The US dollar is expected to continue its downtrend through 2021 as the Democrats take control of Congress.
Meanwhile, Bitcoin, a cryptocurrency traded inversely to the greenback, has hit new record highs above $ 40,000 – more than double its December 2017 high
Many observers agree that the dollar would be fine in 2021, given its supposed ability to handle inflation caused by the US government’s expansive fiscal stimulus to people.
“It makes a certain sense to me,” former Fed Governor Kevin Warsh told CNBC about Bitcoin’s bull run. “The dollar is getting weaker, and after the overnight elections I would expect the dollar to continue weakening against a large basket of currencies.”
The narrative is as follows: comes with a pre-defined upper supply limit of 21 million, with supply being reduced by half after four years. In the meantime, the US dollar has no defined upper supply limit.
The Federal Reserve can print it indefinitely, which effectively reduces its purchasing power in the long run. Assets like bitcoin tend to protect investors from fiat devaluation.
The big bitcoin boom
In 2020, Bitcoin’s anti-dollar narrative took off in institutional circles.
When the U.S. government increased spending to help people through the coronavirus pandemic and the Fed cut its base rate to near zero, the dollar fell more than 12 percent from its annual high. That prompted investors to buy Bitcoin (get in too? How to buy Bitcoins with Sofortüberweisung instructions) to move their cash reserves, which ended the year up nearly 300 percent.
The year 2021 offers a similar outlook for both the dollar and bitcoin. Mr. Biden’s win this week has made mainstream analysts more bearish for the greenback.
The president-elect is hoping to increase the $ 900 billion stimulus package, which raises expectations for further inflation.
A clean blue sweep in Congress is “clearly negative for the dollar and reinforces our view of further depreciation in 2021,” Derek Halpenny, head of research for Emea Global Markets at MUFG Bank, told the FT, adding that they are now expect the greenback to fall more than previously estimated.
In the meantime, the Fed wants to keep interest rates close to zero for the next few years – or until they push inflation above 2 percent. That includes their commitment to buy $ 120 billion worth of government and corporate bonds every month. That means more pressure on the US dollar.
Fiat competition
The bearish bias is also likely to strengthen as foreign currencies perform better amid a global economic recovery. At Goldman Sachs, analysts say investor demand for non-American assets would depreciate the dollar by at least 5 percent from its current level.
“The dollar remains near its cycle high with plenty of room for a multi-year downtrend,” said Gurpreet Gill, a strategist at Goldman Sachs Asset Management.
All in all, Bitcoin could benefit from the dollar’s downtrend – just as it has been since March.
Institutional investors such as Paul Tudor Jones, Scott Minerd, and Stan Druckermiller have already allocated part of their multi-billion dollar portfolios to cryptocurrency. In the meantime, companies like MicroStrategy, MassMutual, Ruffer Investments and Square have bought Bitcoin for risk hedging.