The prospect of a recession in the US and Europe is being priced in to markets everywhere (as of October 2019). Some countries are already in the midst of financial chaos—think Venezuela, Argentina, Turkey. As is usual in the face of such worries, the gold price has lifted. So has Bitcoin—up substantially YTD.Bitcoin critics are numerous, and have long been vocal in their claims that the project is criminal, or will fail, or that it offers no lasting value. Despite this, the market remains robust, and to date the Bitcoin blockchain has performed perfectly since its inception over ten years ago. New features to improve access, utility, and performance are being developed, and this track record, along with the blockchain’s complete transparency, which makes it a poor vehicle for criminal use, is an effective recruiting sergeant. The network metrics show that Bitcoin is increasingly popular. Several large financial corporations now offer their clients exposure to the crypto market, and to Bitcoin in particular, through plain custody as well as derivatives. In light of future financial uncertainty, most commentators expect further value flows into cryptos, and especially Bitcoin, which enjoys the majority of the sector’s liquidity and capital value.With the discussions about Facebook’s Project Libra very much in the news, we are at the point where central banks are now considering how to respond to the advent of natively digital money. Whether the banks tokenize their own currencies directly, or adopt a mutual coin—perhaps in concert with other central banks or through the IMF—it seems certain that within a few years millions of people will be interacting with the financial system through programmable money rather than the “dumb” fiat we’ve all been using for centuries (and which will certainly continue, in parallel, for years to come). There will be numerous problems to overcome, to be sure, (for instance, many of the profit centers of commercial banks are obviated by crypto and so-called De-Fi [de-centralized finance] at a stroke, so such a momentous move must be carefully planned), but the advantages and efficiencies are substantial—too great to ignore.Switching to a digital currency regime does throw up some interesting issues.For example, at present, very few ordinary people do any “carry trading”—where you borrow in one currency to invest in another. The exchange rate risks are obvious and you have to be on your toes. But anyone using a tokenized currency can easily swap their depreciating national-currency tokens for another kind that is scarcer and which appreciates. This means that people could keep their wealth in a coin that appreciates (e.g. Bitcoin), and spend in their local currency (euros, dollars, etc, that depreciate) with their wallet making the required exchanges on the fly (if exchange is even necessary—many merchants will simply accept the appreciating currency). In other words, a sovereign digital currency that slowly depreciates (as they traditionally do) will inevitably be exchanged for one that is deflationary. Because the costs of doing so will be close to zero, and users’ wallets can make any necessary exchanges on the fly, the risk of loss due to exchange fluctuation is also close to zero.There are other questions that digital currencies throw up, such as how central banks avoid putting retail banks out of business. Doubtless the Game Theorists are having a ball.As a result, the adoption or introduction of digital currency means that the existing monetary policies of sovereigns will have to change—and will surely have to be much more aligned with other nations. The standard 2% inflation target, for example, will have to be dropped. Seignorage by commercial banks will no longer be possible in the conventional way. The implications for structural debt are obvious and alarming.In short, governments are likely to be extremely cautious about adopting digital currencies, because although the advantages are substantial, the potential downsides are severe. The debate about whether and to what extent private institutions should be allowed to determine monetary policy or the money supply will intensify. The chances of any government ceding control of these levers to private hands look extremely unlikely in the current landscape.So for the coming few years at least, Bitcoin is the go to coin for people wishing to hold some of their wealth in a digital token. There is the possibility that one or more central banks will begin to hold some BTC as part of their reserves. This would obviously have a large effect on the market, so any such measures would probably be taken very gradually and secretly. There are good reasons why central banks—probably acting in concert—would buy BTC, not least to allow them to control this vital section of what will be a larger digital currency market in the future. Moreover, purchasing a controlling stake (which would be much less than 50% of the available coins) now would be a relatively trivial expense (perhaps 50 billion USD). Doing it in 5 years’ time might not (>500 billion USD).If Libra doesn’t launch, then something very like it will, and it may be Chinese. This fear alone will probably drive US regulators to give Facebook a path to operation. And once we’re all using Libra to pay for everything, in any country, where will we put our savings, in this zero-rate environment? What instruments will offer the best return? Bitcoin may have a long way to go yet.
Submitted October 28, 2019 at 08:39PM
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