Bitcoin and other cryptocurrency investors have enjoyed a phenomenal skyrocketing, yet there have always been (and probably will be) some doubters.
In 2017, as chair of the Federal Reserve, Janet Yellen stated that Bitcoin was a “highly speculative asset” and “not a stable store of value”. Those negative remarks were quoted by many other public officials at the time. Since then, nevertheless, the market value of Bitcoin has practically doubled. Cryptocurrencies are here to stay.
Comedian John Oliver once described Bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers”. The technology facets, specifically the blockchain network of digital ledgers that are used to record transactions, haven’t really lived up to their first hype, yet they are beginning to make some progress. The issuance of $20 billion in “initial coin offerings” seemed to include elements of a speculative bubble, but the funds raised are now being used to launch projects largely similar to other IT ventures in Silicon Valley.
However, resistance to digital currencies as payments and transfer vehicles still seems to remain. Partly because of pricey costs of transactions, Bitcoin is not widely used for payments, and its future role seems limited.
Institutes in the U.S. have been working on new regulations to increase transparency in Bitcoin transfers and reduce the scope for money laundering. Ms Yellen, together with the Fed, is likely to adopt an even more traditional approach, treating the payments system as a quintessential public good.
The Fed is working together with foreign counterparts in investigating the development of central bank digital currencies. It is nearly certain that CBDCs will eventually be issued in the major jurisdictions, just as in China. But they will be denominated in national currencies, not crypto.
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All the private competitors denominated in genuinely new currencies, such as bitcoin, will be heavily regulated or actively discouraged. Hybrid stablecoins, such as Facebook’s libra, that are pegged to a single currency or other real assets might be more welcomed by central banks, in case they were directly transferable into traditional currencies. Furthermore, they may not be powered by blockchain. Each of the major central banks might develop its own distributed ledger technology.
Despite all that, crypto is still an excellent investment vehicle and store of value. Could Bitcoin seriously challenge gold as a safe asset for the largest investors? History, regulation and market volatility make that look improbable, but it is slowly yet surely beginning to develop a more important role. Many big hedge funds and some conventional asset managers have followed Paul Tudor Jones in using bitcoin as a core hedge against inflation. While this may have seemed attractive when central banks were in effect creating money by buying up government debt last year, there are some signs of inflation on the imminent horizon.
Yet bitcoin prices have continued to rise, apparently compelled by a narrative that holds that a privately created asset, which in theory has a finite supply and cannot be “printed” like the “legacy” fiat currencies.
At the end of 2019, gold stocks held above ground amounted to 198,000 tonnes with nearly 57,000 tonnes of proven reserves below ground. This total stock would be valued at roughly $17 trillion in today’s prices. The latest market value of bitcoin is just about $0.6 trillion – and Bitcoin bulls see this as a standard of how much higher its price could rise.
For us there seems little reason on monetary policy or financial stability grounds why there should be any worries about cryptocurrencies competing with gold as a store of value.
The crypto world is currently in a craze of short-term speculation. But if investors continue to buy into the arguable narrative that these private currencies are somehow safer than the ones controlled by the central banks, they could rise much higher in market value in coming years.
One thing is for sure – as a matter of finances, we are certainly living in a revolutionary era.