The basis of the Bitcoin protocol is that there will only ever be a fixed supply i.e., 21,000,000 Bitcoin. No more BTC can be created, and Governments cannot alter the value by intervening in the market.
The criticism of Governments is that they can print as much new money as they want (and do). So, by definition, the currency is a deflating asset – more and more money chasing the same assets.
Besides Governments printing money, further money can be printed through Banks creating more lending. This can be done through a myriad of market instruments like Futures, options, some Exchange Traded funds, Contracts for Difference (CFD’s), and unregulated Financial Institutions.
I tried to highlight these trends with the article I published: “Money Printer goes brrrrrrrr.”
The main point I was trying to make was that the Broad Money supply as of the end of August 2021, was $2.55 Trillion dollars, that is, money created by Governments and bank lending.
The Australian Bureau of Statistics (ABS) published the National Accounts: Finance and Wealth on the 23rd of September 2021, for the June 30 quarter ending 2021. According to the ABS, a total of $7.8 Trillion borrowings comprises debt of households, State and Federal Governments, and Public non-financial institutions.
So, the financial system has managed to increase the Money Supply by a factor of three. Obviously, there are even more undisclosed liabilities in things like unfunded pension liabilities across the globe and offshore unregulated currency markets. In short, there is unlimited money printing and then more leverage on top of that.
The complaint in the gold markets, for many decades, is that the financial system has artificially created a much greater supply of gold, over and above the physical gold in existence. The theory is that the price of gold has been artificially depressed by the large increase in printed (paper) gold.
Paper gold is also referred to as unallocated gold accounts. You can buy, say, $1m worth of gold from a bank through an unallocated gold account. “Unallocated” means the gold does not exist and is only an unsecured liability of the bank with who you have the deposit. In effect, the gold has been printed. This gold that has been created, in turn, can be on-lent in the market by the bank, creating further leverage.
If you buy BHP shares through a CFD provider, the shares do not necessarily exist. Buy a commodity or any product on a futures market, and there is cash settlement rather than physical delivery, the underlying product will not necessarily exist.
Bitcoin participants have lobbied for a Bitcoin Exchange Traded Fund (ETF) and Bitcoin futures. Be careful of what you wish for. This will result in more than the original 21 million BTC circulating in the market.
On the 17th of December 2017, Bitcoin futures were introduced by the Chicago Mercantile Exchange (CME). A contract is a cash-settled contract, not physical delivery.
Each contract is 5 Bitcoins. There are 16,966 contracts in open interest, 84,830 BTC. The current value is about $5.2 billion
On the 19th of October 2021, a Proshares Bitcoin Futures ETF was launched in the US. The ETF is backed by futures contracts and no actual BTC is required to be purchased.
The current notional value is $1.17 Billion – not bad in a week.
Hot on the heels of the Proshares BTC ETF, comes another ETF – Valkyrie Bitcoin Strategy ETF (Nasdaq: BTF) launched on Friday. Now that major financial centers like the US and Canada have allowed Bitcoin products onto the markets, no doubt there will be a plethora of similar products coming.
Further financial innovations are set to come. For Bitcoin to establish itself as an alternative financial currency, the ability to create lending products will be necessary. And we know how good the financial system is in creating supply via money lenders.
Like Gold and Silver, expect a greatly increased supply of Bitcoin.