The use of bitcoin may be a return to the gold standard, but while early investors in the cryptocurrency may initially be optimistic following rising prices, they need to be aware of the pitfalls, ETF Securities has warned.
London-based global foreign exchange and commodity strategist Martin Arnold said many investors were buying bitcoin because they felt central bank intervention was devaluing fiat currency, while others invested because they believed the eventual widespread acceptance and usability of bitcoin would lead to prices rising over time.
But Arnold said an eventual decline in economic growth would result in bitcoin prices crumbling, which could then be worsened by the lack of a lender of last resort.
“With a finite supply of bitcoin, rising usage could see prices rise, but it would come at a cost,” he said.
“In the event of widespread acceptance of bitcoin or another cryptocurrency with limited supply, the growth of the global economy will theoretically be limited.”
He added slowing growth, falling to zero in the future, in the supply of bitcoin would hinder economic growth.
“Money supply growth is critical for economic growth and is an important part of the current monetary policy,” he said.
He compared the growing use of a cryptocurrency to the gold standard, where the underlying premise was the convertibility of currency to gold at a certain rate of exchange. The gold standard was implemented to achieve price stability, limiting the ability of governments to print money, and therefore devaluing the currency and potentially leading to inflation.
“The gold standard failed for several reasons. One critical problem was that it tied policymakers’ hands to deal with a downturn in economic growth,” Arnold said.
“In the end, growth is limited by the amount of gold in circulation, assuming 100 per cent gold backing.”
He said a so-called ‘bitcoin standard’ would remove volatility because if currencies were backed by bitcoin, those currencies would move in line with the bitcoin price. Bitcoin in other currencies would continue experiencing volatility, but the problems of money supply growth impacting on production would remain.