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 value for the world’s preeminent cryptocurrency, the former Reagan administration economic adviser said, “From a high theoretical point of view, you end up with bitcoin that has a price, it’s objective and we 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 can be derived when determining its exchange rate with national currencies, such as the dollar (GBP / USD) and the British pound, adding that “it 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, the interest rate parity. Hanke states that there is no way to rationalize the interest rate parity between bitcoin and a recognizable global currency. A seasoned currency reformer, Hanke said the two fundamental models of currency valuation “don’t make sense in this bitcoin space.”
“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 global fiat currencies, such as the dollar and the British 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 the main directive from God. Thus, fiat currency was issued by an authoritative decree which has absolute sanction, and confidence in the value of fiat currency is closely related to confidence in the authority of the issuing state.
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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 supporters of bitcoin, such as MicroStrategy CEO Michael Saylor, see it as “digital gold” and a digital asset to be used as a hedge against inflation.
Watch: Steve Hanke on Milton Friedman’s Cryptocurrency Predictions
Milton Friedman, one of the intellectual leaders of the Chicago School of Economics and colleague of Steve Hanke, spoke to the National Taxpayers Union (NTU) in 1999 about a new medium of exchange that was a premonitory description of the rise of bitcoin 10 years later. . He predicted that there would be a digital currency, native to the Internet, which 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 of the money was already produced by commercial banks, most of it was already electronic, and with the advent of the Internet, even more would be electronic.”
Friedman’s discussion of “electronic money” could also be seen as foreshadowing the emergence of central bank digital currencies (CBDCs), where all accounts are held at the central bank and middlemen are bypassed. Hanke thinks it’s inevitable that we will see a version of the US dollar produced as a digital currency by the Federal Reserve.
However, he adds that it will not create the banking revolution that made the headlines in the media. Hanke points out that “most of the US dollars that are produced are currently produced electronically and the Federal Reserve only produces 10 or 15% of the money held by the public, the rest comes from commercial banks. who produce it electronically ”.
Look: will a digital yuan threaten the US dollar?
“We talk about digital currency like it’s something new, but most of the currency in the world is produced digitally.”
Hanke paints a grim picture of CBDCs in the hands of authoritarian governments that have the potential to create serious breaches of privacy. He rejected 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 in China, but Hanke remains indifferent to Beijing’s advantage in the region.
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“The yuan is not even a convertible currency, so the idea that it could 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 of the digital yuan stems from the “problem of espionage or the problem of privacy in China.”
“This is why the digital yuan is not even accepted by the Chinese on the mainland, they don’t want to be spied on, they are 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 new coronavirus variants such as Omicron. Inflation poses a challenge for central banks around the world and is expected to stay above the US Federal Reserve’s target until 2024. He called on central banks to tighten monetary policy in the years to come. He said the best way to resolve the current situation “is to look at the causes and to quote Milton Friedman, the cause of inflation is a monetary phenomenon, it is the creation of money that causes inflation.”
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Hanke said the real cause was “too much money in the system”. He said the way to solve the rising inflation of currencies such as the dollar, “which climbs to 6% and possibly as high as 9% by the end of December”, was to “slow the rate of growth of the money supply now ”.