Anyone who has watched Bitcoin’s erratic price gyrations since its inception could get dizzy.
When first introduced in 2009, a unit of the pioneering cryptocurrency was valued at … zero cents. Within about two years, the price rose to $1 and months later surged upward in value to about $30, according to data from SoFi, a student loan refinancing firm. But then it plunged to $5.
By 2013, SoFi reported the price of Bitcoin was peaking at $1,100. It took off from there, hitting a 2021 high of more than $60,000, but with lots of stomach-churning swings. In mid-December, it was bouncing between $48,000 and $46,000.
Watching this roller-coaster ride has left economists and experts lining up in opposing camps regarding the future of not just Bitcoin, but the entire cryptocurrency sector.
For the uninitiated: The digital currency is a form of money that’s created and tracked in cyberspace by means of blockchain technology, which could best be described as a digital ledger. Unlike “fiat” currency such as dollars that are backed by the U.S. government, crypto is largely untethered to controls such as federal reserve banks. The digital ledger can be viewed by all of its users, which makes it an unusually transparent form of currency. But there also are tremendous unknowns and questions about future regulation of crypto, a status that almost always leads to volatility.
Economist Hugh Johnson, one of the Capital Region’s most eminent financial advisors, listed cryptocurrency as a risk factor to watch for in his annual market forecast for 2022. The combination of volatility and a lack of regulation poses a threat to the market’s stability, he said.
“It is difficult, at best, to make the case (cypto) has a fundamental appeal beyond being possibly a hedge against inflation or financial disarray,” Johnson said. “If it doesn’t go beyond that … if there is no fundamental reason to buy Bitcoin, it becomes a speculation on price only.”
Johnson’s colleague Sean Leonard, chief investment officer of the Graypoint financial planning firm, said as a highly volatile asset, the more “wallets” of average Americans are tied to crypto, “the more risk to household spending and economic health if cryptocurrencies decline materially.”
Leonard noted that crypto’s volatility has also made businesses reluctant to accept it as payment — and some high-profile frauds haven’t helped to cement crypto’s place in the economy.
To Johnson and Leonard, the most significant threat crypto assets pose could be an undermining of the Federal Reserve’s control over the money supply. If crypto assets were to increase as a percentage of liquid assets and trade freely, it could cause the Fed to lose its handle and alter its ability to impact economic activity through setting interest rates. (Libertarian-minded backers of Bitcoin and other forms of crypto, however, see this kind of disruption to systems of economic control as a feature and not a bug.)
Moreover, the coding community can vote to increase supply of some cryptocurrency. It’s a power the Federal Reserve will not permit to be delegated away, the advisors said. Considering the majority of investors and citizens have confidence in the global banking system, cryptocurrencies aren’t necessarily addressing a “real economic need, either,” Leonard said.
Bitcoin is supposed to be limited with a cap of 21 million “coins” that will be produced.
Richard Plotka, who directs the information technology and web sciences program at Rensselaer Polytechnic Institute in Troy, is far more bullish on crypto’s acceptance by the financial sector. But the idea that crypto can be another form of fiat currency — currency legally tendered by government that is not backed by a physical commodity such as gold — needs to become more widely accepted before that can happen, he said.
While Plotka, who wants to start a research center devoted to crypto’s developing market at RPI, acknowledges the “wild west” element to this world right now while noticing steady evolution.
In his opinion, crypto will change the economy — but not overnight.
“I believe it will ultimately stabilize out, especially once the government(s) start to get behind it,” he said.
Plotka said the current crypto system is unpredictable because not all of the kinks have fully been worked out, and just about anyone can have a say in what happens to a digital currency’s value.
He doesn’t doubt that the rise of crypto will be “disruptive” to banks and other currencies. Once the system’s most concerning bugs are addressed, he anticipated middleman services — similar to those that service more analog financial business — will facilitate blockchain transactions and make it accessible and easily transparent to less tech-savvy users.
Several banks and institutions have already started trying to break into the sometimes confusing crypto marketplace. Mastercard, for example, partnered with three cryptocurrency providers in the Asia Pacific region to introduce crypto payment cards that convert digital currency into traditional money. In Central America, El Salvador has committed to building a city funded by Bitcoin-backed bonds.
And in one sure sign that crypto is here to stay — or at least be taxed — the U.S. government is implementing reporting requirements on cryptocurrency transactions.
Plotka sees cryptocurrency becoming the “gold of the future,” where other currencies are measured against Bitcoin.
This story appears in the Times Union’s new quarterly magazine devoted to the major trends driving the Capital Region’s economy.
“It’s the ideal electronic money for everybody,” he said. “It’s just who gets there first … and that’s what this war is about.”