Bond King Gross: Bitcoin's high volatility makes it impossible to become a currency

In a research report on November 1, Nobuhide Kiuchi, a former senior official of the Bank of Japan and executive economist of Nomura Research Institute, pointed out that in a market with low volatility that is like a "stagnant pool of water", investors have shifted from pursuing high returns to pursuing high volatility to "make quick money". Digital cryptocurrencies (such as Bitcoin), where intraday fluctuations of hundreds of dollars are not uncommon, can be said to be "exactly what they want" as a high-volatility investment product.

However, in an interview with Bloomberg TV today, Gross, the "Bond King" and founder of the world's largest mutual fund PIMCO, bluntly stated that although Bitcoin's price has been rising steadily on exchanges due to its scarcity , its high volatility, which is favored by speculators, is precisely the biggest stumbling block that prevents Bitcoin from becoming a currency, and runs counter to the nature of currency as a means of storing value.

The three properties of money that are widely accepted by the public in modern monetary economics include "medium of exchange", "measure of value" and "store of value". It is the last point that Gross questions. The effectiveness of money as a means of storing value is closely related to the general level of its price; if the price level fluctuates significantly, then its effectiveness as a means of storing value will be greatly discounted or even cease to exist.

In Gross's view, the current surge in Bitcoin prices is a direct product of the quantitative easing credit expansion of global central banks after the 2008 financial crisis. After global central banks cut interest rates and "flooded the market with money", other asset classes have ushered in unprecedented expansion in price levels, and investors pursuing higher returns have become increasingly aggressive in risk appetite, and the "jumping up and down" Bitcoin has become their first choice in the short term.

Gross: Bitcoin is based on central bank credit expansion Source: Bloomberg TV

Can the surge in Bitcoin be blamed on the central bank's loosening of monetary policy? Gross: That's right!

In fact, this is not the first time that Gross has "pointed to" the global central bank policy as the "culprit". After the 2008 financial crisis, the global "central banks" released a large amount of liquidity to stimulate economic recovery, and the resulting low interest rate environment currently seems endless. Investors seeking income growth have to invest their funds in high-yield bonds with higher credit default risks, and the compression effect of capital pursuing high returns has put general pressure on bond yields. The global market has seen abnormal corporate bond issuance spreads (spreads with risk-free interest rates).

As risk-return ratios narrowed, prices of all major asset classes saw a general rise, and prices that “only rose but never fell” meant a continued decline in volatility. Gross said in early October that there was no opportunity for earnings growth in the current “fake market” with tight interest rate spreads.

Implied volatility in the stock market, bond market and foreign exchange market is close to historical lows. Source: Nomura Securities, Bank for International Settlements quarterly data

However, as an emerging asset class, Bitcoin's intraday trading fluctuations of hundreds of dollars are commonplace, which is completely unimaginable in the market of other investment products. Global investors with increasingly aggressive risk appetite will naturally not miss such an opportunity to make quick money.

The price fluctuation range of Bitcoin has soared from around $300 to nearly $700 (90-day moving average) Source: Nomura Securities

However, in Gross's discussion of the "value storage" nature of currency, there is another more terrifying "consequence" of central bank credit expansion: in the process of "central bank flooding", the effectiveness of national fiat currencies as a means of value storage has also been weakened, and the public's panic in the face of potential inflation has gradually eroded their trust in the national fiat currency system. Whether this round of Bitcoin's surge is a temporary flight to volatility or the twilight of the sovereign currency system remains to be further observed.