Bitcoin’s bounce holds a lesson for central banks
As its fresh peak defies crypto doomsayers, Bitcoin’s value as an artefact of the digital age lies in the mirror it has held up to the way monetary policy is usually conducted everywhere
The world’s original cryptocurrency, Bitcoin, scaled a fresh peak on Monday. It touched $72,234 per token, whipping past its pandemic summit of almost $69,000 back in November 2021. It lost about threefourths of its value in a prolonged slump after that, with cryptosceptics gloating over the deflation of an ‘asset’ with neither any intrinsic value nor yield. Today, with the tables turned, what was dismissed as a covid blip is back in the spotlight. The latest upshoot was mostly on the back of US flows into recently launched exchange-traded crypto funds, but it’s the underlying scarcity of Bitcoin that explains its basic appeal as an investor pick. This April, the supply of new tokens will halve, as it’s designed to do every four years. While new Bitcoin can be ‘mined’ online by expending energy and exercising minds to validate open-ledger transfers on its ‘blockchain,’ Satoshi Nakamoto—as Bitcoin’s mystery originator likes to be called—had capped the total at 21 million coins in all. Since the periodic halving of new tokens will ensure all Bitcoin ever created will converge to that figure, it is destined to stay scarce. Hence, so long as demand exists, it can act like a form of digital gold: No matter how hard alchemists try, they can’t add to its overall stock. Which, of course, was the big idea.
That’s also what makes Bitcoin such an enigmatic artefact of the digital age. It began life as a medium of exchange, after all, a currency run by software beyond the reach of human control, aiming to challenge the fiat money issued by central banks. At its core lies a tribute to the monetarist theory of Milton Friedman, an economist who warned against the oversupply of currency. Issuers, he held, were given to printing an excess of it in the hope that such an easy-money policy would act as a stimulus for the economy. Although commerce can briefly be sped up this way, Friedman argued, it would eventually prove inflationary as economic agents will respond by pricing everything up, including wages. Inflated price expectations, thus, would take us back to square one. This didn’t mean that cash levels had to be held constant; just that any increase had to be kept in line with the economy’s capacity to generate real value. Else, too much money would go chasing too few goods and services. It’s another matter that central banks routinely use their interest rates—which serve to tighten or loosen lending—as policy tools for economic modulation. While this is a valid aim (within limits), critics believe it has been corrupted by a tendency to err in favour of growth over inflation, as seen in the gush of cheap credit let loose after almost every crisis. Currencies often get debased in the process. A way to end the follies of this temptation, argue crypto fans, is to have a kind of artificial intelligence do the job. Bitcoin, by design, cannot be oversupplied. In that sense, it holds up a mirror to the world’s monetary methods.
This argument must not be taken too far, though. Bitcoin supply is inflexible and thus not responsive to the needs of any economy. Moreover, in its potential use as a currency, the concept violates a key state monopoly, which explains the Reserve Bank of India’s discomfort with it. After the judiciary lifted RBI’s crypto curbs about half a decade ago, the government began to treat it like just another taxation target. The real significance of Bitcoin, though, lies in the popularity of its insurgency and the notice it has served central bankers everywhere.