On September 26, the British pound hit a a record low against the US dollar Following the announcement of tax cuts and further debt increases to cushion the effects of a potential economic downturn. The volatility simply reflects investor doubts about the government’s ability to withstand the rising cost of living across the region.
The US dollar has been a clear winner as investors seek shelter in the world’s largest economy, but weakness in the British pound could be a net positive for Bitcoin. The GBP, or English pound, is the world’s oldest currency still in use, and has been in continuous use since its inception.
Fiat currencies are a 52-year-old experiment
The British pound, as we know it today, began its journey in 1971, after its convertibility with gold or the like had effectively ceased. Since then, the currency issued by the Bank of England has not had a fixed value.
Inflation has been at the center of economic discussions throughout 2022 as central banks added liquidity to markets over the previous two years to stimulate economies. As a result, in August 2022 UK consumer prices rose by 9.9% compared to the previous year.
On 22 September, the government announced an unprecedented tax cut, the largest since 1972, which saw the British pound hit an intraday low of $1.038 against the US dollar on 26 September. Analysts concluded that the issuance of government bonds increase to pay less tax, and interest rates would have to be raised aggressively.
Although the loss of value of the GBP is shocking, it is necessary to closely analyze how important the global Forex 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 are dealing with bank deposits, savings and certificates of investment. If we stick to the definition of base money, which measures only cash in circulation and deposits at the central bank, the value of the British pound in June 2022 was £1.05 trillion.
In US dollar terms, the UK currency represents $1.11 trillion of the global 28.2 trillion fiat base currency, or about 4 percent. On the other hand, the euro, the single currency of the eurozone countries, leads the list with $6 trillion, closely followed by the US dollar with $5.5 trillion. As such, the importance of the GBP remains high, backed by the region’s GDP of $3.19 trillion in 2021, the fifth largest in the world.
In October 1990, the British government decided to peg the pound to the German mark, as Germany was the leading economic power in the region. However, the country was forced to withdraw from the partnership in September 1992 after Britain’s poor economic performance made the exchange rate unsustainable. As a result, during “Black Wednesday” interest rates suddenly rose from 10% to 15% and the pound currency devalued by 25% overnight.
Supply limits and scarcity can give crypto a chance to shine
Very few assets can compete with fiat money in terms of relevance. With a value of around $6 trillion, excluding jewelry and non-financial assets, gold is a definite contender. Tech giant Apple also tops the stock market valuation with $2.45 trillion in capital, followed by oil producer Saudi Aramco at $2 trillion.
Assessing the importance of the British pound in cryptocurrencies is not straightforward, but according to data from Nomics, of global Bitcoin-fiat trading, the US dollar is the absolute leader at 89 percent, followed by 4 percent of the Japanese yen at 3 percent. euro and 2 percent sterling.
Because of this, the direct impact on Bitcoin trading seems relatively minor, but the fact that the oldest fiat currency hit an all-time low against the US dollar could change cryptocurrencies.
According to Porkopolis Economics, the average issue rate of the British pound since 1970 has been 11.2% per year. This figure compares directly to Bitcoin’s circulation of 900 coins daily or 1.7% per year.
As the general population realizes that their savings and investments are being more aggressively devalued by central bank stimulus, the benefits of a decentralized form of money may become clear. But so far the US dollar has been the clear winner, reaching the highest level in more than 20 years compared to other major global fiat currencies.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risks, you should do your own research when making a decision.