On September 26, the British pound hit a record low against the US dollar following the announcement of tax cuts and further debt increases to cushion the impact of a possible economic recession. The volatility simply reflects investor doubts about the government’s ability to support rising living costs across the region.
The US dollar has been the clear winner as investors seek refuge in the world’s largest economy, but the weakness of the British pound could be a net positive for Bitcoin. The GBP, or British Pound, is the world’s oldest currency still in use and has been in continuous use since its inception.
Fiat coins are an experiment from 52 years ago
The British pound, as we know it today, began its journey in 1971 after its convertibility with gold or its equivalent effectively ended. Since then, the currency issued by the Bank of England has not had a fixed valuation.
Inflation has been the centerpiece of economic debates throughout 2022 after central banks added liquidity to markets over the previous two years to stimulate economies. As a result, in August 2022, the UK saw a 9.9% increase in consumer prices compared to the previous year.
On 22 September, the government announced an unprecedented tax cut, the largest since 1972, which sent the British pound to an intraday low of $1.038 against the US dollar on 26 September. Analysts concluded that government bond issuance would increase to pay less taxes, and interest rates would have to be raised aggressively.
While the GBP’s loss of value is shocking, one needs to look at exactly how important the global currency market is and how relevant the British pound is to cryptocurrencies. The first part is relatively easy to answer, but it depends on whether you count bank deposits, savings, and certificates of deposit. If we stick to the monetary base definition, measuring purely cash and current deposits at the central bank, the pound sterling stood at GBP 1.05 trillion in June 2022.
In US dollar terms, the UK currency represents $1.11 trillion of the global $28.2 trillion in fiat-based money, or about 4%. On the other hand, the euro, the unified currency of the eurozone nations, leads the ranking with $6 trillion, closely followed by the US dollar with $5.5 trillion. Therefore, the importance of the GBP remains high, supported by the region’s gross domestic product of $3.19 trillion in 2021, the fifth largest in the world.
In October 1990, the British government decided to peg the GBP based on the German mark because Germany was the main economic force in the region. However, the country was forced to withdraw from the peg in September 1992 after Britain’s financial performance made the exchange rate unsustainable. As a result, during “Black Wednesday” interest rates suddenly rose from 10% to 15% and the GBP currency devalued by 25% overnight.
Related: GBP follows the Euro; The pound-dollar rate is at an all-time low
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Very few assets can compete with fiat money in terms of relevance. With a value of approximately $6 trillion, excluding jewelry and non-financial assets, gold is a definite contender. Tech giant Apple also leads the stock market valuation at $2.45 trillion, followed by oil producer Saudi Aramco at $2 trillion.
Estimating the relevance of the British pound in cryptocurrencies is not simple, but according to data from Nomics, of the global fiat Bitcoin trade, the US dollar is the absolute leader with 89%, followed by 4% of the Japanese yen, 3 % for the euro and 2% for the pound sterling.
Accordingly, the direct impact on Bitcoin trading appears relatively small, but the fact that the oldest fiat currency hit an all-time low against the US dollar could be a game-changer for cryptocurrencies.
According to Porkopolis Economics, the average rate of issuance of sterling since 1970 has been 11.2% per annum. This figure compares directly to Bitcoin’s issuance of 900 coins per day or 1.7% per year.
Once the general population realizes that their savings and investments are being more aggressively devalued by central bank stimulus measures, the benefits of a decentralized form of money could become clear. But for now, the US dollar has been the clear winner, reaching its highest level in more than 20 years against other major global fiat currencies.
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