In less than 12 months, Bitcoin prices rose from less than $10,000 to nearly $65,000. The cryptocurrency has pulled back somewhat and traded at around $57,000 Friday morning.
Most central banks are wary of the whole cryptocurrency phenomenon, and on Thursday, Bank of England Governor Andrew Bailey repeated a warning he first uttered in 2017: “If you want to invest in Bitcoin, be prepared to lose all your money.” At the time, Bailey was the CEO of the Financial Conduct Authority (FCA), the United Kingdom’s version of the U.S. Securities and Exchange Commission.
In Bailey’s view, cryptocurrencies like Bitcoin, Ethereum and Dogecoin “have no intrinsic value. That doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value.”
Of course, one could say that a fiat currency like the U.S. dollar has no intrinsic value either. It gets its value from the federal government’s promise to back the dollar with the full faith and credit of the United States. That implies that there is an intrinsic value in the country, if not its currency.
A cryptocurrency believer, however, sees things somewhat differently. For believers, cryptocurrencies are a store of value because they are scarce and, like gold, can function as an inflation hedge in the event central banks start printing too much currency. If that should happen, though, and creditors demand cryptocurrency instead of fiat dollars, it seems that cryptocurrencies like Bitcoin that have a fixed limit (21 million Bitcoin) would become even more in demand and subject to the same inflationary pressures. If you don’t own any Bitcoin or other acceptable cryptocurrency, how do you get some if your dollars or euros or yen are worthless?
That is not to say that central banks aren’t looking at issuing their own digital currencies. The Bank of England set up a task force last month to investigate a central bank digital currency (CBDC) that would coexist with cash and other bank deposits (like gold).
The benefits of a CBDC include lower transaction costs and protection against the failure of private payment systems. Most important, perhaps, is ensuring that central banks maintain control over a nation’s monetary policy, guarding against a small chance that payments should shift to cryptocurrencies over which the banks have no control at all.