St. Louis Federal Reserve Vice President David Andolfatto has become one the Fed officials most involved with Bitcoin. He has been blogging about Bitcoin and recently provided his personal insights in an interview with Business Insider. He also presented a talk on the topic.
The title to Business Insider’s story reflects a positive view on cryptocurrency (“Bitcoin Could Be A Good Threat to Central Banks”), while the title of his blog post sounds more negative (“Why Gold and Bitcoin Make Lousy Money”).
Both are true in their own way: In his perspective, the main advantage posed by Bitcoin is how the disruptive technology will force the Fed to run responsible policies. Overall, the Fed has done a good job but hasn’t been perfect. Still, inflation has been low and stable for the last 30 years and the world looks to the dollar for stability.
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In countries which maintain an iron grip on their currency, there is even more opportunity for Bitcoin. In Albania for example, “you would suffer severe consequences” if you were caught holding U.S. dollars. These days, where money can be transferred electronically and with mobile devices, such policies are harder to enforce unless draconian measures are taken.
However, he draws close comparisons to gold, saying that both “make lousy money” (although this doesn’t necessary mean to say that both are entirely worthless). His takeaway #1 is that Bitcoin suffers the “same defect” as gold- the high volatility (one can certainly argue, however, that while gold is slightly more volatile than major currency pairs, it is less volatile than the average equity. Its volatility is a far cry from Bitcoin’s. Only when viewing their multi-fold gains over a period of several years can they be viewed as “volatile”, in which case the same can be said for many equities.)
He argues that both really have no intrinsic value and that their perceived value derives from their fixed supply (again, a debatable argument for gold which is sought in numerous industrial and commercial applications). Gold is not “superior money” (some will argue that this and the views regarding inflation expressed above are highly “Fed-centric”).
Economists have recently had a tough time predicting the future price of gold, with some openly acknowledging such. Gold is currently hovering around $1300 USD. It has been a raging bull market, posting sizeable gains for 9 out of the last 10 years, its only major hiccup coming last year where it lost nearly 30%- perhaps a justified correction after gaining 1700% since the early 70’s. Bitcoin has a similar story, only that it has all transpired within a 5 year span. Bitcoin investors are indeed hoping that it is truly like gold in this way.