Bitcoin is the most popular of the new phenomenon of crypto-currencies. One of the main reasons there appears to be so much buzz about the virtual currency is that there is a definitive limited amount of the currency, and enthusiasts believe that it could replace the centralized control of central banks over monetary policy. What might be more important about Bitcoin is the innovation of blockchain, which to put it bluntly means that the same electronic thing cannot be in two places at once. Think of this more like an eBook, which must be checked out by an individual, versus a streaming audio file which can be accessed by millions. Banks are eager to jump on the bandwagon and use blockchain to help them reduce their own costs of transferring money across and within entities. Recently, Satoshi Nakamoto–the ‘inventor’ of Bitcoin–may be nominated for the Nobel Prize in Economics, mostly for the invention of blockchain.
The appeal of Bitcoin as a currency stems from it’s perceived similarity to gold. Like gold, Bitcoin has a limited amount of currency ever available meaning prices of all goods are expected to fall over time. Unlike fiat currencies which have increased in quantity over time and led to rising prices. However, there are currently 662 crypto-currencies trading on the open market, implying that there are an infinite number of ‘finite’ currencies. So, it could be that the finiteness of crypto-currency is not a novelty after all. Does this undermine the ability to declare Bitcoin the end of government control of currency? Does this eliminate the credit created by banks, or do people demand credit in a way that Bitcoin cannot foreseeably provide? Is Bitcoin a safe store of value? It is intended to be safer than typical bank money, but there have been many publicized thefts in recent years.
The current market capitalization of Bitcoin is less than $5b USD, selling at a price of around $320, and only a week ago was trading at $408. While this is down significantly from the all time high of around $1,110 in December 2013, it is still nearly three times higher in value than it was just two ago. Compare this volatility to other globally accepted currencies and see if Bitcoin (or any other crypto-currency) measures up as a reasonable store of value. Imagine if the euro went from 10 per dollar, to 2 per dollar, then back up to 4 per dollar. While Bitcoin is the most popular crypto-currency, it may not yet measure up as money if it does not serve the reasonable functions of money. Compare Bitcoin to other forms of money to help you determine if it can serve as money.
One 0ther possibility is that these crypto-currencies will never develop into full-fledged money that competes with central bank and bank developed money. For example, the website Reddit is introducing their own cryptocurrency to award their contributors and users, and Microsoft is trying to make it easier for banks to use blockchain. It is doubtful that the recipients of this crypto-currency would expect Reddit to be the only issuer of currency in the world. What role do you think these types of crypto-currencies will play in the future if Bitcoin (or some other) does not actually develop into a currency? What role will crypto-currencies play? Are they a fad, or are they here to stay?
As many countries attempt to devalue their currencies at once, we may be experiencing a race to the bottom. Inflation in the U.S. is low, with expected inflation rates of around 1.7% over the next several years (actually quite a bit lower even more recently). The ECB is also dealing with low inflation, and even deflation in countries like Italy. Falling global inflation rates have likely contributed to the falling price of gold, a typical inflation hedge. Countries trying to ease credit terms have increased their money supplies at relatively more rapid rates than before the financial crisis, and the ECB is easing the types of activities it is conducting. While this might be inflationary in the long term, it hasn’t created inflation to date, nor has it raised inflation expectations among the general public. Is this general easing of credit conditions expected to stabilize markets which have suffered large price declines (e.g., housing) and allow for more labor market and credit market flexibility? Would this flexibility open up the economy to a more rapid recovery? Or should we simply allow the economy to take the necessary time to return to a healthy state? What role should fiscal policy play in this economic reconstruction if any?
There are a lot of questions I posed above, so pick one and go with it.