In a recent commentary for the Financial Times, economist Dambisa Moyo makes a case for why business leaders should invest in Bitcoin. Her three main arguments are that Bitcoin is a way to mitigate company risk; cryptocurrencies can provide possible solutions for doing business in emerging economies; and digital currencies augur an exciting new future of “currency platforms.”
Is Moyo right? Let’s take her points in turn.
First, it is unclear how buying Bitcoin can mitigate company risk. The only risk Moyo identifies is that of missing out on what could be one of the greatest speculative bubbles of all time. True, a company that missed out on a continued Bitcoin appreciation could face dire consequences – including acquisition by a Bitcoin-invested rival. Obviously, investing in Bitcoin is one sure way to avoid missing out on capital gains on Bitcoin. But that hardly makes it a wise investment, especially when one weighs the potential returns against the high risk of material capital losses.
Equally far-fetched is the idea that cryptocurrencies could provide solutions to problems often encountered in emerging economies. It is true that, unlike conventional fiat money – which includes central bank digital currencies (CBDCs) – decentralized private cryptocurrencies like Bitcoin are not at risk of being “over-issued” by profligate governments. It is also true that the risk of over-issuance is greater in some emerging markets than in most advanced economies.
But over-issuance of currency is just one possible threat to emerging-market financial stability, and removing it does not suddenly make Bitcoin a reliable store of value. Quite the contrary: Bitcoin’s price volatility since its inception in 2009 has been staggering. On March 29, 2021, its price reached $57,856 – some distance below its all-time high of $61,284 on March 13 – with a market cap close to $1 trillion. According to a note from JPMorgan on February 17, its three-month realized volatility at the time was 87%, compared to just 16% for gold. Similarly, a recent study finds that Bitcoin’s price volatility is almost ten times higher than that of major fiat currencies (such as the US dollar against the euro and the yen).
Moyo also suggests that Bitcoin could facilitate remittances to low- and middle-income countries. But this ignores the fact that Bitcoin transactions are notoriously inefficient. Because its block size is capped at one megabyte and the block-discovery process takes approximately ten minutes per block, only seven transactions can be completed per second. By contrast, Visa executes an average of 1,700 transactions per second, and could feasibly handle more than 65,000 transaction messages per second. By design, Bitcoin is simply too inefficient ever to become an effective medium of payment.
Similarly, the fact that Bitcoin’s supply is fixed at 21 million units is more of a drawback than a selling point. A proper currency should be able to undergo a massive expansion in supply when circumstances demand it, such as in the case of a financial crisis or a shock to aggregate demand. There can be no lender of last resort or market maker of last resort capable of systemic rescue operations with Bitcoin and other decentralized cryptocurrencies.
Finally, is Bitcoin really the vanguard of a new digital-currency infrastructure that wise investors cannot afford to ignore? No, because the CBDCs under development in China and elsewhere have nothing in common with Bitcoin and other decentralized private cryptocurrencies. There is no blockchain or other distributed ledger technology (DLT) involved, nor is proof of work required to establish the validity of a transaction.
Rather, CBDCs function as straightforward digital versions of conventional bank accounts. In principle, they could be implemented as individual accounts with the central bank for every consumer and business in its jurisdiction. Alternatively, those accounts could be guaranteed by the central bank, but held with a wide range of private financial institutions.
CBDCs represent nothing new. They are not a revolutionary development like decentralized, DLT-based cryptocurrencies. But that revolution has already failed, because Bitcoin and similar cryptocurrencies are extremely unattractive as stores of value. No sensible investor should go near them (unless she has very deep pockets and extremely low risk aversion).
Moreover, Bitcoin’s extremely high energy demand is another nail in its coffin. Bitcoin transactions are verified through proof-of-work “mining” operations that require exorbitantly energy-intensive computational efforts. The Cambridge Bitcoin Electricity Consumption Index estimates annualized consumption at 139.15 terawatt-hours – more than that of Argentina.
Simply put, Bitcoin and other proof-of-work cryptocurrencies are an environmental disaster. Worse, cryptocurrencies can be replicated without bound, further amplifying the environmental damage. As of March 29, 2021, CoinMarketCap listed 4,490 cryptocurrencies, starting with Bitcoin (with a $1.08 trillion market cap) and followed by Ethereum (with a $204 billion market cap).
The bottom line is clear: Bitcoin is an excessively risky and environmentally undesirable investment. It is not a sensible solution to any emerging-market problem, and it cannot possibly serve as a store of value or reliable medium of exchange. The sooner it and other DLT-based cryptocurrencies are relegated to a footnote in economic history, the better.
Willem H. Buiter is Visiting Professor of International and Public Affairs at Columbia University. This content is © Project Syndicate, 2021, and is here with permission.
34 Comments
Oh dear. The same lame FUD that has been refuted many times. The sooner these boomer economists from the old world accept their system is broken beyond repair and move on, the sooner the younger generations can make their financial system fit for purpose in the digital future. We can choose where we decide to park our wealth, and with a TAM of circa 600T in the world. BTC is only at 1T market cap...so only early days. We’re coming for your wealth! It’s inevitable.
Bitcoins not going to make it long term, it will just be absorbed into a new digital currency. It simply was not designed to be a global currency and has several points of failure. The only reason it has taken off is that buyers subconsciously think it will be the new world reserve currency. Yes buyers of it have done well, especially if you got into it at the start of the Ponzi but realistically very few people have any significant amount of money in it so even if it quadruples in value over the next few years, the actual return is not significant.
Yes buyers of it have done well, especially if you got into it at the start of the Ponzi but realistically very few people have any significant amount of money in it so even if it quadruples in value over the next few years, the actual return is not significant.
Correct. 98% of BTC wallets hold less than 1 BTC. Dollar cost averaging is the way to go for BTC (worked for me anyway). Assuming you buy a fixed amount every month. Portfolio gains look like this -- Past 1 year: 316%; P2Y: 435%; P3Y; 572%; P4Y: 814%; P5Y: 2,260%; P6Y: 4,900%: P9Y: 73,900%
So basically an exponential drop in gains and its still falling. Like I said, great if you got in at the start and are in the 2% with big money in it but otherwise its just a great conversation starter round the water cooler.
We're still at the start of the start. Jp morgan, goldman, citibank, et. al. have only just entered the picture. The ETF Bitcoin funds are still in the works. It is still so early. You'll know the start has been and gone when retail exchanges no longer have any Bitcoin left to sell. Remember, there is only enough Bitcoin for everyone in the world to own $140 worth at current prices.
To paraphrase Thomas Kuhn, the competition between monetary paradigms is not the sort of battle that is resolved by intellectual arguments. It is settled by actual adoption driven by human action and self-interests. -Andy Yee
Refute:
Most payments will happen on layer 2 or higher and will be cheap and fast.
Volatility will drop way down at 10+ trillion dollar market cap. Volatility is part of rapid adoption - not for weak hands like this guy.
Bitcoin can arguably speed up the transition to renewables. The centralised system uses much more energy, as well as the flow on effects of funding weapons to maintain the value of the USD + excessive consumption of trying to achieve inflation in a inherently deflationary environment due to technology and aging populations.
Bitcoin is a savings account in a world where savers are punished.
Bitcoin has offered many Nigerians a solution to fundamental economic challenges. The ban from the country’s central bank won’t change that.
Bitcoin offered the glimmer of hope that many Nigerians desperately needed as they could finally see the chance of attaining financial freedom to be more likely than ever. And, in the following ways, Bitcoin has become successful in Nigeria:
As a store of value: The naira’s continuous inflation has made many lose confidence in keeping their hard-earned money in fiat. Bitcoin offers a better alternative as its adoption across the world increases, thus driving up its demand and, consequently, its price.
As a better investment alternative: Many Nigerians have turned to trading and investing in bitcoin as a form of passive income and, despite the cryptocurrency’s volatile nature, the returns over time have seen many become millionaires.
As an enabler of easy transactions: The sending and receiving of money across the border for the payment of goods and services, or to loved ones, has never been easier with bitcoin, thanks to its cheaper network rate and faster transfer time than traditional remittance systems.
Awesome, Nigeria is such a poster child for success. Who else is on the list ? Lebanon should be a starter as just another country that corrupt politicians have run it into the ground and their local currency is now worthless. You changed my mind, perhaps Bitcoin will get adopted after all, but not in countries that you would like to visit let alone live in.
My comment was in response to the article comment "cryptocurrencies can provide possible solutions for doing business in emerging economies".
However its pointless debating BTC with you - your mind is made up and so be it. Some of us don't think it will be the world reserve currency - however we are exchanging paper fiat for a better store of wealth and hard money. If you own gold then you should own BTC - I assume you hold neither?
And your mind is made up too frazz. And it's pointless debating with you as well. As per your comment above.
Never pointless unless you are coming from a side of ignorance.
Lebanon should be a starter as just another country that corrupt politicians have run it into the ground and their local currency is now worthless.
Unfortunately people cannot choose where they're born. You talk about Lebanon and Nigeria. Well how about NZ and Australia? Rampant money printing is not helping the young and disenfranchised. They're being thrown under a bus to preserve the status quo for the boomers and those who call the shots. Of course being born in NZ is better than being born in Nigeria probability wise, but probably a good idea to give it some context.
There are many boomers (and I am one of them) who are horrified by the current reckless and ultra-loose monetary policies, whose only effect is to further inflate the housing Ponzi and preserve the status quo for the boomers.
Many boomers (at least the many ones I know) take strong exception to the current situation, for the sake of the longer term health of NZ society and the real economy. The parasitic unproductive minority of specuvestors does not represent my generation - or at least I do not want to be identified with it, not in the least.
Your attitude probably doesn't represent the critical mass of the boomer generation. I know boomers who understand what's going on and a colleague who's 65 and owns Bitcoin. But the real problem is that most people don't understand what is going on with the monetary system, across all demographics. The problem with the boomers (in general) is that they believe that the issues that young people face today are equally as arduous as what the boomers faced at a similar age. In light of the monetary system itself, this is just plain wrong. Historically, there has never been a period in human history where the monetary system has been debased to what it is now.
No JC. Boomers don't have a significantly different view on this from other group's. I see a lot of them here telling how horrified they are about it.
Try to hear that.
Prof Buiter appears to not know about, or has ignored, Layer 2 protocols (such as Lightning) and the fact Bitcoin supply = 2.1q satoshis (smallest unit of a bitcoin).
Entirely possible that volatility will decrease over time with broader adoption and use cases. According to a 01.04.2021 client note from JP Morgan, "a convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is likely a multi-year process."
Yes, I was going to mention this. Regarding payments, Jack Mallers' Strike is simply amazing. Just because most people don't use it is irrelevant. I think it's fair to say that most NZers will ever own a single BTC (well it's mathematically impossible if only 2% of current holders never or don't sell), but many people will be able to own Satoshis.
This is poorly researched and it's clear the author has little knowledge of BTC or cryptocurrency more broadly. I like reading well thought out criticisms of blockchain tech and crypto (although I hold some I'm still aware of the potential risks); however, this was not one of them.
Based on this post, I predict Wilem buiter will be buying bitcoin in the 2 - 3 million range.
Until the IRD accepts it in payment of taxes then you will still require regular old NZ Dollars.
Can't help but think, these are the words of a recalcitrant no-coiner.
I take it I'm not alone in my view!
Most of the smart people here have already spotted the obvious flaws. As for whether its a "sensible investment" - I don't have a crystal ball but people have been telling me what a terrible investment since I was buying from $3k ($500 if I count my first foray).
Saying that bitcoin has no value because other cryptocurrencies can be created, is like saying facebook has no value because I could create a facebook clone tomorrow. None of the bitcoin clones have succeeded, and the other ones have completely different properties and don't compete as a store of value.
As for "A proper currency should be able to undergo a massive expansion in supply when circumstances demand it" - well that seals it. Look at what happens to property prices and relative buying power when this happens.
As for the environment, gold and the banking system are far worse. Even the fashion industry has a gigantic carbon footprint - far worse than bitcoin. Strange I don't hear calls to abandon fashion.
I once here asked the genuine question about uses of bitcoin beyond speculation. No convincing reply's received.
But some trends emerged 1. religion helps some people. 2. You can buy a gambling rush.
May I suggest you read “The Bitcoin Standard” by Safedean Ammous. If you take the time to read this, no other explanations will be necessary.
May I suggest you “The Bitcoin Standard” by Safedean Ammous. If you take the time to read this, no other explanations will be necessary
It's a good read but it is not the 'only explanation' surrounding BTC. Safedean does a great job at outlining the history of money, but I do think he tends to be repetitive on a number of issues. Furthermore, he does not explore the energy consumption / environmental concerns in great detail. Furthermore, I believe there is a price for 'sound money' like Bitcoin and that price is the energy involved in driving and maintaining the blockchain.
The point remains pacman that everybody who replied was using bitcoin for speculation. No other useful purpose emerged from the actual replies.
You can send me all the book titles you like. But on the ground, that's how it was
The point remains pacman that everybody who replied was using bitcoin for speculation..........on the ground, that's how it was
No. That's your take. For ex, I own BTC as a 'store of value.' That is different from 'speculation.' The only thing I am 'speculating' about is that it is actually a store of value. You will probably respond "but you wouldn't own it if it's value went down." I would respond "It does and will go down. Possibly to zero." Don't just focus on BTC. Focus on fiat currencies. They have depreciated against BTC. Therefore, BTC has been a greater store of value since its existence.
why hold Bitcoin as a store of value if fiat is crash?
Isnt Bitcoin valued in fiat?
Agree with everyone above.
To talk about Bitcoin without mentioning newer developments and what is actually happening in this area is simply spinning and more akin to mis-information.
It makes me laugh how much a lot of commentators see through the b.s too.
My faith in humanity has risen today
I assume you're referring to the second layer of BTC. If so, I agree. If you're referring to other blockchain protocols, it's irrelevant.
What a waste of time this article was. Who is Dambisa Moyo in relation to Crypto commentary? She's a nobody. Mix in a dinosaur economist has been, in the guise of Willem Buiter and you get a non-article. These two have next to no idea how blockchain works and it shows, resurrecting old arguments that were dispelled back in 2017. Lift your game interest. Where's the commentary on Lyn Alden, Dan Held, Mike Novogratz, Kay Clayton, Benoit Coeure, Jamie Dimon, Jeff Currie, Lloyd Blankfein, Christine Lagarde or literally hundreds of other more prominent commentators, bankers, politicians and economists in the real world who are bullish and understand the potential of the crypto space? Please do your research.
This. Glad to see my boys doing me proud in my week of absence. The Bitcoin FUD destroying is in good hands :)
Bit CON
A coin held by so few
Now just needing the masses to accept that only a few have all the coins
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