Switzerland just showed why bitcoin may struggle to go mainstream

Harold Cunningham/Getty Images

Of all the hurdles facing cryptocurrencies in 2018, none is larger than the threat posed by government and regulatory intervention.

As has been seen countless times over the past year, whenever there’s chatter about potential regulation, crypto prices tend to take a bath.

To Oliver Harvey, Macro Strategist at Deutsche Bank, the chart below demonstrates why policymakers around the world are unlikely to let cryptos flourish by allowing their use to go unfettered.

It shows the price of bitcoin against the share price of the Swiss National Bank (SNB), Switzerland’s publicly-listed central bank.

Source: Deutsche Bank

As bitcoin got obliterated recently, losing 50% of its value, shares in the SBN soared, jumping 30% from the beginning of the year.

“There is surely some dramatic irony at work,” Harvey says.

“Bitcoin advocates that point to the role of post-crisis quantitative easing as ‘debasing’ fiat money might ponder why the circa 400 billion Swiss franc expansion of the SNB balance sheet in the last few years appears to have done little to dent investor perceptions about its future solvency.

“Meanwhile, Bitcoin, whose scarcity is carefully governed by computer algorithms, has moved almost diametrically in the opposite direction.”

As Harvey puts it, based off what’s happened so far this year, the current scoreboard reads “central banks 1, bitcoin 0”.

In his opinion, Harvey says the recent divergence highlights one of the key weakness in the arguments for Bitcoin, and other non-conventional currencies, under our present socio-economic model.

The state, and by implication central banks, are likely to be extremely reluctant to cede control over seigniorage to disintermediated alternatives, says Harvey.

“The SNB’s ability to print francs and buy foreign assets is now resulting in enormous valuation gains on its portfolio as the Swiss franc has started to weaken. These profits will be distributed back to society via the central and regional governments,” he says.

“More importantly, it has helped the Swiss authorities to resist the even more powerful disinflationary forces that would have resulted if the exchange rate had been left purely to market forces.”

So after years of printing francs to purchase financial assets, seeing the SNB’s balance sheet swell by hundred of billions of francs, it has now delivered a financial and economic windfall to the Swiss government, both at the national and regional level.

Fiat currency, even after the worst financial crisis since the great depression, managed to deliver an outcome few thought possible in the early stages of the global recovery.

And that naturally raises the question as to whether government’s would like to change the status quo?

To Harvey, it’s almost certainly no.

“Unless and until these policy levers become superannuated, Bitcoin is likely to remain just an alternative in the broadest sense of the word,” he says.

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