It may just be a coincidence, but Bitcoin emerged just a few months after the mighty Lehman Brothers filed for bankruptcy in September 2008, heralding the West’s Great Recession and eliciting a great gush of liquidity from central banks that sceptics saw as an overstretch of fiat money. The big flaw of a currency unbacked by any valuable, in their view, was its vulnerability to oversupply and thus eventual loss of purchasing power. Like gold, might value not be retained more reliably by a token-of- exchange whose scarcity was insulated from fallible human intervention? It is not clear exactly what motivated Bitcoin, a privately-created cryptocurrency based on blockchain technology that is reputed to have its supply restrained by its digital design, but its 2020 boom after the covid crisis began to spawn trillions of dollars of extra cash has been too spectacular to ignore. On Monday, it hit an all-time peak of $19,800 per unit, surpassing its previous high of 2017. It is up by 140% so far this year and could be headed higher still.
Bitcoin’s vertiginous rise is not difficult to explain. In essence, it reflects investor dissonance with frenetic cash creation by central banks, globally. While it does have a few rivals, this cryptocurrency appears to have the pioneer’s advantage. It is seen not only as a reliable store of wealth—perhaps in the same league as gold—but also as a hedge against the inflationary risks of monetary-easing policies that may have gone overboard, as some seem to suspect. With economies reeling under the pandemic’s fallout on commercial activity, risk-free bonds offering negligible returns (if any), and so much investment money chasing so few safe assets, it was perhaps inevitable that Bitcoin would attract large sums. Its value hinges on its much-touted supply limit. Its software rules are said to specify that only 21 million coins will ever be minted, with a widely-accessible online ledger keeping account. New units of it need to be “mined” digitally, a long process that devours electricity and requires e-puzzles to be cracked. Given the claimed cap on Bitcoin’s final count, its minting rate has been set for a terminal decline: the number that miners can win halves every four years. This last happened in May, when the pace of tokens entering circulation fell to 6.25 every 10 minutes from 12.5.
The Bitcoin phenomenon may have ridden its way up on investor conservatism at the very opposite end of “modern monetary theory”, by which money can limitlessly be issued until inflation breaks out, but central banks may be forced to reckon with it soon. While their initial response ranged from dismissal to denouncement, it now seems here to stay. Yet, its success should dismay us. Like gold, it serves no clear productive purpose. It is used by shady operators on the dark web, remains highly volatile, and has highly concentrated holdings. It could plausibly stay this way till 2140, when the last token is scheduled for mining. But, as India’s apex court ruled, there is no reason to ban the buying and selling of cryptocurrency. Central banks, however, may need to be more vigilant of their currencies’ real value, especially as Facebook seeks the approval of Swiss authorities for Libra, a “stablecoin” backed by the US dollar that it expects to launch in January. They may want to launch virtual money of their own, as the European Central Bank and others have proposed. What seems at stake here is the future of money, sovereign control over which is considered integral to economic management. But let regulation not scotch innovation.
