The author is president of Fulcrum Asset Management
Investors in bitcoin and other cryptocurrencies have had a phenomenal rush, but now fear that Janet Yellen’s arrival as US Treasury Secretary heralds a new era of hostility from regulators and central banks with respect to what boosters call “libertarian” forms of digital currency.
During her 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 contemptuous remarks were echoed by many other officials of 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 Jon Oliver described bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers.” The technological aspects, especially the blockchain network of digital ledgers used to record transactions, haven’t quite lived up to the initial hype, but they are starting to gain ground. The $ 20 billion ‘initial coin offerings’ issue appeared to contain elements of a speculative bubble, but the funds raised are now being used to launch projects broadly similar to other IT companies in Silicon Valley.
The recent departure of Jay Clayton as chairman of the US Securities and Exchange Commission could result in less hostile regulatory oversight of these activities, especially if Gary Gensler, who teaches digital currencies, replaces him.
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 widely used for payments and its future role appears limited.
Outgoing Treasury Secretary Steven Mnuchin has been working 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 is working with its foreign counterparts to investigate the development of central bank digital currencies. It is almost certain that CBDCs will eventually be issued in major jurisdictions, following the example of China. However, they will be denominated in national currencies, not crypto.
Private competitors denominated in genuinely new currencies, such as bitcoin, will be heavily regulated or actively discouraged. Hybrid stablecoins, such as Facebook’s Libra, which are linked to a single currency or other real assets may be more welcomed by central banks, if they were directly transferable into 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 this seem unlikely, but it is starting to play a bigger role. Many large hedge funds and some conventional asset managers have followed Paul Tudor Jones in adopting bitcoin as their primary hedge against inflation. While it may have looked appealing when central banks were effectively creating money by buying government debt last year, there are few signs of inflation on the imminent horizon.
Still, bitcoin prices have continued to rise, apparently prompted by a narrative that a privately-created asset, which in theory has limited supply, cannot be “printed” like “legacy” fiat currencies.
According to Gold Hub, gold stocks held above ground stood at 198,000 tonnes at the end of 2019, with around 57,000 tonnes of proven reserves underground. This total stock would be valued at around $ 17 billion at today’s prices. Bitcoin’s latest market value is around $ 0.6 billion – Bitcoin bulls see this as a measure of its price rising.
There seems little reason for monetary policy or financial stability reasons that regulators should be concerned about cryptocurrencies competing with gold as a store of value.
The crypto world is currently in a short-term speculation frenzy. 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.
