Shutdown, Satoshi and stimulus: Bitcoin’s $US126,000 surge explained

Bitcoin set a record high in US dollar terms overnight, driven by the US Government shutdown and expectations that the Federal Reserve will cut interest rates this month.

The world’s most popular cryptocurrency has risen about 67 per cent to $US126,000 ($190,600) since the November 5 election of US President Donald Trump, gains that have further enriched the Trump family.

Since its launch in 2009, Bitcoin’s market value has risen to $US2.6 trillion ($3.9 trillion), greater than the $3.3 trillion market value of all companies listed on the Australian Securities Exchange (ASX).

Some investors see Bitcoin as safer than conventional currencies or gold, which is also booming. US stocks and gold hit record highs on Monday too.

“I think the price is heading higher,” said Jun Bei Liu, the co-founder of Ten Cap Funds Management. “It’s got a huge boost ever since Trump took office, he’s pro-crypto and deregulation which is encouraging institutional adoption.

“And there’s more liquidity in the system, interest rates are going lower, and people have less faith in government-backed currency as money, so you’ve got more demand for alternatives like bitcoin.”

US shutdown

The US Government shutdown is set to extend into its second week from Wednesday, as Mr Trump’s Republican Party fights the Democrats over proposed cuts to healthcare spending and each party blames the other for the stand-off.

The political dysfunction and worries around the US Government’s debt ballooning to $US38 trillion as Washington funds huge budget deficits by printing money is leading investors into digital assets, according to Justin Arzadon, the head of digital assets at BetaShares.

“Investors are increasingly viewing Bitcoin as a hedge during periods of political and fiscal stress - similar to how gold has historically behaved,” he said.

On Tuesday, the gold price hit a record high of $US3977 an ounce and has risen 4.5 per cent since the government shutdown.

The tech-heavy Nasdaq Composite Index hit a record 22,941 points overnight, helped by expectations of more interest rate cuts from central banks in the US and elsewhere over the next 12 months.

Broadening rally

Bitcoin’s online code limits its supply to 21 million coins, with ownership interests now traded via crypto exchanges, conventional stock exchanges, or directly via peer-to-peer transfer.

Pseudonymous founder Satoshi Nakamoto originally intended it to work as decentralised money free from government control, although it has since snowballed into a decentralised digital asset class popularised across social media and latterly on Wall Street.

Shane Oliver, the chief economist at AMP, said the token is widely viewed as a store of value similar to digital gold and unlike cash, which is used as a means of exchange to buy goods and services.

“Unless a government allows bitcoin to be legal tender in their country then it can’t replace fiat money. El Salvador has done so, but even there it’s struggled,” said Dr Oliver.

“Even then there’s a problem as bitcoin is not really structured to be a transactional currency as its proof of work requirement leads to relatively high transaction costs and can take up to a few hours to complete.”

Bitcoin’s popularity increased after regulators around the world allowed exchange-traded fund (ETF) providers to offer it as an investment to retail and institutional investors from January, 2024. This means interests in it can be bought in the same way as stocks and shares.

Ms Liu said she doesn’t own bitcoin personally, but is inclined to buy some on the basis that she thinks it will continue to streak higher.

“It’s a risk barometer and has always traded as a tech, AI momentum trade,” she said. “When people are bullish, they buy bitcoin. In the old days the only alternative to equities and fixed income was gold. People still use gold and it’s flying, but the next gen of investors now use bitcoin as a hedge against inflation and geopolitical uncertainty.”

Doubters

The hype around the token and its popularity as a get-rich-quick scheme still has some expressing caution it could be an old-fashioned asset price bubble with potential to burst.

In 2022, bitcoin’s price crashed around 66 per cent from around $US47,400 at the start of the year to a low around $US16,500, as rising inflation forced central banks to lift interest rates at their fastest pace in a generation.

“There are lots of reasons for caution, it’s highly volatile and hard to value as it generates no income,” said Dr Oliver. “I’d just bear in mind that while the trend may remain up, it periodically has 80 per cent pullbacks. So anticipate bouts of extreme volatility.”

On Tuesday afternoon the price of the cryptocurrency eased 1 per cent to $US124,300.