A timely piece from Megan McArdle: Bitcoin Is an Implausible Currency
“I find that a lot
of the people who write me about bitcoin talk about it in exactly the same way
that gold bugs talked about gold 10 years ago. They are particularly attracted
to the fact that its quantity is strictly limited: There can never be more than
21 million bitcoins in existence. If you’re worried that your government is
going to inflate away the value of your savings, that guaranteed scarcity is
pretty valuable….
Inflation is low.
Moreover -- and much more importantly -- most of the people with serious
savings no longer do that saving in banks, where their savings is vulnerable to
inflation risk. For most Americans, their biggest asset is their home, which is
hedged against inflation, which is to say that home prices will rise along with
the general price level. The equities in their 401(k)s offer a similar
inflation hedge.”
The simple reason Bitcoin will never be a currency by
Matt O'Brien notes:
“Just because you call something a currency doesn't
mean it is one. It has to be a stable store of value that people actually use
to buy things with. Bitcoin fails on both accounts. Indeed, in the past year,
the number of bitcoin transactions is up only about 33 percent from what was
(and is still) a very low level.”
Related:
Is Bitcoin the Most Obvious Bubble Ever?
https://www.theatlantic.com/business/archive/2017/12/bitcoin-bubble/547952/
https://www.theatlantic.com/business/archive/2017/12/bitcoin-bubble/547952/
Start Worrying When Investors Borrow to Buy
Bitcoins
Bloomberg’s Noah Smith notes:
“Why does debt make bubbles so much worse? When equity
crashes, notional wealth simply vanishes. That makes people feel poorer, which
makes them consume less -- a phenomenon known as the wealth effect. But when
companies or households have borrowed a lot of money from each other, an asset
price crash can also cause other bad effects. Lenders who see their loans go
bad will themselves be forced to borrow money, which slows the real economy
because borrowing is costlier than funding a business internally. Debt also
creates systemic risk, because key financial institutions can go bankrupt
easily if they have too much leverage. Banks whose debts suddenly go bad have
trouble lending to businesses due to their own capital adequacy requirements,
or even require a government bailout. And households saddled with an overhang
of debt may shift into deleveraging mode, hurting consumption -- a phenomenon
known as a balance sheet recession.”