In a sixteen-page report entitled “A Short Introduction to the World of Cryptocurrencies,” Aleksander Berentsen and Fabian Schär of the St. Louis Federal Reserve Bank discuss the history, applications, risks and future of cryptocurrency and its underlying technologies.
Staying Power and Fiat Comparisons
Berentsen and Schär are among the few bank-affiliated finance experts who publicly endorse cryptocurrency, praising it for the influence that it has had, and speaking positively of future applications of the technology. According to them, Bitcoin and major digital currencies as a whole have a permanent place in the current global currency ecosystem.
Providing an interesting perspective, the co-authors address the familiar refrain that Bitcoin and its peers do not have any intrinsic value of their own, with the rebuttal that the same applies to many fiat currencies. The report explained that,
“Bitcoin is not the only currency that has no intrinsic value. State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree.”
“The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system,” wrote Berentsen and Schär.
Speaking of the speculation about Bitcoin’s price, the experts wrote:
“Most Bitcoin users believe that Bitcoin’s limited supply will result in deflation. That is, they are convinced that its value will forever increase,” said the report. “The present price of the currency is determined solely by expectations about its future price. A buyer is willing to buy a Bitcoin unit only if he or she assumes that the unit will sell for at least the same price later on.”
According to the report, there is a strong possibility that crypto assets will eventually be viewed as an asset class unto themselves, which implies an attractive investment and a method of diversifying an investment portfolio. Also, they speculate that Bitcoin may evolve to take a position alongside gold and eventually become regarded in the same manner.
However, the co-authors did not gloss over the issues that Bitcoin has faced, with the majority coming to light in 2017. The phenomenon of forks was raised as the first “risk,” stating that a blockchain can be split in two over a disagreement amongst developers and the public.
The report listed energy wastage as the second risk but took lengths to argue that a centralized system would not necessarily be more cost-effective, despite the common belief that this would be the case.
The third and final risk outlined was price volatility, wherein the Berentsen and Schär shared their opinion that the predetermined number of Bitcoins would not lead to a stable currency or a desirable monetary policy.
“Price volatility and scaling issues frequently raise concerns about the suitability of Bitcoin as a payment instrument. As an asset, however, Bitcoin and alternative blockchain-based tokens should not be neglected,” emphasized the St. Louis Fed experts. The duo concluded that,
“Blockchain technology provides an infrastructure that enables numerous applications. Promising applications include using colored coins, smart contracts, and the possibility of using fingerprints to secure the integrity of data files in a blockchain, which may bring change to the world of finance and to many other sectors.”