Bitcoin reached a record high of around $58,000 recently and institutions have begun to increase their exposure to cryptocurrencies.
America’s oldest bank, Bank of New York Mellon, announced it will help clients hold and transfer cryptocurrencies. The world’s largest asset manager, Blackrock, said it had invested in bitcoin futures for the first time.
There are still big concerns with cryptocurrency: Extreme volatility and possible future regulations from governments. There is also speculation from some analysts that bitcoin could be “the mother of all bubbles” and cause harm to financial systems.
Q: Is it dangerous for the economy for banking and investment institutions to have cryptocurrency exposure?
Jamie Moraga, IntelliSolutions
NO: Cryptocurrency is a disruptive technology. It’s not going away anytime soon. Traditional banking and investment institutions are beginning to adopt it, allowing for the technology to become more mainstream and widely accepted. That said, they should remain cautious and vigilant as the future of cryptocurrency is still unknown, and its volatility and lack of predictability remain a concern. As more respected institutions embrace cryptocurrency, they must deploy methods to protect themselves and decrease risk and exposure. Practicing due diligence, internal governance, appropriate disclosures, and regulation should help mitigate some of the risk.
David Ely, San Diego State University
NO: Risks will certainly arise from cryptocurrency exposure. But banking institutions are already exposed to a wide variety of risks that are part of engaging in traditional lending and investing activities. Some institutions may make bad decisions related to cryptocurrencies and fail, but this need not lead to a dangerous condition for the economy as long as most institutions develop the tools to manage the new risks and their regulators exercise appropriate oversight.
Ray Major, SANDAG
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.
Reginald Jones, Jacobs Center for Neighborhood Innovation
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.
Lynn Reaser, Point Loma Nazarene University
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.
Kelly Cunningham, San Diego Institute for Economic Research
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.
Gary London, London Moeder Advisors
NO: Certainly the bid up in bitcoin value will eventually end, and the current values may decline or at least stabilize. But as an investment vehicle, bitcoin exists in perpetuity with built-in limitations, so over the long term, it should be solid. Think of it as gold without the bars. As a part of a portfolio, I do not see this as a danger to investors or the government. Purchasing now may not be smart, but nobody is going to get wiped out.
Phil Blair, Manpower
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.
Alan Gin, University of San Diego
NO: Bitcoin is increasingly accepted as a method of payment and more financial institutions are recognizing it as an investment vehicle. Both of these developments provide more stability to and faith in bitcoin than was previously the case. Even if it is currently in a bubble that eventually collapses, its current market capitalization of $1 trillion is dwarfed by that of U.S. stocks ($50 trillion at the end of 2020), the value of U.S. housing ($30+ trillion, according to Zillow), and gold (roughly $11 trillion).
Bob Rauch, R.A. Rauch & Associates
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.
Austin Neudecker, Weave Growth
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.
James Hamilton, UC San Diego
YES: The value of bitcoin is extremely volatile. You can gain a huge amount in a single day, but you can also lose a huge amount. The core principle of a sound banking system is to make sure that banks can guarantee payment of their short-term liabilities. It will end up hurting everyone if too much risk exposure leaves banks undercapitalized. Until the volatility of cryptocurrency gets closer to that of sovereign currencies, regulated financial institutions should stay away.
Chris Van Gorder, Scripps Health
Not participating this week.
Norm Miller, University of San Diego
N/A: 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.
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