CBDCs and Bitcoin: substitutes or complementary?

Eurozone, United Kingdom, Japan, Switzerland, Sweden and Canada, with their central banks, have set up a working group at the Bank for International Settlements (BIS) with the aim of creating digital currencies to be circulated parallel to the fiat currencies in their countries. The news is sensational, since it represents a real U-turn by institutions such as the European Central Bank and the Bank of England which, with their governors, Mario Draghi and Mark Carney, had always expressed an extremely contrary opinion to cryptocurrencies.

The turning point has been probably incentivized by the initiative by the People Bank of China, which, according to rumors, is ready to launch its long-awaited “digital yuan” in the coming months. The 6 central banks have decided to break the delay and study the feasibility of the operation. By now, the Federal Reserve remains outside, at least in appearance. The United States, however, as denounced by Facebook CEO Mark Zuckerberg in front of the U.S. Congress, seriously risks legging behind on the topic, also considering the well-known aversion of the U.S. financial watchdogs. Only recently they expressed an interest in studying the possible introduction of a “digital dollar”.

After this news, the most interesting question for traders is: will the digital currencies issued by central banks (CBDCs) be competitors of Bitcoin and alternative coins, or will public and private digital currencies be able to grow and prosper together? In other words, will they be substitutes or complementary? It is difficult to say. To answer this question, one should ask whether the issuance of new digital currencies by central banks would create a reduction in the interest of traders in Bitcoin and alt coins, an outcome which should be justified on the basis that the use of Bitcoin for transactional purposes would be replaced by that of CBDCs. In summary, the demand for Bitcoin and alt coins should be expected to decrease.

Looking at the current prices of the most famous cryptocurrencies, however, it seems that traders think differently. From the beginning of 2020 to January 22nd, Bitcoin rose from $7,200 to almost $9,000 (+20.0%), the largest year start gain since 2012, as if the return in vogue of the cryptocurrency argument has had a more positive effect than the less positive one deriving from the possible competition of the CBDCs. A recent survey carried out by Alex Kruger among professional traders concluded that Bitcoin could reach $20,000 by the end of the year. Other traders believe that it can reach even higher levels. Furthermore, Bitcoin seems to have achieved the status of ‘safe haven’, after its positive behavior showed in times of volatility, as in the case of the U.S. attack on Iran. Not to mention that next May there will be the halving of the remuneration for Bitcoin miners. As of now, it seems that traders see a bright future for Bitcoin price.

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