemic.

I mean, going digital is great for central banks. It makes monetary policy much easier and gives central banks more options. But it makes us more vulnerable.

It’s easier to impose fees or things like negative interest rates. You see, with cash as an option, if central banks impose negative rates, people can take the money out of their bank accounts and hoard it in cash, gold…or cryptos.

Digital money is also programmable. China, for example, is testing setting expiration dates on their digital yuan, so there is an incentive to spend it…which in turn could boost the economy.

It is also easier to impose restrictions on your money. For example, if there is a massive loss of confidence, like a bank run.

During a crisis, the first thing that happens is access to your money gets restricted, to contain the loss of trust. Just look at the banking crisis that happened in Argentina or Cyprus. People queued up in front of closed banks…ATMs rationed cash.

And, of course, there are privacy concerns.

If everything is digitalised, then it is easy to track where you are spending your money. Where you’ve been, what you’ve done.

There’s freedom in being able to spend your money where you want.

It’s no wonder that Facebook has also resurrected their efforts for a digital currency through Diem, a stablecoin they plan to launch in the US.

There’s a fight for your money.

But point is, when people start to question what money is, it is because they feel that something isn’t right. There is already a loss of trust in the system.

And in a system based on trust, that’s not good…

Best,

Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

PS: FREE report reveals that both bitcoin and gold could soon soar. To find out what’s set to kick-start this ‘Wealth War’…claim your FREE report now. 


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


The Rum Rebellion