Bitcoin: The One Currency to Rule Them All? - Part 2
Op-Ed by Sandro Joseph Azzam, Staff Writer
February 26th, 2021
It’s a bright and sunny day in Chevy Chase Village, Maryland. Through the troves of houses scattered throughout the community, one of them stands out among the rest like a sore thumb: the doorbell reads “Powell Residence”. Behind the doors arguably lives the most powerful man in modern finance whose decisions can make or break global markets: Jerome Powell. The Chairman of the Federal Reserve Board (essentially Riad Salameh, but with a hint of ‘In God We Trust’) is starting his day. He brews his morning coffee and reads through the day’s news: being informed matters when your job is to neutralize potential threats to the global financial system. All what the news outlets seem to talk about is Bitcoin. Alarms start going off in the Powell think tank.
Bitcoin’s decentralized characteristics paired with its anonymity create a problem for global markets. Jerome has been following the rise of Bitcoin for the better part of the last decade and he’s noticed that markets tend to react to the slightest news about the currency. Take the Lord of the Nerds, Elon Musk, as an example. When he set his twitter bio to “#bitcoin”, the currency saw an unprecedented rise, signaling strong buying activity. When you went on the streets and asked people why they were investing in bitcoin, the common answer was “Elon thinks we should buy it, he’s the richest man in the world. He ought to be right”. Decades of Warren Buffet going on like a broken record about index fund investing and nobody paid attention. What caused the moves in the market then? Simply put: Bitcoin is disruptive.
One of the first “currencies” humanity has ever known was called the rai stone, essentially a human-sized circular rock with a hole in the middle – it pretty much looked like a donut but if you bit down on one of these, it’d be extra crunchy and harder to swallow. There was only one problem: it weighed several tons which meant that it couldn’t really be used as a means of payment (unless Superman was buying something from Mr. Incredible). When being transported from one pacific island to another, legend has it that the rai sunk to the bottom of the ocean. Fortunately enough, this didn’t matter at all for the owners of that rai. It was actually the original bitcoin: both forms of currency depended on public transparency surrounding transactions as well as security added to the fact that neither of them had to deal with a centralized banking authority. The rai had public records on who owned how much of it, not unlike the case of bitcoin ledgers. There were oral records among villagers that exhibited who owned what. The security of the currency was unquestioned: unless you were some descendant of Hercules, odds are you couldn’t really move a human sized rock and even if you did manage to plan a heist, the public records wouldn’t change, which meant that the rightful owner never lost his stone. Just as cryptocurrencies are completely detached from the banking sector, so was rai. There wasn’t a bank to loan you a big rock, and so you needed to do that peer-to-peer.
If we look at the next evolutions in the history of money, we see a transition towards systems that are less and less ledger-based: when trading gold or silver, nobody needed to know exactly what you had, trading fiat money meant that your available assets were simply those in your possession and the biggest disruption was credit cards. Top hedge fund managers were confused when they were told that a small flimsy piece of plastic could replace actual pieces of paper. Bitcoin doesn’t fit into this equation: welcome to disruptive technologies. If there’s one thing that regulators don’t like, it’s change. They are thus left with 2 options: either embrace it but keep the innovation on a tight leash or get rid of it entirely.
After some thought and on his way into work, Jerome calls up the Securities Exchange Commission and tries to speak to the chairman-designate Gary Gensler. The SEC acts as the “finance police” and makes sure that everyone stays within the rules of the game. Powell is perplexed by the dangerous potential that bitcoin has and wonders what he can do to nip it in the bud: he doesn’t want any currency competing with the dollar on the global stage. Given bitcoin’s decentralized nature, there’s only one thing Powell can do: pull a page out of the authoritarian playbook and shut down the entire internet. Bitcoin relies on the blockchain but the blockchain itself is composed of numerous nodes. These nodes are anything from a supercomputer the size of a building to a nerd with an overpowered PC sitting in his mom’s basement. The decentralized nature means that even if one of the nodes is shut down, say, by having the SEC jail the owner of that node and seizing the computer, there are more than enough replacements available. The only way to stop bitcoin in its tracks is, well, to cancel the internet. Needless to say, that’s as likely to happen as “إستعادة الأموال المنهوبة”. This brings me to my next point: cryptocurrencies, not unlike Lebanese banks, are unregulated. Elon Musk can tweet from today until kingdom come prompting his cult-like followers to buy up bitcoin to drive up the price and Gensler’s SEC team will be left twiddling their thumbs.
So, now, Powell and the rest of the Fed team face a problem: there’s this strain of alphanumeric characters going around with a value over the median American income which can’t be regulated and cannot be controlled by the government. What could possibly go wrong?
Let’s think of the US dollar. Its value has remained stable over the past 10-20 years. It’s not like $1 bought you an all-expenses trip to Hawaii in 2000. Bitcoin on the other hand has been extremely volatile in the past. In 2010, Laszlo Hanyecz ordered two large pizzas from Papa Johns. He opted to pay using bitcoin. At the time, Bitcoin was trading below $1 a piece, in fact, way below that. He paid 10.000 bitcoins for the pizzas which at the time was about $30. Unbeknownst to Hanyecz, 10 years later, that late night pizza craving would end up costing him over 500 million dollars. To put this into perspective, if Hanyecz had decided to pay using, well, anything else, and keep the bitcoin on the side, he would have been able to buy 14% of all of Papa Johns. There’s clearly a problem when buying a pizza 10 years ago ends up costing you 14% of a publicly listed multinational restaurant franchise. The problem with bitcoin is that its price ends up being more volatile than the prices of what you buy with it. The prime example is the half-a-billion-dollar pizza.
Powell takes a deep breath to try to digest everything that’s going on with the bitcoin revolution. He thinks it’s best to bring this to the attention of the rest of the board of directors of the Federal Reserve. Numerous economists see bitcoin as the logical next step in the evolution of money: we went from barter to commodities to fiat money to credit cards and the next step should be cryptocurrencies. The economists meet and find a deal breaker concerning the possibility of integrating bitcoin into the American and global financial system: inflation.
When bitcoin was worth spare change, the Fed didn’t particularly care about the size of the global bitcoin market. With a single bitcoin running over $50.000, Bitcoin’s market cap is edging towards almost $1 trillion. Whilst not all of this money is concentrated in the US, a large portion of it is. If bitcoin rockets past $500.000 in the future, the economists at the Fed will find themselves stuck between a rock and a hard place. On one hand, the money supply in the US has drastically increased. More money floating means higher inflation. On the other hand, as we mentioned earlier, the Fed can’t impose an outright ban on cryptocurrency without shutting down the world’s internet. What the Fed is left with is opting to adapt the supply of real US dollars so that American money supply achieves its desired levels through a mix of bitcoin and “real” money. Disaster strikes if bitcoin reaches extremely high levels: under the aforementioned mixing scenario, if the bitcoin trading on the markets is worth so much that it overshoots the targeted money supply, the US could be headed for disastrous and uncontrollable inflation.
But why doesn’t the Fed try to estimate the value of bitcoin in the future to figure out whether or not it’s a real threat to financial stability? It is simple: Bitcoin has no intrinsic value. Think of bananas. You can eat a banana if you’re hungry. Can you do anything with gold other than decorate a lavish penthouse? If you consume gold on a regular basis, please contact your general practitioner, and probably your accountant too. The reality is, bitcoin is only worth what someone else will pay you for it. If nobody wants to buy the bitcoins off of you, what are you left with? A bunch of numbers on a computer screen are just as useless as a bar of yellow metal.
Bitcoin has left even the world’s best economists perplexed. The consensus is that the move to cryptocurrency is disruptive, and not in a “we’re sending electric cars to outer space” kind of way but in a “we’re privatizing world peace” kind of way. It leaves room for controversy, and people are arguing on both ends of the spectrum, acting as supporters or critics. On one hand, bitcoin may seem like the next logical step in the sequential evolution of money but on the other, it poses a serious threat to financial stability in terms of regulation and monetary policy. However, one thing’s for certain: cryptocurrencies are here to stay. What’s subject to interpretation is just how integrated into the financial system they will become.