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Category: Soap Box

Soapbox: Failing fiat money versus tulip mania… gold to the rescue?

By comparison with Bitcoin's 300% rise in 2020 gold's 24% gain looks measly. And for some advocates – who may well be talking their own book – Bit...

7 January 2021

Gary Mead

By comparison with Bitcoin’s 300% rise in 2020 gold’s 24% gain looks measly. And for some advocates – who may well be talking their own book – Bitcoin could be set for a further rise, by almost 200%, in 2021. JP Morgan’s analysts have just forecast that Bitcoin could trade as high as $146,000 if it becomes established as a safe-haven asset. Which is a little surprising given that Jamie Dimon, billionaire CEO of JP Morgan, referred to Bitcoin in September 2017 as a “fraud… worse than tulip bulbs”, and said he would fire JP Morgan traders who dealt cryptocurrencies “in a second, for two reasons: it is against our rules, and they are stupid”. Nevertheless, JP Morgan created JPM Coin in 2019, a digital token for internal use only by the bank’s institutional clients, and Dimon has endorsed blockchain technology, which underlies cryptocurrencies because it lets people “move money around the world cheaper”.



Even one of the biggest critics of cryptocurrencies, the eminent economist Nouriel Roubini, professor of economics at New York’s Stern School of Business, seems to have capitulated somewhat. In July 2019, when Bitcoin was worth about $9,500, Nouriel said the cryptocurrency phenomenon was “overhyped”, like a “cesspool”, destined to end its days in a “museum of failed coins”. But in November 2019 Roubini said Bitcoin “may be a partial store of value”.

Bloomberg has done us the service of assembling various pro-and-anti comments from 1999 to 2018 on Bitcoin by the great and the good of international finance. Among them is an endorsement from Peter Thiel, the billionaire founder and CEO of PayPal, until PayPal – which has some 350 million users globally – was sold to eBay for $1.5 billion in 2002. It’s perhaps no surprise therefore that PayPal last October said it would start to enable customers to buy and sell Bitcoin and other cryptocurrencies using their Pay Pal accounts. PayPal has been granted a “Bitlicence” by the New York State Department of Financial Services. PayPal formerly was a partner in Facebook’s struggling digital currency venture Libra (now called Diem) but was the first company to pull out of that.

Cryptocurrencies also got a pre-Christmas gift from Pornhub, one of the biggest internet pornography sites, after in December Mastercard permanently ended the use of its cards on the site and Visa suspended the use of its cards pending the results of an investigation into allegations of child porn. To access its “premium” services Pornhub now accepts only cryptocurrency payments. Reuters reported the US Drug Enforcement Agency as saying that drug cartels in Mexico and Colombia “are increasing their use of virtual currency”; they hide behind the anonymity which cryptocurrencies lend.

Reserve currencies

Fiat currencies which enjoy “reserve” currency status last around 100 years: we have had Portugal’s (from 1450 to 1530), Spain’s (from 1530 to 1641), the Netherlands (1642 to 1720), France (from 1720 to 1815) and Britain (1815 to 1920). The US dollar has had this status for about 100 years. Some are asking how long the US dollar can cling onto its reserve status, with Bitcoin supposedly waiting in the wings to take over. The Euro and China’s Yuan might be contenders but for their inherent political problems – too little central government control and too much, respectively.

Venezuela’s government is trying to digitalise its currency, yet again. Its fiat currency Bolivar notes are practically worthless as a result of hyperinflation, currently running in excess of 2,000% per year. Venezuelans prefer to carry out their business in US dollars. The largest note in circulation, 50,000 Bolivars, is worth about $0.04. Nicolas Maduro, the President says he’s “set the goal of an economy that’s 100% digital” but then the “Petro” cryptocurrency (supposedly backed by reserves of oil, gas, gold and diamonds) he introduced in 2017 is regarded by most as a worthless scam. His latest digitalisation promise is probably also destined to fail.

Cryptocurrencies are gambles

JP Morgan’s bullish note about Bitcoin hinges on what it calls the “current speculative mania” sustaining; the $146,000 price represents what Bitcoin would need to reach if it were to rise from its current $575 billion market capitalisation to match the value of gold wealth held in gold bars, coins or exchange trade funds, as calculated by the analysts.

“Speculative mania”. That sums up the cryptocurrency world right now. Bitcoin crashed by more than 50% from its February 2020 highs as Covid-19 tanked all but the safest assets. Its value went up 14-fold in 2017 before falling more than 70% in 2018. Cryptocurrency traders view it more like an equity than a currency; useful for money-laundering and anonymity but not for buying your morning coffee (it’s too slow for that). Bitcoin’s ownership is also highly concentrated – the biggest 2% of the anonymous accounts tracked on its ledger control about 95% of supply.

You can see why cryptocurrencies are attractive in the current environment, when yields on just about all assets are so low. And people are rightly worried that governments are starting to debase their fiat currencies, so they are seeking an alternative that might enable them to take control over their wealth. What people are chasing with cryptocurrencies however is no more than the greater fool theory, meaning that during a market bubble – which Bitcoin certainly is in – one can make money by buying overvalued assets and selling them for a profit later, because there will always be a ‘greater fool’ willing to pay. Bitcoin has entered its “tulip mania” phase.

So for those who believe there will always be a greater fool around the bend, cryptocurrencies are perhaps a risk worth taking. But as far as a new reserve currency is concerned, that already exists – gold. With Glint you can easily buy your morning coffee or indeed just about anything you like. Gold is a safer asset than paper money and has been so for thousands of years. It, and Glint, will still be here when the latest mania crashes.

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