The View | Cryptocurrencies like bitcoin solve none of the problems of fiat money, and add some new ones
- Believers in cryptocurrency insist it offers a transparent, decentralised alternative to the fiat monetary system
- In reality, it has all the same inconsistencies, with the added drawbacks of being spectacularly risky, carbon intensive and easily co-opted for cybercrime
The price of bitcoin has undergone yet another wild gyration, rising from US$41,030 to US$69,000 between September 29 and November 10 last year, before falling back to US$35,075 on January 23. That is its second-largest decline in absolute value, though it has suffered larger declines in percentage terms, notably falling by 83.8 per cent between December 15, 2017 and December 14, 2018.
More broadly, the cryptocurrency market (comprising some 12,278 coins) was estimated to be worth US$3.3 trillion on November 8, 2021, before plummeting to US$1.75 trillion as of January 30.
If you got in early – the price of bitcoin was US$327 on November 20, 2015 – and held on for dear life, you would be looking at a capital gain of 11,521.5 per cent as of January 30. But although bitcoin could be worth US$200,000 by the end of this month, it could also be worth nothing. There is no anchor.
If, through a random convergence of random factors, bitcoin achieves a positive valuation at some point, subsequent valuations must be driven by the arbitrage condition requiring that risk-adjusted returns on different assets be equal. And because zero is always a possible valuation for bitcoin, we can expect wild swings in its price.
True, the same applies to the valuation of central-bank-issued fiat money. Though its use in paying taxes and its status as legal tender give it a leg up on cryptocurrencies, economics falls short when it comes to determining the market value of this central bank liability.