Central banks have the power and the means to crush bitcoin before bitcoin crushes them
European Central Bank governing council member Gabriel Makhlouf has a stark warning for bitcoin investors: Be prepared to lose all your money.
“Personally, I’m not sure why people invest in those sorts of assets, but they see them as assets clearly,” Makhlouf told Bloomberg TV on Friday. “Our role is to make sure that consumers are protected.”
Makhlouf’s comments echo similar comments made by U.S. congressional leaders last year. They, too, raised their concerns of investors losing money in cryptocurrencies and their determination to limit their use.
Apparently, protecting investors and consumers is the official reason central bankers and governments want to rein in bitcoin. But there’s an unofficial reason, too. Cryptocurrencies threaten to break their monopoly on printing money and manipulating the economy.
That’s why, sooner or later, they will crush it.
Bitcoin began as a collectible currency for digital wallets, drawing the interest of what marketing experts call “innovators,” or tech-savvy people. They liked the centralized nature of bitcoin and its potential to correct the ills of a global economy, like inflation, usually created by central banks to bail out heavily indebted corporations and big governments.
Somewhere down the road, innovators were joined by “early adopters,” or enterprising individuals. They saw bitcoin as a better hedge against global uncertainties than conventional hedges like gold.
Soon, investors joined innovators and early adopters. They, too, saw bitcoin as a haven against central bankers’ ultra-accommodative policies and the rise of geopolitical tensions.
Meanwhile, venture capitalists joined the game through initial coin offerings, adding fuel to a bitcoin bubble blooming like a colorful tulip in the early 17th century.
Bitcoin has soared from less than $20 in 2012 to $40,000 in early January.
Thus far, big governments and central banks are waiting, limiting their intervention to regulating ICOs and warnings about the risks of investing in bitcoin and other cryptocurrencies rather than restricting its use as money.
This situation may change once Bitcoin reaches the “tipping point,” gain greater acceptance by the “early majority,” a larger group of individuals; replace national currencies as a medium of exchange and store of value and break the monopolies of governments to collect seigniorage income—the acquisition of commodities and assets by printing money.
But that will never happen. Big governments and central banks have the power and the means to crush bitcoin before it crushes them and reduce it to its early role: a collectible currency for tech-savvy enthusiasts.
Disclosure: I don’t own any bitcoin.
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About the author:
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.
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