Middle East

Now outlaw cryptocurrencies

Willem H Bitter / New York

Bitcoin prices rose from $ 41,030 on September 29, 2021 to $ 69,000 on November 10, 2021, and experienced yet another volatile fluctuation before falling to $ 35,075 on January 23. did. It decreased significantly as a percentage, with a decrease of 83.8% between December 15, 2017 and December 14, 2018. In a broader sense, the crypto market (including about 12,278 coins) was estimated to be worth $ 3.3 trillion on November 8, 2021, before plunging to $ 1.75 trillion as of January 30. rice field.
Bitcoin, a private digital asset based on distributed ledger technology known as the “blockchain,” is used as a decentralized digital currency, a peer-to-peer electronic cash system. Its market valuation (US dollar basis) is just a bubble because it has no intrinsic value.
If Bitcoin was priced at $ 327 on November 20, 2015, and if you “maintain a dear life” early on, you can expect a capital gain of 11,521.5% as of January 30. At the end of this month, it may not be worth anything. There are no anchors.
If Bitcoin achieves a positive valuation at some point through a random convergence of random factors, subsequent valuations will probably have to be driven by arbitrage terms that require equal risk-adjusted returns on different assets. It will not be. Also, since Bitcoin’s valuation can always be zero, significant price fluctuations are expected.
Indeed, the same applies to the valuation of fiat money issued by central banks. While its use in tax payments and its fiat currency status step into cryptocurrencies, economics is inadequate when it comes to determining the market value of this central bank’s debt. It has no intrinsic value and can only be freely converted to itself. And while it is possible to assume a well-behaved demand function for the actual balance of money, this keeps the problem away.
Nor is it useful to assume that the actual inventory of central bank fiat money creates unspecified productive services and mysterious uses for households. The best economics came up with the assumption that efficient bartering is not possible and therefore fiat money is needed to carry out important transactions such as consumer purchases.
However, even if we were able to squeeze meaningful demand for a substantial money balance from the world of essentially worthless statutory banknotes, the price of money (the reciprocal of the general price level of goods and services). The decision remains a problem. For flexible prices, there are always multiple equilibria.
For example, suppose that the nominal money supply (the total supply of currency in the economy) and all other related factors remain constant. Even under these simplified conditions, it is not possible to determine the initial value of the price level. Whenever the price of money is zero, there is an equilibrium (which means that the general price level is infinite). In addition, there can be reasonable inflation or deflationary bubbles, limit cycles, or chaotic behavior for various initial conditions. There is also a unique “basic” equilibrium in which the price of money remains positive and constant. Finally, random transitions between different equilibria can be equilibrium in their own right. Irrational behavior and inefficient markets increase the potential for market turmoil.
Neoclassical economics argues that “basic” equilibrium predominates, while Keynesian economics does not say that general price levels are flexible asset prices driven by arbitrage transactions. By insisting, we are avoiding the conundrum of multiple equilibrium. Instead, it is sticky or rigid. The history assigns initial values ​​to general price levels and then updates with a dynamic inflation equation like the Phillips curve (which claims a stable inverse relationship between inflation and unemployment). That approach isn’t great, but I can live with it.
The same is true for private assets (such as commercial bank deposits) that are confident that they can be converted into central bank money at a fixed price on demand if the fiat currency issued by the central bank is of value. And government deposit insurance enhances the credibility of most of the assets held by banks, even when they are illiquid.
In contrast, stablecoin, a digital currency that seems to be convertible to dollars on demand at a fixed price, is effectively deposited without insurance. Depending on when and where it is accepted, digital payments will be easier. But even if the assets held against them have intrinsic value, they are dangerous. And if the proceeds from the issuance of Stablecoin are invested in crypto assets that are essentially worthless, the stability of that Stablecoin will be challenged by the market.
The current popularity of very risky and essentially worthless cryptocurrencies is difficult to understand, and buyers’ confidence in the blockchain’s ability to maintain a constant record of transactions is in quantum computing. Upon arrival, it will be tested immediately and may create even more risk. In addition, the amount of energy consumed by proof-of-work distributed ledgers such as Bitcoin’s blockchain is even higher per transaction, with proper carbon pricing or, if that is not possible, taxation on cryptocurrency mining. You will need.
Finally, the anonymity given to cryptocurrency holders is serious about the illegal use of funds, such as tax evasion, money laundering, hiding revenue from ransomware attacks and other cybercrime, and funding terrorism. Causes concern. This issue is urgent – ​​and regulation may not be sufficient. – Project Syndicate

•• Willem H Buiter is a visiting professor of international and public relations at Columbia University.



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