Scarcity of high-yield investments is driving up Bitcoin’s price

After the 2007-2008 financial crisis, the government's strict regulation of the market caused complaints from many practitioners, but surprisingly, this regulation made Bitcoin more attractive.

In the aftermath of the financial crisis, regulators created a complex set of rules and regulations designed to ensure the continued stability of the global financial system. The new framework applies to many different aspects of the financial services industry, including the financial institutions involved in transactions.

Under the new rules, investors will often need to deposit cash, known as “margin,” when they trade. Margins are usually held by a clearinghouse, the middleman for the transaction, to ensure that the transaction goes through even if one party backs out.

The clearinghouse can then deposit this cash into safe assets, such as German bunds or U.S. Treasuries, for short-term loans through the repurchase agreement, or “repo”, market.

As a result, safe assets (especially high-quality government bonds) have become increasingly scarce.

ECB executive board member Yves Mersch recently warned that the situation could get worse.

"Demand for centrally exchanged instruments remains high, so the need for financial market infrastructures to exchange cash on collateral will continue to grow," he said in a January speech.

The clearinghouse is not alone in its rush to buy safe assets. Central banks around the world have taken similar actions, buying trillions of dollars in Treasury bonds in the aftermath of the financial crisis.

A major goal of quantitative easing (QE) is to lower interest rates, stimulate lending, and boost economic growth.

The policy was largely successful, keeping interest rates very low for many years.

Seeking yield

While quantitative easing has created a low interest rate environment, it has also unexpectedly created downward pressure on yields.

Tim Enneking, chairman of cryptocurrency hedge fund EAM, said: "It's not so much a shortage of safe-haven assets as it is low yields on all assets." This also makes Bitcoin more attractive.

He added: “The low-yield environment is fueling investor interest in cryptocurrencies.”

Cryptocurrency fund manager Jacob Eliosoff also said: At present, the critical demand generated by the scarcity of high-yield investment opportunities is pushing up Bitcoin.

Disaster Hedge

Chris Burniske, blockchain analyst and product manager at ARK Investments, told CoinDesk: “Bitcoin prices tend to be boosted when geopolitical and macroeconomic uncertainty surges. Therefore, the capital market has used Bitcoin as a tool to hedge against disasters.”

While investors tend to seek safer assets during times of economic turmoil, the scarcity of safe assets could drive money into Bitcoin. So if the economy is in recession and the stock market falls, Bitcoin prices could rise as a result.

“Our new fund is specifically targeted at high net worth individuals and institutions to invest in some high-yield alternative assets,” Harry Yeh, managing partner of investment management firm Binary Financial, told CoinDesk.

He added: “When there is a currency devaluation or a global macroeconomic event like Brexit, cryptocurrencies are viewed by investors as a safe haven asset.”

Alternatively, some analysts, such as Eliosoff, have proposed a more complex hypothesis, stressing that while a recession could boost Bitcoin, it would depend on the factors that cause the recession.

Michael Moro, president of financial institution Genesis Global Trading, noted that “security” is a relative term and that the geography of financial resources plays a key role in investor decisions.

He added: “If I were an American investor, there are a lot of safe assets I could choose from, but when a crisis comes, Bitcoin would probably be my first choice.”

Moro believes that historical data shows that the price of Bitcoin is not correlated with the prices of other assets.

If there is an economic recession or financial crisis, cryptocurrencies will become more attractive as investors panic and sell off their assets, causing securities to lose value.