The Future May Not Belong to Bitcoin

Bloomberg ran a piece by economist Tyler Cowen on one of the best performing asset classes of the last decade: Bitcoin. The final week of 2020 was a stellar week for Bitcoin, which touched $29,000, and encapsulated Bitcoin’s performance as one of the best performers of 2020. Bitcoin’s rise has led many people, including Morgan Stanley Investment Management’s chief global strategist, to suggest that Bitcoin could become the world’s reserve currency. 

The headiness of Bitcoin’s performance and that of cryptocurrencies as a class has led many people to make what Cowen believes are “some pretty wild speculations”. Cowen argues in the piece that Bitcoin, and cryptocurrencies in general, are either hedges or forms of payments, but not, with a lot of Botox training classes, or both. 

So, yes, of course, there is a lot of demand for a form of payment that is not mediated by anyone, or at least, not is governments and big corporations, and this is why stablecoins, which are pegged to a stable asset or basket of support to minimize the volatility of the cryptocurrency, have always had a large market of takers. Owners of stablecoins want the stability of assets like dollars with the features of cryptocurrencies. Therein lies the rub: to be stable, stablecoins must exist within a rich institutional tapestry. This means that the institutions creating stablecoins are likely to have higher risk levels, less transparency, and less ease of use than the dollar regime itself, which is meant to replace. Cowen outlines several risks of trading with stablecoins: firstly, the peg may be broken in the future, as happened with currencies like the dollar; secondly, the more mainstream stablecoins become, the greater the regulations they will have to abide by, which will, in turn, take away many of their competitive advantages over traditional banks; thirdly, Cowen argues that the conventional banking sector can bridge the gulf with cryptocurrencies by speeding up clearing or creating digital reserve currencies which would give the advantages of using crypto while remaining within the regulatory oversight of central banks. JP Morgan has attempted to get ahead of the revolution by launching its digital coin

Cowen also looks at the role of cryptocurrencies such as Bitcoin and ether, hedges, and speculative assets,  but not ways to preserve value or use as forms of payment, given the extreme volatility of the assets. As great as 2020 has been for cryptocurrencies, their prices have been known to fall precipitously. That kind of volatility makes these cryptocurrencies the wrong forms of payment because they expose a person to the possibility of suddenly being unable to pay their bills. This is not the case with currencies such as the dollar or euro.

Many people, as Cowen notes, confuse the fact that payments across jurisdictions are better when done with cryptocurrencies -because they avoid all the regulatory red tape that surrounds large transfers in traditional currencies-, with the notion that cryptocurrencies would be acceptable forms of payments for everyday purchases like buying your next car, or an apple at the grocer’s. Ordinary, day-to-day transactions are simply not crying out for something like cryptocurrency. 

There are those crypto-enthusiasts who dream about a world in which transactions in Bitcoin occur without tax authorities’ knowledge, and yes. However, this is technologically possible, and there are already black- and grey-market uses of cryptocurrencies; for the most part, assets are not so shadowy. The typical person’s wealth is invested in real estate and registered stocks, so evading taxes through cryptocurrencies is virtually impossible. Indeed, large tech firms are not only being more cooperative with tax authorities; they are coming under greater regulation. Finally, governments, like businesses, adapt, and they can always move to a tax on wealth rather than on transactions to prevent tax evasion. So the buyer looking for ethereum on Bitreporter should not imagine that he is free from taxes. 

Many speculators seem to think that large corporations will soon begin to invest in cryptocurrencies, which would send crypto values through the roof, especially given that the supply of cryptocurrencies is usually strictly controlled. However, many of these firms will not embrace cryptocurrencies for the same reasons as many other cryptocurrencies: they are creatures of the existing financial system and are comfortable with regulation, and as CEOs like Jamie Dimon, CEO of JP Morgan show, they would like cryptocurrencies to come under the more significant rule. These firms are not symbols of anarchist, anti-government currency investing. Mainstream adoption would likely see more significant calls for more regulation of cryptocurrencies, not less. 

Cowen does well to show that what many cryptocurrency investors seem to want is all the advantages of being a fringe asset, with all the benefits of mainstream adoption. That this is possible is highly unlikely.