San Diego Union-Tribune (Sunday)
THE BITCOIN BANDWAGON
U-T ECONOMETER
Banking and investment institutions are increasing their cryptocurrency exposure. Is it dangerous for the economy?
YES
Fabricating money in record proportions while the U.S. government continues to reset record spending levels, the Federal Reserve is monetizing massive federal debt. Holders of bitcoin may seek to avoid the inherent negative interests of the established banking system and risks of holding inflationary fiat money, but exposure to at best equally unstable bitcoin is no safe haven. Bitcoins are fabricated digital tokens collected and traded having no real inherent value that can easily evaporate.
NO
As long as banking and investment institutions treat cryptocurrency like high risk/high reward investments. Challenges can occur when financial institutions become greedy, speculating or overweighting investment portfolios too heavily in cryptocurrency. It is important to keep in mind that this is a new world, and cryptocurrency is here to stay. As we’ve learned with any new technology, the challenge is not “if” but “how” to best integrate it into existing systems.
NO
It is not dangerous for the economy. It is dangerous for individuals and institutions to have too much allocation to bitcoins? Yes! Any portfolio comprised mostly of a volatile asset with no collateral aside from “limited supply” that could “correct” down by 20 percent to 50 percent is akin to casino gambling. There are pragmatic uses of cryptocurrencies that save transaction costs, and the drug dealers like that it’s untraceable, but no one knows what it is really worth.
YES
Holding cryptocurrencies poses significant risks for banks and investment firms. Extreme volatility dominates their performance. Regulators could demand major capital increases to cover potential losses. Regulators could find institutions violating anti-money laundering rules, facilitated by cryptocurrencies. Institutions could also face reputational risk should they unintentionally accommodate activity generating public outrage. As is true for small investors, banks and investment houses should be wary.
YES
Clients and constituents want to be confident in their banking and investment providers. The volatility of cryptocurrencies scares the average investor. Huge increases then collapse. Until there is a trusted government body overseeing and regulating this novel toy of wealthy hedge funds they should be closely watched. Would you agree today to accept your salary in cryptocurrencies? Me neither.
NO
Cryptocurrency offers opportunities as we move toward a cashless society. Cryptocurrency provides for transactions — without banking involvement — from anywhere in the world. Demand is gaining in emerging markets, which is good for future upside prospects. There is risk, though. Beyond market volatility, the biggest concern is regulatory risk. For instance, China is a large player in this space. Any adverse regulations it imposes could crash market value. All said, financial institutions must manage exposure level.
YES
Today, no currency (including the dollar) is backed by hard assets, but based on a collective belief in the future. Blockchain (and cryptocurrencies, which is just one use), is an inevitable, revolutionary technology. Whether bitcoin, specifically, will be more important in 20 years is less certain. In the interim, extreme price volatility and inconsistent regulation will undoubtedly cause problems. There are huge risks, but also improvements over existing country-based currencies.
NO
The technology behind bitcoin is blockchain, a highly acclaimed, distributed ledger technology. Having said that, bitcoin is not ready to replace the dollar as cryptocurrencies need a stabilized value. Further, since bitcoin has a fixed supply, it cannot expand to meet the economy’s needs. To seriously challenge existing currencies, they must be easy to use as money and have a fixed value. Exposure to bitcoin is fine, but it is not money — yet.