Bitcoin Or Embezzelcoin?
Ed Yardeni | Jul 02, 2019 12:45AM ET
In late 2017, when Bitcoin was soaring toward a record-high price of $18,961 on 12/18/17, a distant relative asked me what I thought about the cryptocurrency. He had bought one Bitcoin when it was around $4,000 in mid-2017. I said it reminds me of digital tulips. “What do you mean?,” he responded. He is a Millennial who had never heard of the Dutch Tulip Bubble from 1634-38. I explained what happened back then and noted that the bubble was mostly confined to Amsterdam, whereas the Bitcoin bubble is global.
Of course, some Bitcoin fans believe that Bitcoin has a legitimate role in a portfolio as a hedge against the madness of central banks. I concede that point. However, as we saw last year, it can crash, which is what it did on its way back down, by a gut-wrenching 83% from the high of $18,961 on 12/18/17 to a low of $3,224 on 12/14/18. But now it’s back up to $11,171 or so. It certainly is volatile and hardly a stable store of value, which makes it a very poor candidate to replace more stable forms of money.
Some of this volatility may be attributable to the illegitimate uses of Bitcoin. I’ve noticed more news stories this year about hackers planting ransomware on the computer systems of small city governments in the U.S.. They successfully extort tens of thousands of dollars in exchange for the software key to unlock the frozen computer systems. Payment has to be made in Bitcoin.
In June, Riviera Beach, a city in Florida, paid hackers $600,000 in Bitcoin with the hope of having its systems restored. Also during the month, Lake City, Florida facing a ransomware demand, authorized the payment of $490,000 in Bitcoin to a hacker in order to regain access to its phone and email systems. At the end of the month, the village of Key Biscayne confirmed it had been hit by a cyberattack, though it wasn't clear if it was related to ransomware.
Cities and small businesses are becoming more popular targets for hackers, who recognize frequently unsophisticated systems. According to FBI estimates, there were 1,493 ransomware attacks in 2018, with victims paying a total of $3.6 million.
In my book, Predicting the Markets (2018), I wrote:
I’m particularly intrigued by the impact of Bitcoin and other cryptocurrencies on our monetary system. Blockchain, the software that runs these digital currencies, is allowing banks to eliminate clearinghouse intermediaries in their transactions and to clear them much more rapidly. Smartphone apps allow consumers to use these digital devices to deposit checks and make payments. These innovations could reduce employment and bank branches in the financial sector, much as Amazon (NASDAQ:AMZN) is doing in the retail space. Central bankers are scrambling to understand the implications of Bitcoin and blockchain. In time, central banks likely will incorporate these technologies into their operations, perhaps spawning bitdollars, biteuros, bityen, etc.
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I concluded:
Libertarians might long for a day when central banks are replaced by a monetary system based on a digitized currency that is unregulated by governments. I doubt that the central monetary planners will allow that to happen. But who knows? Technology has disrupted major industries. Maybe it will disrupt central banking!
The International Monetary Fund (IMF) is studying cryptocurrencies. The 6/27 IMFBlog is titled “Fintech: The Experience So Far. " Based on its research, countries generally foresee the emergence of crypto assets backed by central banks. The study surveyed central banks, finance ministries, and other government agencies in 189 countries. More specifically:
The survey reveals wide-ranging views of countries on central bank digital currencies. About 20 percent of respondents said they are exploring the possibility of issuing such currencies. But even then, work is in early stages; only four pilots were reported. The main reasons cited in favor of issuing digital currencies are lowering costs, increasing efficiency of monetary policy implementation, countering competition from cryptocurrencies, ensuring contestability of the payment market, and offering a risk-free payment instrument to the public.
Increasingly, at the top of the list for the central bankers is the need to improve cybersecurity in the payments system. Banning cryptocurrencies that are not officially backed by central banks undoubtedly will be considered. Whether this is even feasible is a matter for future discussion.
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