Earlier this week, the European Central Bank (ECB) made two big announcements. First, the central bank announced that it would lower the deposit facility rate from an already astonishingly low -0.4 percent to -0.5 percent. Second, the ECB said it would begin to expand its quantitative easing program again.
What is quantitative easing? In simple terms, quantitative easing is when the central bank prints money to buy bonds. One might say – well, everyone does that. What is so special about that? The answer about the specialness of quantitative easing comes when one asks were the money comes from for the ECB to buy government or corporate bonds?
Where does the ECB get the money to make the €20 billion monthly bond purchases ECB President Mario Draghi committed to this past week? The answer is out of nowhere. The ECB simply creates money out of thin air and uses that computer created money to buy bonds. Such god-like powers should make some investors jealous. But, how does this matter for Bitcoin?
Bitcoin and the ECB
How are actions of the ECB related to the price of Bitcoin? In theory, when the ECB prints more money, it makes euros worth less relative to competing currencies, such as Bitcoin. The following graph inspects whether this theory is correct.
The blue line is the assets of the ECB. The orange line is the price of Bitcoin based on the Coinbase exchange in US dollars.
Interestingly, the two are connected (well, duh). When the ECB printing lots of money to buy bonds from 2015 to the end of 2017, the price of Bitcoin soared.
Then, when the ECB decided to put the breaks on its massive money printing operations, the price of Bitcoin dropped precipitously.
Over the past couple of years, the ECB has put its quantitative easing program on cruise control – neither increasing nor decreasing asset purchases.
Fast forward to this week, and the story has changed. Dovish Draghi (as he is affectionately known among financial circles) and his ECB colleagues will begin purchasing €20 billion worth of bonds every month in perpetuity.
Where will Mr. Draghi and his ECB colleagues get the money to buy €20 billion worth of bonds? As stated, the money comes out of thin air.
If all other things stayed the same, this storyline likely paints a very positive picture for the price of Bitcoin.
With the ECB upping its commitment to printing money, holders of Bitcoin should be giddy. Further debasement of the Euro means an increase in value for Bitcoin, assuming all other things equal. It may be time to send Mr. Draghi and his colleagues a thank you note for all the wonderful work they have done helping establish Bitcoin as the currency of choice when government-controlled currencies let you down.