How market demand for Bitcoin might be affected negatively by failed monetary policy?
Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. In the earlier topic we discussed the monetary and social impact of demonetisation in India as being detrimental to the nation yet the CCI had a different story to tell.
Fig.1 : Consumer Confidence Index of India – Historical Context
Fig2. Interest in “Bitcoin over Google in India (Jul 2014 – July 2017)
The political narrative in developing countries almost triumphs when the economic situations are bleak. Demonetisation was activated on 8th Nov in 2016 in India and we can see from the chart that the CCI was highest since the last 4 years in Jan 2017! If savings and spending is not impacted (notionally, and not figuratively) then we have a clear roadblock for Bitcoin demand cause for the consumers it was all as if it was ceterus paribus be it a political or economic turbulent time for the nation.
If we observe the Google Trends as an indicator for Bitcoin demand in India and we particularly observe the Apr-Jul period in 2017 we could see when CCI is low, demand for Bitcoin is up. While this is just an empirical data and we might need more on the trends to strengthen our argument, however as a hypothesis it’s fair to say that CCI and Bitcoin demand are inversely corelated (we should have expected a huge spike in November and December due to dwindling monetary policy but the spikes aren’t noteworthy). And the government propaganda ensures that CCI moved upward cause it ensures vote banks in the long run. So even while you might not have rupees in your pockets to buy that latest white good for your home but you still feel confident that we are in a good state which only further fuels a buying / spending cycle. Bitcoin has been so far lauded and advocated by the crypto-anarchists, liberalists and anti-establishment community which collectively serves against the wave of enthusiasm and confidence in a nation. In such a situation even if Bitcoin were to be cheap, consumers would feel confident in holding and spending fiat due to the strong faith in the government (be it their policies or sop programs).
Another argument can be that the Central banks’ enablement of the monetary policy will cease to diminish as they keep on serving being the key institution for unit of account. In a scenario where the Central Bank wishes to classify Bitcoin neither as an asset or as a liability (just like currency notes in circulation) so as to maintain the ease of the classic equation of:
GFX + GB + BL Ξ C + BR + GA + (OL – OA + NW)
where assets of a nation are equal to the liabilities (GFX= Gold & Foreign Exchange, GB= Govt. Bonds, BL= Bank loans, OA = Other Assets and C= Currency in circulation, BR =Commercial Bank Reserves, GA = Govt. Account, OL= Other Liabilities, NW = Net Worth). The recent ban on Bitcoin in China is an example of the monetary policy stranglehold cause as the Yen moves to Bitcoin, it sure becomes a daunting task for the Central bank to account for it in the equation. To shut Bitcoin in totality means the monetary policy will probably stay intact and there is no leakage in the system even when the economy might be collapsing!
Fig.3: Decreasing value of Chinese Yuan vs Bitcoin
We can further strengthen the argument that in a liquidity crunch (for example as severe as in India during demonetisation or due to strong capital controls in China) the concurrent trend is people tend to hold the national currency for as much time as they can. Plus, we need to acknowledge the fact that adopting Bitcoin in their lives is cost prohibitive as much as it is proving to be a good store of value. In uncertain times people first tend to secure their food, shelter and utilities and Bitcoin has a long way to get itself included in the basket of goods of pertinent needs than being a mere want.
- Monadjemi, Mehdi and John Lodewijks (2015), Money and Monetary Policy in an Open Economy, London