Not bad for an asset category created just over a decade ago — by whom is still a mystery — as a kind of libertarian globalist alternative to government-backed money, and which has gone through booms and busts since then. The question is: Does the rise of this virtual financial product, still mainly in the hands of firms, hedge funds and wealthy individuals, pose risks for the rest of us?
As for one oft-cited implication, the possibility that bitcoin and other cryptocurrencies could displace the U.S. dollar as a global reserve currency, the answer is almost certainly no — at least in the short run. The volatility of bitcoin’s price, and its strictly limited supply, make it inappropriate for such a role. The same goes for other high-flying cryptocurrencies such as dogecoin, which started out as a satire on bitcoin in 2013 but now has a total market value of $6.9 billion — at 5 cents apiece.
A more immediate danger is the exploitation of cryptocurrency for money-laundering and fraud, as exemplified in a recent federal indictment charging three North Korean military intelligence agents with cybercrimes including creating false cryptocurrency applications of their own and stealing “real” cryptocurrencies — if that’s the term — made by companies in Slovenia and Indonesia. Still, except for the technology, there is nothing new about financial fraud and bank robbery.
In public policy terms, the best reason to focus on bitcoin’s rise is what it tells us about the risks that may be bubbling up amid the Federal Reserve’s commitment to zero interest rates. The justified purpose of that policy, enacted due to the covid-19 outbreak, was to counteract economic collapse by encouraging investors to risk their money on job-creating activity rather than park it in government bonds. Given limited opportunities for productive investment though, many have “chased yield” through speculative vehicles — bitcoin very much included.
For some, in fact, it would be crazy not to hedge against zero rates, which are actually less than zero when adjusted for inflation. Tesla boss Elon Musk was quite candid about this. “When fiat currency has negative real interest,” he tweeted, “only a fool wouldn’t look elsewhere.” And Mr. Musk, whatever else might be said about him, is no fool. Nor is Treasury Secretary Janet Yellen, which is why she pledged Friday to keep a close eye on bitcoin and other speculative phenomena. We urge her and other regulators to heed what these markets reveal about the real-world consequences of current monetary and fiscal policy — positive and negative, intended and unintended.