“The value of bitcoin is probably zero”

Steve Hanke, economist and former adviser to the Regan administration. Photo: Yahoo Finance

Bitcoin (BTC-USD) has a price “but we don’t know its value, which is probably zero,” said senior economist Steve Hanke.

Speaking to Yahoo Finance about the difficulty of deriving a value for the world’s preeminent cryptocurrency, the former economic adviser to the Reagan administration said: “From a high theoretical standpoint, you find yourself with bitcoin that has a price, that is objective and we don’t know what it is, but we don’t know its fundamental value and I guess it’s probably zero.”

The economics professor wondered how the value of bitcoin could be derived when determining its exchange rate with national currencies, such as the dollar (GBP/USD) and the pound, adding that “there is no There is no exchange rate model that would actually rationalize the bitcoin/US dollar exchange rate.

Watch: How much is bitcoin worth?

It is difficult to know the purchasing power parity of bitcoin. With a national currency, such as the dollar, the price of a basket of goods can be calculated. But a basket of goods calculated in bitcoin is difficult to achieve when most retailers around the world do not accept cryptocurrency in transactions.

This is similar when using the other basic model to derive the value of a currency, interest rate parity. Hanke says there is no way to rationalize interest rate parity between bitcoin and a recognizable global currency. A veteran currency reformer, Hanke said the two fundamental models for valuing exchange rates “make no sense in this bitcoin space.”

Watch: “Cryptocurrencies are fiat money on steroids”

“You have purchasing power parity and that can’t be used for bitcoin, and you have interest rate parity and that can’t be used for bitcoin either.”

The value of the world’s fiat currencies, such as the dollar and the pound, comes from the support of nation states and the level of trust that the majority of people place in them. The word fiat is Latin for “let it be done” and comes from the first lines of the book of Genesis in the Bible. The words “fiat lux” or “let there be light” being God’s main directive. Thus, fiat currency was issued by an authoritative decree that has absolute sanction, and confidence in the value of a fiat currency is closely tied to confidence in the authority of the state issuing it.

Read more: “Crypto Lobbyists Dictate Washington’s Terms”

While a common criticism of bitcoin is that it has no intrinsic value, it is stored as computer code and has no physical properties. However, many Bitcoin backers, such as MicroStrategy CEO Michael Saylor, view it as “digital gold” and a digital asset to be used as an inflation hedge.

Watch: Steve Hanke on Milton Friedman’s Cryptocurrency Predictions

Milton Friedman, one of the thought leaders of the Chicago School of Economics and a colleague of Steve Hanke, spoke to the National Taxpayers Union (NTU) in 1999 about a new medium of exchange that was a prescient description of the rise of bitcoin 10 years later. . He predicted the birth of a digital currency, indigenous to the internet, that would disintermediate global financial intermediaries through peer-to-peer transactions.

In the NTU interview, Friedman said, “The only thing missing but soon to be developed is reliable e-cash, a method by which over the internet you can transfer funds from A to B without them knowing each other. .”

Hanke described Friedman as knowing “that most money was already produced by commercial banks, most was already electronic, and with the coming of the Internet even more would be electronic.”

Friedman’s discussion of a digital “e-cash” could also be seen as foreshadowing the emergence of central bank digital currencies (CBDCs), where all accounts are held at the central bank and intermediaries are bypassed. Hanke thinks it is inevitable that we will see a version of the US dollar produced as a digital currency by the Federal Reserve.

However, he adds that this will not create the banking revolution heralded in media headlines. Hanke points to the fact that “most of the US dollars that are produced are produced by electronic means right now and the Federal Reserve only produces 10 or 15% of the money held by the public, the rest comes from the commercial banks which produce it electronically”.

Watch: Will a digital yuan threaten the US dollar?

“We talk about digital currency as if it were a novelty, but most of the currency in the world is produced digitally.”

Hanke paints a bleak picture of CBDCs in the hands of authoritarian governments that have the potential to create serious privacy breaches. He dismissed the idea that the US dollar could be challenged by the Chinese digital yuan. Beijing has already tested its new digital currency in major cities across China, but Hanke remains oblivious to Beijing’s advantage as a frontrunner in the region.

Read more: How a Bitcoin Court Case in Japan Can Create Crypto Millionaires

“The yuan is not even a convertible currency, so the idea that it can compete with the dollar is a ridiculous notion and until it can become freely convertible into other currencies, forget it, it won’t be a challenge,” Hanke said. He warned that the real concern for the digital yuan stems from “the spying problem or the privacy problem in China”.

“That’s why the digital yuan isn’t even accepted by the Chinese in the mainland, they don’t want to be spied on, they’re smart enough to know that the Communist Party is going to look into every transaction they make.”

Watch: The Pros and Cons of Central Bank Digital Currencies?

Hanke then gave a solution to the escalating inflation affecting world currencies. The global economic recovery is expected to slow somewhat in 2022 as downside risks intensify from novel coronavirus variants such as Omicron. Inflation poses a challenge for central banks around the world and is expected to remain above the US Federal Reserve’s target until 2024. He called on central banks to tighten monetary policy in the coming years. He said the best way to solve the current situation “is to look at the causes and quote Milton Friedman, the cause of inflation is a monetary phenomenon, it is money creation that causes inflation.”

Read more: Ghost of Inflation Past: How 2021 became the year of high prices

Hanke said the real cause was “too much money in the system.” He said the way to solve the rise in inflation of currencies such as the dollar, “amounting to 6% and possibly as high as 9% by the end of December”, was to “slow the rate of money supply growth now”. ”.

Watch: How to Solve the Inflation Problem

About Sharon Joseph

Check Also

Why has the West nervously predicted when China’s economy will overtake the United States?

Photo: GT It is not surprising that it is increasingly fashionable to predict the evolution …