If you thought you were going to get rich during the novel coronavirus crisis with bitcoin, think again.
On April 3, bitcoin was still selling for less than where it started the year. This after a two-week rally that had it selling below $5,000 twice.
What economist Nouriel Roubini calls the other “shitcoins” weren’t doing any better. The entire cryptocurrency market was worth $195 billion, after a steep fall. That’s about two-thirds what Nestle (OTCMKTS:NSRGY) is worth.
The dollar, on the other hand, is still the dollar. As of April 3, it was trading higher, relative to other currencies, than where it started the year.
A Fistful of Dollars
How is this possible, after the government put $2 trillion of new money back into the economy? How is it possible, after the Federal Reserve cut rates to zero, and increased its balance sheet to nearly $6 trillion?
Part of it is just the nature of money. As I’ve said before, money is a verb. It’s only active when it’s exchanging value. The “value” of your house or the “value” of your Starbucks (NASDAQ:SBUX) shares or the “value” of your bitcoin is only what someone else will pay in exchange. Money locked in assets is a battery of indeterminate power.
This means governments can create whatever value is needed to make exchanges happen. So long as most cash is tied up in assets, so long as everyone doesn’t try to cash out at once, the system works.
There will come a time, a month or two from now, when the economy will be restarted. At that point, the Federal Reserve’s policy will need to reverse, as people seek to use dollars and buy things. If the Fed is too slow on this, inflation will skyrocket, and so will asset prices, measured in dollars.
That’s going to be a dangerous moment, but it’s not this moment.
A Fistful of Bitcoin
Bitcoin’s appeal is based on the idea that this will break down. Bitcoin advocates see money as a noun. The maximum number of coins is fixed, so its value, relative to other currencies, must go up.
The whole bitcoin theory fails to account for two points. First, bitcoin isn’t nearly as easily exchanged as its advocates claim. The Bitcoin Pizza trade worked only because someone was willing to give programmer Laszlo Hanyecz two pizzas. The whole purpose of currency is to use it between exchanges of value.
Second, these cryptocurrencies aren’t real. They’re encryption keys. When bitcoin wallets are lost, or when bitcoin exchanges go dark, bitcoin can disappear.
Despite all this, hope springs eternal. Since the coronavirus outbreak began many new cryptocurrency accounts have been opened. The bitcoin market on April 3 was worth as much as Bristol-Myers Squibb (NYSE:BMY). I’d rather hold BMY stock.
A Fistful of Value
All the arguments about the value of bitcoin relative to cash ignore a crucial fact.
The value of the U.S. economy keeps rising, because of technology.
This medium you’re using creates efficiency. It creates deflation. If you’re a tech employee, your employer may now be finding they rent too much real estate.
If the economy were measured by bitcoin, the 21 million possible bitcoin would have to cover over $19 trillion in gross domestic product. The deflationary spiral resulting from that would make the Great Depression look like a garden party.
If a country produces more currency than its economy needs to transact business, the value of that currency will fall. The value will be hardest relative to bitcoin, a currency whose supply is naturally limited.
When that happens, you’ll know it.
Dana Blankenhorn has been a financial journalist since 1978. He is the author of a mystery novella involving bitcoin, The Reluctant Detective Saves the World. Follow him on Twitter at @danablankenhorn. As of this writing, he owned no stocks mentioned in this story, nor did he own any cryptocurrency.