Written by: Willem H. Poeter
NEW YORK – In a recent commentary in the Financial Times, economist Dambisa Moyo makes arguments in favor of business leaders investing in bitcoin. Its three main arguments are that Bitcoin is a way to mitigate corporate risk. And that cryptocurrencies are able to provide potential solutions for doing business in emerging economies; And that digital currencies herald an exciting new future for “currency platforms”.
Was Moyo right? Let’s review her arguments in order.
First, it is unclear how buying bitcoin could reduce corporate risk. The only risk Moyo identifies is to miss a chance to profit from one of the greatest speculative bubbles of all time. It is true that a company that misses the opportunity of a steady rise in Bitcoin’s value may face dire consequences – including its acquisition by a competitor who has invested in Bitcoin. Investing in Bitcoin is clearly a surefire way to avoid missing out on the bitcoin capital gain. But this does not make it a wise investment, especially when one weighs the potential returns against the high risk of losses from physical capital.
Likewise, it is very difficult to grasp the idea that cryptocurrencies can provide solutions to problems that typically face emerging economies. It is true that private, non-centrally managed cryptocurrencies like Bitcoin, unlike traditional fiat money – which includes digital currencies issued by central banks – are not at risk of over-issuance by profligate governments, but it is also true that the risk of over-issuing cash is greater. In some emerging markets compared to advanced economies.
But an over-issuance of currency is little more than a potential threat to financial stability in emerging markets, and removing it does not suddenly make Bitcoin a trustworthy store of value. Just the opposite is true: the volatility of Bitcoin’s price since its inception in 2009 has been staggering. On March 29, 2021, Bitcoin reached $ 57,856 – well below its all-time high ($ 61,284) on March 13 – under a market cap approaching $ 1 trillion. According to an illustration published by JPMorgan on February 17th, Bitcoin’s volatility achieved in three months at that time was 87% compared to only 16% for gold. Likewise, a recent study found that the volatility of bitcoin price is about ten times higher than that of the major fiat currencies (such as the US dollar versus the euro and the yen).
Moyo also suggests that bitcoin could facilitate transfers to low- and middle-income countries. But this ignores the fact that Bitcoin transactions are severely inefficient. Bitcoin’s block size is limited to one megabyte, and the process of discovering blocks takes approximately ten minutes per block, meaning that only seven transactions can be completed per second. On the other hand, the visa system performs 1700 transactions per second on average, and it is practically possible to deal with more than 65 thousand transaction messages per second. In fact, Bitcoin, by virtue of its design, simply lacks efficiency to the point that it is completely unable to function as an effective means of payment.
Likewise, the supply of Bitcoin is steady at 21 million units, which is more of a shortfall than a reason to attract buyers. The appropriate currency must be able to undergo a tremendous amount of expansion in supply if circumstances warrant, as in the event of a financial crisis or shock related to aggregate demand. In this case, there will be no lending of last resort or a last resort for market making capable of implementing systemic bailouts with Bitcoin and other decentralized cryptocurrencies.
Finally, is Bitcoin really at the forefront of a new digital currency infrastructure that wise investors do not have the luxury to ignore? No, because central bank digital currencies under development in China and elsewhere have nothing in common with Bitcoin and other private, decentralized cryptocurrencies. Its issuance does not involve blockchain or any other distributed ledger technology, and there is no evidence of the work required to validate any transaction.
The digital currencies issued by central banks operate as direct digital copies of traditional bank accounts. In principle, it can be executed as individual accounts with the central bank for each consumer and company within his jurisdiction. Alternatively, these accounts can be guaranteed by the central bank, but should be maintained by a wide range of private financial institutions.
Central bank digital currencies are nothing new. They are not a revolutionary development like the distributed ledger-based decentralized cryptocurrency. But this revolution has actually failed, because Bitcoin and similar cryptocurrencies are totally unattractive as a store of value. And no sane investor should approach it (unless he has very deep pockets and is fully willing to take the risks).
Moreover, Bitcoin’s extreme energy overconsumption is another nail in its coffin. Bitcoin transactions are verified through proof-of-work “mining” processes that require energy-intensive computing efforts. The Cambridge Bitcoin Electricity Consumption Index estimates an annual consumption of 139.15 TWh – more than all of Argentina.
Simply put, Bitcoin and other cryptocurrencies that require so-called “proof of work” are an environmental disaster. Worse, cryptocurrencies can proliferate without restrictions, and that means more environmental damage. As of March 29, 2021, CoinMarketCap registered 4,490 cryptocurrencies, starting with Bitcoin (with a market cap of $ 1.08 trillion), followed by Ethereum (with a market cap of $ 204 billion).
The conclusion is clear: Bitcoin is an extremely risky and environmentally undesirable investment. Bitcoin is not a reasonable solution to any emerging market’s problems, and it cannot function as a store of value or as a trustworthy exchange. The sooner we refer them and other cryptocurrencies that rely on distributed ledger to the margins of economic history, the better.