May 24, 2021

Five myths about cryptocurrency

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Five myths about cryptocurrency 1

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.

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.

Biden’s nominees would bring diversity to the Fed—if they’re confirmed

President Biden has announced his roster to fill key vacancies on the Federal Reserve’s 7-seat Board of Governors. If confirmed by the Senate, Biden’s nominees would advance his economic agenda at the central bank. They would diversify the ranks of economic policymakers and likely tighten supervision of Wall Street.

Sarah A. Binder

Senior Fellow – Governance Studies

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Mark Spindel

Chief Investment Officer, Potomac River Capital LLC

These nominations follow in the wake of Biden’s decisions late last year to reappoint Jerome Powell to a second term as Fed chair and to elevate Lael Brainard as second in command. Powell and Brainard already serve as confirmed governors, but the Senate will also need to approve their four-year leadership posts. If the Senate confirms all five, Biden’s Fed appointees would reverse the heavy GOP-tilt of the Board engineered by the Trump administration.  
Here’s what you need to know.
Diversity counts
Biden has nominated two Black economists, Michigan State’s Lisa Cook and Davidson College’s Phillip Jefferson, to seats on the Board. He has also named former Fed governor and Treasury official, Sarah Bloom Raskin, as the Fed’s vice chair of supervision, a position Congress created in the wake of the global financial crisis as the Fed’s top banking cop.
These appointments help to diversify the Fed’s almost exclusively white ranks. Since Congress revamped the Federal Reserve Act in 1935, creating the 7-seat Board of Governors, 82 people have served on the Board. Just three of them were Black men, and ten of them were white women. And while Biden’s nominations augment the Fed’s racial diversity, confirming Cook, Brainard, and Raskin would expand the number of women governors by just one, since both Raskin and Brainard already have Board service under their belts. Notably though, this would be the first Board with a majority (four) of seven seats filled by women governors.
Rough waters ahead?
Observers expect a broad swath of Senate Republicans to vote to confirm Powell, a Republican, to a second term as chair. However, it remains to be seen how many, if any, Republicans will vote to confirm the other four nominees. Of course, Senate Democrats—if they stick together—can confirm all four without any GOP support, since Democrats banned nomination filibusters back in 2013.
Like most Congressional decisions, Fed confirmation votes are more contentious today than they were even 15 years ago, before the global financial crisis. The figure below shows shrinking Senate support on final confirmation votes for Fed nominations since the Reagan administration. Of those nominees considered on the Senate floor between 1982 and 2011, only one, Alice Rivlin, received less than 94% of the vote. The most dramatic contests came in 2020: The GOP-led Senate rejected Trump’s nominee, Judy Shelton, by a vote of 47-50, and just barely confirmed another Trump nominee, Christopher Waller. Four other Trump picks never even made it to a floor vote.

Nor can Biden count on filling the Board swiftly. Prior to the financial crisis, nominees waited about three months on average for confirmation. After the crisis, the wait time ballooned closer to eight months. The Senate took nearly ten months to confirm Waller, a record delay for the contemporary Senate’s handling of Fed nominees. Even with Democrats in control this year, Republicans have found ways to slow down the Senate.
Beware partisan crosshairs
Decades of rising partisanship are seeping into senators’ views of the Fed, often turning otherwise low profile Board nominations into politically charged votes. At the same time, public attention to the Fed has grown with its expanding imprint on the economy.   
The central bank has played an outsized role in stemming the economic damage caused by the global financial crisis in 2007-08 and the global Coronavirus pandemic in 2020-21. And with interest rates near zero, central bankers need to use more creative and often contentious tools to manage the US economy. Critics from both sides of the partisan aisle blame the Fed for either doing too much—or too little—to stem an array of old and new problems.
Add in rising expectations that the Fed will hike interest rates early this year to combat inflation and a hot economy, these nominees will face questions at the core of central banking—how fast and how soon to take away the punchbowl. Raising the price of money is never easy, but this Board could find tightening especially difficult given the addition of Biden’s governors committed to the Fed’s goal of a stronger and more racially inclusive labor market. 
The parties also disagree about whether the Fed can or should do more to combat climate change, especially in light of Congress’s own tentative steps. Democrats want the Fed to use its supervisory powers to force banks to address climate risk in their lending decisions; Republicans think such policies fall outside the Fed’s mandate. Partisans also contest whether the Fed should do more to redress racial economic inequities.
Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are “independent.” But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.

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