As seen on

PBS
Good Morning America ABC
CBBC
CNN
FOX News
FOX Business
Home Markets Currencies

Currencies

Currencies

The Dent Research team examines the rise (and falls) of the world’s latest currency craze… bitcoin and blockchain.

The cryptocurrency market has taken the world by storm in a relatively short period of time, as certain currencies such as bitcoin and ethereum have boomed.

When bitcoin came out during the financial crisis, most everyone I know hated the government. We hated officials because they didn’t regulate the fraudulent bankers before the meltdown occurred, and because they used our tax dollars to bail the criminals out of their financial mess.

The final insult was that none of them went to jail, and we were stuck with extraordinarily low interest rates for a decade to ensure that the banks would survive.

The cryptocurrency offered an attractive alternative. Use a digital currency controlled and issued by no one that allowed anyone on the planet to examine all exchanges, eliminating fraud.

In addition, the currency would be available anywhere a consumer could connect to the internet, as well as on physical memory devices if desired.

And only a set number of the units would be produced… ever. No more games with monetary policy. No more bad banking decisions. Just simple, straightforward currency.

It sounds so good and it is, but some of its main features turn out to be unfixable bugs. The limited supply and fluctuating price kill the deal.

Because there are so few bitcoin available – and anticipated, with a cap of 21 million units to be issued – the mere fact that more people use the currency makes it less affordable.

The more we buy it, the higher the price. Arguably the value of goods and services remain stable, so this means current holders of bitcoin experience a gain in purchasing power. This motivates people to simply hold the currency, not use it as was intended.

Beyond simply units of exchange, currencies are supposed to function as storehouses of value. That means they remain stable when compared to a basket of goods over time, understanding that individual goods, like oil and wheat, can fluctuate dramatically based on factors such as weather and geopolitics.

If the currency itself becomes the asset, consumers will simply hoard the currency. If they don’t use it for transactions, that limits our investment in other, more productive areas.

Today, people are more interested in holding bitcoin for appreciation than using it to replace their home currency.

If there were any way to assure that bitcoin would continue its upward trajectory, everyone would be a bitcoin investor, not a bitcoin user.

But, as we do this, aren’t we robbing the traditional economy of investment, no longer buying bonds that support cities, or stocks that drive the private sector, or even holding funds in bank accounts that will serve as the basis for a loan for the next borrower?

There could be the flip side.

As we free ourselves of dollars – or yen, euro, or whatever – those currencies will diminish in value, cutting into the purchasing power of everyone left holding the relics, and also eating away at the value of earned income (assuming it’s still paid in national currency).

Suddenly the world becomes separated into the digital haves and the digital have-nots.

This game continues until people like me have bought all they want… and then something really bad happens. Without continued demand, the price drops.
Suddenly this currency-turned-asset becomes a liability.

The problem with currency is that unless it grows in conjunction with an economy, it becomes a force for either inflation or deflation.

If we print a lot of it like, say, most central banks on the planet, we create inflation. Everyone understands that today. But if we don’t print enough, money becomes more dear, driving down prices, and money becomes the asset.

This can be just as devastating as inflation… just ask anyone who lived through the Great Depression.

The ideas behind bitcoin are laudable, is it really the answer to our currency woes? Only time will tell.

For more on the future of bitcoin, cryptocurrencies, the value of the dollar and many other currencies, follow the Dent Research team every day, in Economy & Markets.

What the IRS Ruling Means for Bitcoin Category Commodities

  Rodney Johnson | Thursday, March 27, 2014 >> It only exists in digital form, as a saved piece of software, like a computer file. It can’t be lost, destroyed, or stolen in physical form. Transferring it can only happen between computers, typically...

“It Was Like Free Money”

I was reading a February 25 Wall Street Journal article, entitled Yuan’s Decline Triggers Fears on Leveraged Bets, when five words jumped off the screen and slapped me. “It was like free money.” Free money… really?! For one, it goes against my...

$4,000 (so far) Betting Against the Aussie Dollar

Here at Dent Research, we make no bones about our forecast for the U.S. dollar: it’s going higher! And that means we’re bearish on most foreign currencies, which naturally take the other side of the USD exchange rate. The problem with...

The 2 Reasons Why the Aussie Dollar is Done For

I lectured a lot in Australia throughout the 1990s. I saw the Aussie dollar drop as low as 48 cents and go as high as 73 cents to the U.S. dollar in that decade alone. That’s crazy! On one...

Of Course the U.S. Dollar Will Get Stronger

  Our research is based on people and how they spend money in predictable ways over the course of their lives. We, as consumers, spend a lot when we’re young. We take on a bunch of debt (for homes, cars, etc.)...

The Dollar’s Bullish Breakout

The U.S. dollar bounced around like a buoy in choppy water last year. It began the year in a strong uptrend, gaining more than 5% by the middle of May. Then in late May the Fed began broadcasting its plan...

Don’t Bet Against the Dollar

Hyper-inflationists — of the gold bug variety, or otherwise — hold firmly to the mental image of Ben Bernanke circling the New York skyline in a helicopter, dropping $100 bills like confetti at a New Year’s Eve party. True... the...

I give permission to receive newsletters, updates and offers from Economy & Markets. We do not sell your information and you can unsubscribe at any time.