I haven’t been paying attention to the cryptocurrencies lately, so this CNN/Business article from a few days ago caught me by surprise:
Bitcoin has blown past the $20,000 mark and continues to hit record highs as investors flock to the cryptocurrency during the coronavirus pandemic.
After topping the symbolic benchmark Wednesday, bitcoin continued to surge. Prices topped $23,000 Thursday morning.
Bitcoin (XBT) has been on a tear this year, having tripled in value. It and other cryptocurrencies have been attractive to investors as the US dollar has weakened.
“It’s not a surprise to us that Bitcoin has hit $20K but it is a very symbolic threshold to reach at the end of what has been a historic year for bitcoin,” said Michael Sonnenshein, managing director of Grayscale Investments. “These are just the early days, and we think there’s a lot more runway to go.”
With the Federal Reserve expected to leave interest rates near zero for several more years, bitcoin may continue to win new fans.
Later on, the article says that gold bugs, i.e., the investors preoccupied with gold as an investing option, are finding something to love in cryptocurrencies – or at least so the investment pundits would like to think so.
I try to be suspicious of pronouncements like that as possibly self-serving.
But here’s my real question: in a crisis such as the one we’re experiencing right now, where we should, by all rights, be busting our normal Federal budget to keep people and businesses upright, which comes down to borrowing from future generations to keep the world afloat for them, how would this work with a cryptocurrency? One of the features of cryptocurrency is regulation of the currency supply, which is implemented via the action of mining. This was meant to banish runaway inflation, but sometimes – at a time like this – it may make sense to risk runaway inflation, as the alternative of soup kitchens roaming the cities, and hungry mobs armed with pitchforks, is even worse.
With standard currencies, it’s not difficult to ramp up the printing presses and pump more money into the economy. Indeed, the last time we did that, under the terminology of quantitative easing, no substantial inflation was experienced, despite widespread expectations of same among those who were paying attention. Why?
The money, by and large, never entered the economy.
At the time, the Federal Reserve had determined that the banks had become unacceptably vulnerable to shocks to the economy, and they raised the requirements for bank reserves. Then the Fed bought shares in those banks, presumably from their treasuries (bank shares owned by the banks themselves), and the banks funneled that money into their reserves. (The Fed later sold those shares, and at a profit, or at least so I’ve heard.)
I recount this story[1] not to suggest that the link between printing money beyond replacement plus GDP growth and inflation does not exist – the inflation experienced by the Wiemar Republic in its frantic attempts to pay its war reparations to France, as well as various African debacles over the decades, dispute the proposition – but to point out that it doesn’t necessarily exist.
So, if my understanding of cryptocurrency is correct, and that mining cannot be accelerated, as that would violate a foundational precept of cryptocurrency, then, really, of what central use is it? Indeed, is its inflation in price reflective of the fact that US dollars are being printed at a faster pace than normal, while mining doesn’t really go any faster?
Or is it just a convenience? Even worse, has this well-meaning social experiment become nothing more than an investment ghost, useful for shearing the investment sheep of their wool?
1 As I understand it. I am a software engineer, not an economist!
