It is the year 2021, and central bankers are still baffled as to what to make of Bitcoin (BTC).
However, despite the fact that many of them have dismissed the cryptocurrency as a highly speculative bubble in the past, the cryptocurrency continues to grow in terms of price, general adoption, and a variety of other metrics.
Central bankers have, once again, shared their negative views of Bitcoin with the general public as a result of the massive increase in its price over the past year or so, while also highlighting the potential of blockchain technology’s application in the development of central bank digital currencies (CBDCs).
Examine some of these recent comments in greater detail to determine what the central bankers are getting wrong about Bitcoin this time around.
1. “Bitcoin is too volatile and is not a store of value”
One of the most common criticisms leveled at bitcoin by skeptics (including but not limited to central bankers) is that the asset is far too volatile to be used as a store of value.
“Cryptoassets, which we call them crypto assets, [are] highly volatile (see bitcoin); therefore, they’re not really useful as a store of value,” said US Federal Reserve Chair Jerome Powell at an event held by the Bank for International Settlements (BIS) back in March.
When it comes to the claim that bitcoin is not a useful store of value, there are many long-term bitcoin holders who would disagree with this assertion.
While the short-term bitcoin price can be extremely volatile, those who have held bitcoin for the duration of a halving cycle (roughly four years) have never experienced a loss of capital.
The bitcoin price is undeniably speculative and volatile in the short term, but many bitcoin holders are willing to overlook this potentially-temporary characteristic of the system because they are interested in using the cryptocurrency asset as a form of long-term savings.
In the past few months, bitcoin has dropped from more than US$60,000 to approximately US$30,000 before recovering to US$40,000, but it has also gained approximately 250 percent over the previous year and more than 6,000 percent over the previous five years at the time of this writing.
The short-term price action of bitcoin can be extremely volatile, as the market is still unsure of how to value this completely new type of asset that did not previously exist in the marketplace.
Furthermore, the price of bitcoin has been less volatile in the last five years than it was in the first five years, according to empirical evidence.
The notion that a completely new type of asset can go from zero to tens of thousands of dollars in value without experiencing any volatility is simply not supported by the facts.
The fact that Robert Kaplan, the president of the Federal Reserve Bank of Dallas, appears to disagree with Powell’s assessment of bitcoin should be mentioned.
“It’s clear it’s a store of value,” Kaplan stated at a Bitcoin event hosted by Texas A&M earlier this year. “Obviously, it moves a lot in value, so that may keep it from spreading too far as a medium of exchange and wide adoption. But that can change, and that will evolve.”
2. “Bitcoin is not backed by anything and has no intrinsic value”
Another criticism of bitcoin that is closely related to its alleged inability to act as a store of value is the claim that the crypto asset has no intrinsic value. This is a claim that has been made by some cryptocurrency enthusiasts.
According to Powell, who spoke at the aforementioned BIS event, “[Bitcoin] is not backed by anything.”
Unlike pure crypto assets such as bitcoin, stablecoins, in his opinion, are an improvement over these assets due to the fact that stablecoins are backed by sovereign currencies of major countries such as the United States.
Powell considers bitcoin to be more similar to gold than the US dollar from this perspective, according to Powell.
The President of the Federal Reserve Bank of St. Louis, James Bullard, concurs with this comparison as well.
It has been referred to as a “rival to gold,” which Bullard believes is an appropriate way to think about it. Bullard stated this in an interview with CNBC earlier this year.
Other central bankers around the world, including those in the United States, have expressed concern about bitcoin’s fundamental value.
In May, the European Central Bank (ECB) published a report in which it compared bitcoin to the infamous South Sea Bubble.
According to Bloomberg TV, ECB Vice President Luis de Guindos has stated that crypto assets are not real investments due to the fact that their fundamentals are extremely weak.
Andrew Bailey, the Governor of the Bank of England, has also expressed support for this viewpoint.
In a press conference held in May, he stated:
“[Cryptocurrencies] have no intrinsic value. That doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value.”
To be fair, the majority of this criticism of bitcoin is correct.
Bitcoin has no intrinsic value, and its value is entirely dependent on the number of people who believe it to be worthwhile (albeit based on its intrinsic properties).
While bitcoin’s lack of intrinsic value is a valid argument against the crypto asset, the problem with this argument is that it also applies to alternatives such as gold and the US dollar.
There is value in the US dollar because the federal government declares that it has value, and the public believes them.
If more people choose to store their wealth in bitcoin rather than the US dollar, they will discover that there is nothing “intrinsic” about dollars that protects them from this type of speculative attack.
As a result, the federal government can only use its monopoly on violence to attempt to outcompete bitcoin by using force.
There are obviously still fundamental reasons for both bitcoin and the US dollar to be valued at their current levels.
When it comes to the US dollar, many people believe that it is backed by the full faith and credit of the United States government or by the requirement to pay taxes in the currency, which is fine and dandy.
But bitcoin also has its own fundamental value propositions in the forms of an incorruptible monetary policy, the difficulties associated with seizing someone else’s bitcoin, and censorship-resistant online payments.
In closing, Powell’s point about bitcoin’s lack of backing should not be interpreted as a negative because that is precisely the point of the digital cash system in the first place.
Any sort of backing of bitcoin by real-world assets or a centralized issuer would reintroduce counterparty risk (as is the case with stablecoins), which is the very problem that bitcoin was designed to solve in the first place and which has been a source of contention for years.
3. “Bitcoin uses too much energy”
An additional criticism of bitcoin leveled by Powell at a BIS event in March was that the Bitcoin system consumes excessive amounts of energy.
As reported by Reuters, a spokesperson for the World Bank, which is itself investing billions of dollars in fossil fuels despite European officials’ calls to stop funding projects of this nature, said that environmental concerns were one of two reasons why the international financial institution could not assist El Salvador in its adoption of bitcoin as legal tender.
As a further point of reference, ECB Executive Board member Fabio Panetta wrote in May: “The massive amount of energy consumed by cryptoasset mining, as well as the associated CO2 emissions, has the potential to undermine global sustainability efforts.
Bitcoin alone already consumes more electricity than the entire country of the Netherlands.
It is essential that the global discussion include measures for controlling and limiting the environmental impact of cryptoassets, including through regulation and taxation.”
More recently, the European Central Bank (ECB) stated that the energy consumption of their digital currency would be negligible when compared to bitcoin.
Earlier this summer, the British Institute of International Affairs (BIA) published a report that stated, “Bitcoin, in particular, has few redeeming public interest attributes when taking into account its wasteful energy footprint.”
This statement from the BIS report serves as an excellent illustration of the fundamental flaw in the environmental arguments used to oppose Bitcoin: they are unconvincing.
These arguments are only valid for those who believe that the existence of Bitcoin has no intrinsic value.
If you don’t understand Bitcoin’s value proposition, then of course you will make the argument that any energy used in bitcoin mining is a waste. It is no different from someone who does not like Christmas thinking that all of the energy spent on Christmas lights every year is a waste.
To put it another way, this is a subjective point of view.
Those who hold bitcoin understand that the costs of establishing a global, apolitical monetary system are worth the energy costs that are associated with it.
It’s also a myth that Bitcoin has a negative impact on the environment, which has been widely propagated in the media.
Many of the projections for future Bitcoin energy consumption make extremely basic technical errors, such as ignoring layer-two systems such as the Lightning Network and assuming that all future transactions will take place on the base blockchain layer.
There is plenty of reason to believe that a widely adopted Bitcoin monetary standard would have a lower environmental impact than either the current financial system or a return to the gold standard would have.
In addition, ARK Invest and Square Crypto collaborated on a paper that examined whether bitcoin mining could actually improve the economics of renewable energy sources in the long run.
4. “Bitcoin lacks transparency and is too useful for criminals”
According to the same World Bank spokesperson who expressed concern about environmental issues in the context of El Salvador’s adoption of bitcoin as legal tender, transparency is a potential issue with the crypto asset. Additionally, the BIS report mentioned in the preceding section discussed the use of bitcoin for money laundering and ransomware attacks.
However, Christine Lagarde, the president of the European Central Bank, made some of the most critical remarks about cryptocurrency’s use by criminals this year.
Lagarde said at the Reuters Next conference in January that bitcoin is a “highly speculative asset” that has “conducted some amusing business” as well as “interesting and totally reprehensible money laundering activity.”
She went on to say that global regulation of bitcoin and other digital currencies is required in order to prevent people from finding pockets of jurisdictions around the world that can be used to get around financial reporting requirements. Lagarde is herself a convicted felon.
According to a statement made by Lagarde in February, “[Bitcoin] is a [crypto asset] that was established back in 2009 by libertarians and the hopeful of a completely decentralized universe that will be completely anonymous.” This statement demonstrates that Lagarde is aware of the political underpinnings that underpin the Bitcoin network.
However, a digital financial system that is neither decentralized nor potentially anonymous has its own set of social ramifications that should be considered.
It was perhaps BIS General Manager Agustin Carstens who best articulated the implications of these developments at an IMF event in October 2020, when he made a statement about the differences between physical cash today and possible future CBDCs.
“A key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that central bank liability, and also, we will have the technology to enforce that,” said Carstens.
Bitcoin has long been thought of as a potential hedge against a dystopian cashless society where there is no such thing as financial privacy or true ownership over one’s savings (I wrote about it for NASDAQ five years ago).
With complete government control over the digital financial system, it becomes easier to implement inflationary monetary policies, seize assets from the populace, and censor specific types of transactions, all in the name of protecting the children from the Four Horsemen of the Infocalypse.
Due to the numerous regulatory developments surrounding cryptocurrency that are taking place around the world right now, this year may provide an indication of just how far governments are willing to go in order to protect their “absolute control” over the digital financial system, which is a welcome development.