The UK mulls its debt problem, as bitcoin surges

Bitcoin, the cryptocurrency, reached a record high on Wednesday and surged passed $20,000. As bitcoin reached to the stars, the UK Chancellor, Rishi Sunak, announced his spending review, and the UK economy is also breaking records, but of a different kind. Borrowing has reached a peace-time high and the economic contraction caused by restrictions to limit the spread of coronavirus is set to cause a 11.3% decline in GDP, the largest decline for more than 300 years.  While interest rates are low for now, which makes the UK’s huge borrowing pile relatively cheap to pay off, Covid measures means that the UK government is tied to potentially at-risk businesses through loans and credit guarantees. If there is a problem with the roll out of the coronavirus vaccine, and the economy fails to recover next year as expected, then the next crisis could be brewing: massive debt defaults in the private sector, that weigh down sovereign credit ratings. 

What’s next for bitcoin 

When the costs of fighting the coronavirus are laid bare, it is no wonder that bitcoin and cryptocurrencies are surging. There are a growing number of hedge funds and institutional investors who are taking a view that the conventional economic model has been hollowed out by the coronavirus and the surge in quantitative easing across the world, the printing of fiat currency by multiple central banks to pay off the debt of coronavirus. The coronavirus has boosted the attractiveness of cryptocurrencies for three reasons. Firstly, they are not linked to any government or controlled by central banks, thus the value of bitcoin cannot be manipulated by the powers that be. Secondly, the coronavirus has seen civil liberties curbed and governments take more control in order to fight the pandemic. For some, this is too close to a dystopian future for comfort. Bitcoin offers security due to its anonymity, which can be a hedge against the worst excesses of the state. Thirdly, compared to Bitcoin’s crash and burn in 2017, this time the cryptocurrency is easier to get hold of and easier to store. While it is still not managed by the global banking system, you can buy and store it on PayPal, although you cannot use it to make payments. Cryptocurrency is also better regulated than it was three years ago, which is why hedge funds and some institutional investors have been investing in bitcoin in recent months. 

While bitcoin is not going to replace fiat currency any time soon, it has become a luxury good in some quarters. People are willing to pay up for it because they like its unique properties: it’s anonymity and divorce from governments and central banks. Thus, although bitcoin has reached a record high, and is down approx. 6% so far on Thursday, we still think that there is a case in favour of more gains for Bitcoin. Today’s decline could be an attractive entry point for the next person seduced the allure of the most popular cryptocurrency. We do not expect the large and protracted crash that we saw in 2017. Bitcoin has become the new Hermes bag, it has a loyal following, and some people just have to have it, regardless of the price. 

The government weigh on banks’ share prices 

This leads us back to the UK’s finances. In contrast to bitcoin, the pound’s fortunes are deeply tied to the UK government and the Bank of England. The BOE’s QE programme is supporting the government’s borrowing plans, and it is keeping interest rates at a record low to ensure that the interest costs that will be incurred as a result of this debt will remain low. The suppression of interest rates by the BOE has both short-term and long-term consequences. In the short-term, UK banks’ share prices took a hit on Wednesday as low interest rates hurt their retail lending businesses. In the long term, the UK’s giant debt load means that even small moves in interest rates will be of concern for the Treasury and could lead to panic in the bond market. Thus, as bitcoin potentially becomes less volatile, the risk is that the UK’s bond market becomes more volatile. 

The market reaction 

Of course, there is a hope that the UK economy returns to normal quickly and that the Office for Budget Responsibility’s estimate that coronavirus will cost the UK economy 3 years’ worth of growth is too pessimistic. If the vaccine process can be rolled out in the UK quickly and efficiently then life could return to normal faster than expected and growth could bounce back, which will make it much easier to grow our way out of our debt pile. However, there are risks to consider too, for example, a shambolic roll out of the vaccine, which cannot be ruled out by this government, and, in the worst case, another pandemic in the next 5-7 years would cripple the UK financially, and may not be affordable. Overall, the grim figures delivered by the Chancellor had little impact on financial markets in the middle of the week. Global stock indices pulled back slightly after the Dow jones breached the significant 30,000 mark earlier in the week. Worsening US jobless claims could be a sign of things to come in the US, which may dent hopes of a Santa rally next month. 

Thanksgiving takes place today, and we sincerely hope that all of our readers who celebrate this wonderful holiday do not find the sentiment of this note puts them off their turkey dinner.