Forget bitcoin as an alternate currency
The very fact that cryptocurrencies have no intrinsic value should settle this debate Special to Gulf News
operating alongside one another. The entire point of money is that it allows parties to transact without having to barter. But for money to have value, and to generate economies of scale, only so many currencies can operate at the same time.
In the US, the reason we do not use euros or yen in addition to dollars is obvious: doing so would be pointless, and it would make the economy far less efficient. The idea that hundreds of cryptocurrencies could viably operate together not only contradicts the very concept of money; it is utterly idiotic.
But so, too, is the idea that even a single cryptocurrency could substitute for fiat money. Cryptocurrencies have no intrinsic value, whereas fiat currencies certainly do, because they can be used to pay taxes. Fiat currencies are also protected from value debasement by central banks committed to price stability; and if a fiat currency loses credibility, as in some weak monetary systems with high inflation, it will be swapped out for more stable foreign fiat currencies or real assets.
Achilles heel
As it happens, Bitcoin’s supposed advantage is also its Achilles heel, because even if it actually did have a steady-state supply of 21 million units, that would disqualify it as a viable currency. Unless the supply of a currency tracks potential nominal GDP, prices will undergo deflation.
That means if a steady-state supply of Bitcoin really did gradually replace a fiat currency, the price index of all goods and services would continuously fall. By extension, any nominal debt contract denominated in Bitcoin would rise in real value over time, leading to the kind of debt deflation that economist Irving Fisher believed precipitated the Great Depression. At the same time, nominal wages in Bitcoin would increase forever in real terms, regardless of productivity growth, adding further to the likelihood of an economic disaster.
Clearly, Bitcoin and other cryptocurrencies represent the mother of all bubbles, which explains why every human being I met between Thanksgiving and Christmas of 2017 asked me if they should buy them. Scammers, swindlers, charlatans, and carnival barkers (all conflicted insiders) have tapped into clueless retail investors’ FOMO (fear of missing out), and taken them for a ride.
As for the underlying blockchain technology, there are still massive obstacles standing in its way, even if it has more potential than cryptocurrencies. Chief among them is that it lacks the kind of basic common and universal protocols that made the internet universally accessible (TCP-IP, HTML, and so forth). More fundamentally, its promise of decentralised transactions with no intermediary authority amounts to an untested, Utopian pipe dream.
No wonder blockchain is ranked close to the peak of the hype cycle of technologies with inflated expectations.
So, forget about blockchain, Bitcoin, and other cryptocurrencies, and start investing in fintech firms with actual business models, which are slogging away to revolutionise the financial-services industry. You won’t get rich overnight, but you’ll have made the smarter investment.
The writer is Professor of Economics at the Stern School of Business, NYU, and CEO of Roubini Macro Associates.