Five myths about cryptocurrency
Bitcoin, the original cryptocurrency, was launched in 2009. Today, there are thousands of cryptocurrencies with a total value of about $2 trillion. The surge in their prices earlier this year minted tens of thousands of cryptocurrency millionaires—at least on paper. Cryptocurrencies might turn out to be a massive speculative bubble that ends up hurting many naive investors. Indeed, many cryptocurrency fortunes have already evaporated with the recent plunge in prices. But whatever their ultimate fate, the ingenious technological innovations underpinning them will transform the nature of money and finance.
Myth No. 1
A cryptocurrency is real money that can be used for payments.
Cryptocurrencies such as bitcoin and Ethereum were designed as a way to make payments without relying on traditional modes such as currency notes, debit cards, credit cards or checks. The bitcoin white paper, which set off the cryptocurrency revolution, envisions an electronic payment system that allows “any two willing parties to transact directly with each other without the need for a trusted third party,” cutting governments and banks out of the financial loop. The website Pymnts claims, “Blockchain IS the future of the payments industry,” a reference to the computational technology that undergirds cryptocurrencies.
In fact, it has become very expensive and slow to conduct transactions using cryptocurrencies. It takes about 10 minutes for a bitcoin transaction to be validated, and the average fee for just one transaction was recently about $20. Ethereum, the second-largest cryptocurrency, processes transactions slightly faster but also has high fees.
Moreover, wild swings in the values of most cryptocurrencies make them unreliable as a means of payment. In late April, the price of a Dogecoin was 20 cents. It tripled in the next two weeks and then fell to half that peak value ten days later. It is as though a $10 bill could buy you just a cup of coffee one day and a lavish meal at a fancy restaurant just a few weeks later. Even on a calmer, more typical day, the value of a major cryptocurrency such as Ethereum might fluctuate by 10 percent or more, making it too unstable to be practical. Recently, Elon Musk announced that Tesla would no longer accept bitcoin as a form of payment, reversing a policy it had implemented earlier in the year. The value of a single coin almost immediately plummeted. A Chinese crackdown on cryptocurrencies then briefly took another one-third off the price in just one day.
Myth No. 2
Cryptocurrencies are a good investment.
Investment funds in bitcoin and other cryptocurrencies have proliferated. Even major banks such as Goldman Sachs and Morgan Stanley are getting into the game. And you would certainly have made a fantastic return if you had bought any of the major cryptocurrencies last year. A typical article in the Motley Fool debates not whether cryptocurrencies are a good investment but “which one is right for you.” The website Business Mole claims: “Even with adjustments made, Bitcoin and Ethereum are very profitable. It’s simple.”
But beware. Part of the allure seems to be that, like gold, the supply of most cryptocurrencies is tightly controlled (by the computer programs that manage them). For instance, about 18.5 million bitcoin have been created so far, and there will eventually be a maximum of 21 million bitcoin. This is a cap set by the computer program that manages the supply of the currency.
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Scarcity by itself is not, however, enough to create value—there has to be demand. Since cryptocurrencies cannot easily be used to make most payments and have no other intrinsic uses, the only reason they have value is because many people seem to think they are good investments. If that changed, their value could quickly drop to nothing.
Myth No. 3
Bitcoin is fading. Meme coins are the future.
Bitcoin is now seen as the granddaddy of cryptocurrencies, and investors (or speculators, more precisely) are piling into other cryptocurrencies such as Dogecoin. In 2019, Investopedia claimed that bitcoin was “losing its power as the driving force of the cryptocurrency world.” “Bitcoin And Ethereum Are Being Left In The Dust By Dogecoin,” reads a recent Forbes headline.
Dogecoin and other such cryptocurrencies, which are simply built around memes (Dogecoin, with its Shiba Inu dog mascot, references the “doge” meme), don’t even make a pretense of being usable in financial transactions. And there is no clear constraint on the supply of these coins, so their prices surge or crash on random events such as tweets from Musk. The valuations of meme currencies seem to be based entirely on the “greater fool” theory—all you need to do to profit from your investment is to find an even greater fool willing to pay a higher price than you paid for the digital coins.
Bitcoin’s technology does seem outdated compared with some of the newer cryptocurrencies that enable greater anonymity for users, faster transaction processing and more sophisticated technical features that facilitate automatic processing of complex financial transactions. For all its flaws, however, bitcoin remains dominant: It accounts for nearly half of the total value of all cryptocurrencies.
Myth No. 4
Cryptocurrencies will displace the dollar.
Morgan Stanley’s chief global strategist, Ruchir Sharma, has argued that bitcoin could end the dollar’s reign—or at least that the “digital currency poses a significant threat to [the] greenback’s supremacy.” A Financial Times headline proposes, even more ominously, that “Bitcoin’s rise reflects America’s decline.”
Cryptocurrencies are not backed by anything other than the faith of the people who own them. The dollar, by contrast, is backed by the U.S. government. Investors still trust the dollar, even in hard times. As one illustration, domestic and foreign investors continue to eagerly snap up trillions of dollars in U.S. Treasury securities even at low interest rates.
New cryptocurrencies called stablecoins aim to have stable values and therefore make it easier to conduct digital payments. Facebook plans to issue its own cryptocurrency, called Diem, that will be backed one for one with U.S. dollars, giving it a stable value. But the value of stablecoins comes precisely from their backing by government-issued currencies. So while dollars might become less important in making payments, the primacy of the U.S. dollar as a store of value will not be challenged.
Myth No. 5
Cryptocurrencies are just a fad and will fade away.
Warren Buffett has compared cryptocurrencies to the 17th-century Dutch tulip craze, while Bank of England Governor Andrew Bailey cautioned, “Buy them only if you’re prepared to lose all your money.” Economist Nouriel Roubini called bitcoin “the mother or father of all scams” and even criticized its underlying technology.
Cryptocurrencies may or may not persevere as speculative investment vehicles, but they are triggering transformative changes to money and finance. As the technology matures, stablecoins will hasten the ascendance of digital payments, ushering out paper currency. The prospect of competition from such private currencies has prodded central banks around the world to design digital versions of their currencies. The Bahamas has already rolled out a central bank digital currency, while countries like China, Japan and Sweden are conducting experiments with their own official digital money. The dollar bills in your wallet—if you still have any—could soon become relics.
Even transactions such as buying a car or a house could soon be managed through computer programs run on cryptocurrency platforms. Digital tokens representing money and other assets could ease electronic transactions that involve transfers of assets and payments, often without trusted third parties such as real estate settlement attorneys. Governments will still be needed to enforce contractual obligations and property rights, but software could someday take the place of other intermediaries, including bankers, accountants and lawyers.
All kids deserve to have recess next school year
As school leaders, educators, and families think ahead to the new school year, they are faced with tremendous challenges to ensure school experiences are safe for kids. They have a critical role in creating the conditions needed to help kids recover from lost learning and the trauma caused by the pandemic, especially for families in low-income or socially vulnerable communities.
Along with parents, there is a shared understanding among educators, school leaders, researchers, and child psychologists that the 2021-2022 school year will be critical in shaping kids’ experiences and the adults they become. One important decision that will be crucial to these two factors in the new school year and that many schools now face is whether they will or will not have recess next year.
Part of the challenge in making this decision is that schools don’t know where to turn for guidance. The Centers for Disease Control and Prevention (CDC) has not provided official guidance to schools specifically about recess. The CDC does, however, recommend outdoor activities, “cohorting” groups of students, mask wearing, and physical distancing—all of which are possible during recess. Most state departments of health or education also have not provided guidance to schools about recess. Some states have mandates of minimum number of minutes for recess, so schools and districts have to figure out for themselves how to host recess safely that ensures quality, COVID-safe recess experiences. And at other schools, recess may not have been part of the regular school day before the pandemic, so getting back onto the playground might feel especially daunting.
The Many Benefits of Recess
Recess is a critical time in the school day, and all kids deserve to experience it next year. A growing body of research supports the physical, social, and emotional benefits kids get from playing at recess.
“Play allows children to use their creativity while developing their imagination, dexterity, and physical, cognitive, and emotional strength,” says the American Academy of Pediatrics. “Play allows children to create and explore a world they can master, conquering their fears while practicing adult roles.”
A big focus for educators now is how they will build social connections with and among kids. Play can create opportunities for kids and adults to feel emotionally and physically safe so that they can develop strong relationships and build healthy communities. According to researchers, recess can be the foundation to helping kids recover from trauma and learning loss. Many parents agree, as over the past year, they have prioritized the purpose of education differently—from primarily building academic skills to supporting social-emotional development as well.
How to Create COVID-safe Recess
The good news is that it isn’t hard to create a COVID-safe environment for recess—it just takes intentionality and planning. Playworks, a national nonprofit leveraging the power of play to bring out the best in every kid, offers free tools, COVID-safe games, and resources to support school leaders and educators as they reintroduce in-person recess. Here are some examples:
Journey around the World:
Have the group of students spread out and explain to them that they are going on a journey around the world using motion and creativity.
Choose one student to pick the first destination, then ask another student to choose the mode of transportation to get there, such as hopping to Kenya.
Have the students act out the mode of transportation in their locations for a few seconds before reaching the destination.
Upon “arrival” after a few seconds of the activity, ask a few of the students what there is to see/do while there and act those out accordingly.
Ensure every child has an opportunity to provide some input into the journey and let this be as student-driven as possible.
Switch:
Play on a foursquare court or map a larger space using cones or chalk to make a square and put one cone or X-mark with chalk in the middle. One player stands on each corner and one in the middle.
The person in the middle says “switch” to start the game and then all players must find a new corner/cone to occupy. No player can go to the center cone.
If two players arrive at the corner at the same time, a quick rock-paper-scissors is played, and the winner stays at the corner. The group tells the person who is less successful “good job” or “nice try” and the student joins the line of other students.
The next person in line becomes the person in the middle and begins the next round by saying “switch.”
One key component in the design of a COVID-safe recess is mapping the space. The playground can feature different stations for cohorts to visit until all kids can play together safely at school—using cones, chalk, lines, and more. Indoor space can be mapped too—in classrooms, hallways, auditoriums, and more—to ensure kids can play indoors safely. Playworks’ Safe Return to Play Training and Playworks School Reopening Workbook both feature ways to think creatively about mapping spaces to maximize COVID-safe play.
All kids deserve to have recess next year. The pandemic has established new norms throughout our society, and it presents us with that same opportunity in education. We have an unprecedented chance to prioritize equitable opportunities for play for all kids returning to school next year. Because there isn’t formal guidance and it is left up to each school, we all have a critical role in making safe and fun recess come to fruition for every kid.
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What’s behind the semiconductor shortage and how long could it last?
A global shortage of semiconductors has created serious anxiety in some industries and even caused automakers to halt production in several factories across North America. What led to this shortage, and is there anything manufacturers or the Biden administration can do to meet demand? David Dollar is joined by Don Clark, a contributor to The New York Times, to discuss the factors that triggered the recent supply issues and the potential implications for the future of chip manufacturing in the United States.
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This transcript has been lightly edited.
DAVID DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast Dollar and Sense. Today, we are talking about the semiconductor shortage which has caught the world off guard and is disrupting the auto industry and other sectors of the economy. My guest is Don Clark, a contributor to The New York Times on technology issues. Welcome to the show, Don.
DON CLARK: Hello there.
DOLLAR: So let’s start with the big picture. How serious is the semiconductor shortage for the economy now that we are recovering from the pandemic recession? What are the sectors that are particularly hurt by this?
CLARK: Well, I think the reason we are here talking today is because of the impact on the auto industry, which is a huge sector of the economy. They have been forced to temporarily close a bunch of plants in North America because of the chip shortage. So that has caused alarm bells in particular. Those are union jobs, the kind of people that voted for President Biden. This has definitely got the world’s attention, but there’s many other sectors of the economy that are affected. And not that the economy is doing that badly, but it’s kind of like we would be in a much better position had this not happened.
DOLLAR: I’ve read a number of your articles. You have some great stories about the types of firms that are affected far away from automobiles. You had one about a cement manufacturer. Does that ring a bell?
CLARK: This is a company that makes a little sensor that you place in places where you are going to pour concrete. So with these things that measure temperature in the ground, they beam signals to some people with laptops nearby and they can tell how quickly cement is hardening so that it’s secure. So these guys are worried about making future sensors. And they are worried not just about themselves, but on all the construction projects that they are involved with.
DOLLAR: So we’ve got chips just throughout the economy now. It’s really an interesting change. So how did we get to this shortage? What’s the failure here? We economists usually think about there being some kind of market failure to get you into a real mess. So, what was the failure here?
CLARK: Well, it’s really a combination of short-term and long-term factors both on the supply side and on the demand side. So the short-term factor, of course, is the pandemic. When the pandemic came around, people pulled in their sales or they just physically couldn’t keep production going. So the automakers in particular shut down temporarily. Meanwhile, everybody else, after sitting around at home, started buying everything you can imagine, particularly computers, appliances or game consoles, tablets, everything to educate and entertain themselves at home. So they started placing orders, and when the car guys came back around in the September time frame, they basically had lost their place in the manufacturing queue to get chip supplies. So they were disproportionately hurt. But there’s some other really interesting factors.
The chip industry has had many shortages before, but they usually are in a particular kind of chip like memory chips. This time it’s across the board, which is a sign that demand is really going through the roof. There’s two vectors. The chips are being used in many more kinds of products, and then each product that is using chips—like a car or a smartphone—they are using many more chips. So the cars that we are making today, they were designed three years ago. The cars next year are going to have even more chips. So it’s this kind of treadmill that wasn’t really factored in.
The other thing to keep in mind is that there’s both the new cutting-edge chips that are scarce supply—those mainly come from this one company, TSMC, in Taiwan, and that’s what’s in, say, the latest Apple smartphone—but also all these old factories, old chips, very simple things that were paid off years ago. In those cases, it’s very hard to upgrade those supply lines. The biggest factor is demand, but after that you get to these supply bottlenecks.
DOLLAR: Right. So to some extent, it sounds like the chip manufacturers didn’t anticipate this big surge in demand, which is kind of understandable because it’s been a really uncertain world.
CLARK: Yeah, and they have been expanding, but the great thing for a chip manufacturer is when their factory is full. They love that. When it’s empty, they lose lots of money. But if there’s a shortage and they can’t fill demand, they sort of leave money on the table. The history of the chip industry has been marked by these periods where they built too many factories so there’s a glut of chips or they built too few factories and there’s a shortage of chips. So they weren’t getting accurate demand signals from their customers. So a lot of the problem here is properly evaluating and forecasting demand, which is very difficult.
DOLLAR: Then I take it these firms cannot easily ramp up production. So the firms that suddenly have large increases in demand, can’t just—
CLARK: Yes, they cannot. There’s two dimensions of that. If they just wanted to build a new factory from scratch, the cutting-edge factories are $10 billion a pop, takes three years to build them. So that’s a long lag right there. Then you have these older factories I was talking about. Some of those are using a kind of smaller silicon wafer to make the chips, and the machines for making those kinds of chips aren’t being made anymore. So they can’t increase production even if they want to. So anyway, it’s not an easy situation.
Read the full transcript.
David Dollar
Senior Fellow – Foreign Policy, Global Economy and Development, John L. Thornton China Center
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Don Clark
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