Friday, May 24, 2024

Bitcoin has ambitions for the role of gold

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The author is president of Fulcrum Asset Management

Investors in bitcoin and other cryptocurrencies appreciated a phenomenal but they now fear that the arrival of Janet Yellen as Secretary of the US Treasury may herald a new era of hostility from regulators and central banks towards what boosters call ‘libertarian’ forms of digital currency. .

In his last press conference as chairman of the Federal Reserve in 2017, Ms Yellen said bitcoin was a “highly speculative asset” and “not a stable store of value”. These dismissive remarks have been echoed by many others officials at the time. Since then, however, the market value of bitcoin has practically doubled. Digital currencies are here to stay.

In the first crypto frenzy of 2017-18, comedian John Oliver described bitcoin as “whatever you don’t understand about money combined with whatever you don’t understand about computers”. Technological aspects, especially the blockchain network of digital ledgers that are used to record transactions, have not really lived up to the challenge. initial hype, but they start to do progress. The issue of $ 20 billion in “initial coin offeringsSeemed to contain elements of a bubble, but funds raised are now being used to launch projects broadly similar to other IT companies in Silicon Valley.

Jay Clayton’s recent departure of the Chairman of the United States Securities and Exchange Commission may result in regulatory review of these activities, especially if Gary Gensler, who teaches digital currencies, replaces it.

However, resistance to digital currencies as a means of payment and transfer will likely remain. Partly because of the high transaction costs, bitcoin is not largely used for payments, and its future role seems limited.

The outgoing Secretary of the Treasury Steven Mnuchin has worked on new regulations to increase the transparency of bitcoin transfers and reduce the possibilities of money laundering. Ms Yellen, working with the Fed, will likely take an even more orthodox approach, treating the payments system as a quintessential public good.

The Fed collaborates with its foreign counterparts investigate the development of digital currencies for central banks. It is almost certain that CBDCs will eventually be issued in major jurisdictions, follow the example of China. However, they will be denominated in national currencies, not in crypto.

Private competitors denominated in genuinely new currencies, such as bitcoin, will be heavily regulated or actively discouraged. Hybrid stable coins, such as Facebook Book, which are pegged to a single currency or other real assets may be more hosted by central banks, if they were directly transferable in traditional currencies. Additionally, they may not be powered by the blockchain. Each of the major central banks can develop their own distributed ledger technology.

This still leaves a role for crypto as an investment vehicle and store of value. Can bitcoin seriously compete with gold as a safe asset for larger investors? History, regulation and market volatility make it seem unlikely, but he’s starting to develop a bigger role. Many large hedge funds and some conventional asset managers have followed Paul Tudor Jones adopting bitcoin as a fundamental hedge against inflation. While this may have looked appealing when central banks were actually creating money by buying government debt last year, there are few signs of inflation on the imminent horizon.

Still, bitcoin prices continued to rise, apparently motivated by a narrative that a privately-created asset, which in theory has a finished supply, cannot be “printed” like “traditional” fiat currencies.

According to Gold Hub, gold stocks held above ground stood at 198,000 tonnes at the end of 2019, with approximately 57,000 tons of underground proven reserves. This total stock would be valued at around $ 17 billion at today’s prices. The last bitcoin market value is around $ 0.6 billion – Bitcoin’s bulls see this as a measure of its price rise.

It seems few reasons for monetary policy or financial stability reasons regulators should be concerned about the competition between cryptocurrencies and gold as a store of value.

The crypto world is currently in a frenzy short-term speculation. However, if investors continue to buy into the dubious rhetoric that these private currencies are “safer” than those controlled by central banks, their market value could increase further in the years to come.

Stranger things have certainly happened in the financial markets.


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