Scientific American recently reported on the phenomenon of blockchain and crypto-currency in general, explaining the invention, as well as many of the recent innovations. 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.
The appeal of Bitcoin as a currency stems from it’s perceived similarity to gold. Like gold, Bitcoin has a limited supply, and once the supply is exhausted, the prices of goods would be expected to fall over time if the economy continues to grow. Unlike fiat currencies which have increased in quantity over time and led to rising prices. However, there are currently 1453 crypto-currencies trading on the open market, implying that there are an infinite number of ‘finite’ currencies. In fact, some cryptos do not have a natural limit in supply, although there would be a nominal limit at any moment in time allowing it to remain scarce. So, it could be that the finite-ness of crypto-currency is not a novelty after all. In fact, we are all free to use blockchain technology to create our own (one or more) crypto-currencies. Does this undermine the ability to declare Bitcoin the end of government control of currency (if this link doesn’t work, please read this one)? Does this eliminate the credit created by banks, or do people demand credit in a way that Bitcoin cannot foreseeably provide? What is the role of debt in our society, and can Bitcoin adequately fill those needs? 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 around $200b USD, up from around $5b USD in late 2015. The price (as of this writing, is between $11,000 and $12,000) up from less than $10,000 a few days ago, but down from nearly $20,000 in December 2017. On January 17th, the entire crypto market was down, with Bitcoin losing over 21% of its value in the 24-hour stretch leading to the price nearly hitting $9,500. 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 1 per dollar, fell to 2 per dollar, then rose back to 1 per dollar in a 24-hour period. 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. Microsoft is trying to make it easier for banks to use blockchain. 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? Furthermore, if many believe that Bitcoin will have no value in the future because the technology is outdated, why would you accept it or invest in it today?
Inflation in the U.S. is low, with current inflation rates at only 1.5%, although they are expected to rise to about 2.2% over the next five years. The US unemployment rate is currently at 4.1%, generally believed to be well below a rate that is sustainable without causing inflation. We expect the Fed to raise the target federal funds rate twice in 2018, and possibly three times if signs of rising inflation emerge. With all this in mind, crypto-currencies exist in a world where cycles still exist. If the Fed and other central banks were truly undermined by the invention of blockchain, would we still have financial crises? Would there be debt created by fiat? Did the world live without crises before the expansion of fiat currency and fractional reserve banking?
There are a lot of questions I posed above, so pick one and go with it.