In 2009, Bitcoin (BTC) was launched as a digital currency, which would compete with assets like the dollar and euro. But more than a decade later, the biggest cryptocurrency tends to be seen as a store of value or “digital gold” rather than a digital equivalent of cash. A bad for a good ? We interviewed Odile Laguerre-Lakomsi, researcher at CRIISEA, to discuss the thorny question of the status of the queen of cryptocurrencies.
Cryptoast: It is often said that Bitcoin is created on a deflationary model. Is it a reality?
We must already go back to the basics of Bitcoin. Classic bank money is considered to be hierarchical, and fundamentally this is already a distorted view. This shows that pro-Bitcoins and those who designed digital currencies were and still are computer scientists, more than economists or money theorists. They clung to the theories put forward in particular by [l’économiste ndlr] Friedrich Hayek who already criticized bank currencies in the 1930s as being inflationary.
But in my opinion, they didn’t really dig into Hayek’s theory and stayed on the surface on the main point. That is to say, to sum it up: it would suffice to abolish the banking system and the central bank to eliminate inflation. In reality, it’s more complex than that.
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The role of central banks in the context of inflation is therefore to be measured in your opinion?
The main mission of central banks, in the historical period in which we live, is to do inflation targeting. That is to say that their priority objective is the fight against inflation, by trying to control the supply of money to contain it at certain levels. Whether it is the American central bank or the ECB, inflation targeting theoretically allows us to have a level of inflation less than or equal to 2%. It is therefore not entirely correct to say that classical currencies are inflationary, at least for the contemporary period. I think there is a big confusion in the crypto community between the notion of inflation and the notion of the value of money.
How to consider Bitcoin in this case?
It is a currency that retains its value, but [ses créateurs] designed Bitcoin more as a commodity than as a currency: it can therefore effectively be considered like a commodity that increases in value. This is something that we observe very clearly. If there is an increasing demand, compared to the available supply, this feeds this mechanism.
This is what happened when the first trading platforms [de cryptomonnaies] were opened around 2011, you could already exchange dollars for Bitcoin. But this increase in value is always relative to the price of another currency, and therefore official currencies. Note also the training effect. We saw it with the “memes” which generated a lot of volatility once the public got interested.
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Bitcoin is therefore not an anti-inflation asset in your opinion?
The notion of inflation is conceived in relation to a currency that is actually used for transactions. If, for example, we talk about inflation for a currency like the dollar, that makes sense, because the dollar is used as a means of payment in the American economy. That is to say that everyone pays in dollars, all prices, debts, claims, services and salaries are expressed in dollars. It’s the same for the euro.
As soon as you have a currency for transactions, it is confronted with the goods and services that you buy with this currency. This is why when we try to measure inflation in an economy, we take as a reference consumer price index.
Which cannot be the case for Bitcoin, for now.
Exactly. For now, I say good for now, it makes no sense because as long as these currencies do not allow to constitute a payment zone in which we would pay for everything in crypto, and where all prices would be expressed in Bitcoin for example, the notion of inflation does not exist. Bitcoin will be a bulwark against inflation only if it becomes a generalized means of payment that allows the purchase of a set of common goods and services. The creators of Bitcoin actually created a type of digital gold, as they sought to establish a currency which has the same rare propertiestee than gold. For other types of blockchain, the equivalent would be the burning of tokens in circulation.
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The price of Bitcoin is highly correlated to equities: does this mean that cryptocurrency has not yet succeeded in breaking away from “classic” finance?
Unfortunately, Bitcoin has mostly been institutionalized by finance. For the moment, it failed as an alternative monetary project, but on the other hand it has had a lot of success in finance and as a financial asset, that is to say since around 2017. Crypto-assets are considered as asset classes in which one can invest and thanks where you can get a good return on investment. As there is a very high volatility, there is also a lot of return.
Bitcoin and cryptocurrencies have thus been absorbed by this financial logic which is very predominant in our contemporary capitalism, and which took hold from the 1980s. We are therefore dominated by investors who are constantly looking for high performancesince the crisis [des subprimes] of 2008.
With the accommodative monetary policies of the central banks, which tried to restart the economic machine to avoid deflation, as well as a recession which followed the financial crisis, the central banks injected a lot of liquidity into the financial system. They have also carried out many massive purchases of traditional assets, which has had the effect of reducing their profitability, or even making it completely zero. Investors were therefore forced to turn to alternative asset classes, of which Bitcoin is a part. Especially since from 2017, the Chicago Stock Exchange sent a very positive signal to the market by opening specialized cryptocurrency trading services. Cryptocurrencies and Bitcoin then became financial assets that now obey a speculative logic typical of the financial logic at work in the contemporary period.
Why has Bitcoin failed to fully find its place yet?
I would intuitively say that bitcoin may have unfortunately arrived a bit too early. I think financial capitalism should have collapsed completely, and we should have switched to another type of model. Thus, Bitcoin would have naturally positioned itself.
That said, I still think that there is a ground swell forming. We are in the process of switching to another type of capitalism, with the massive development of the Internet and digital technology. But we are in a phase where financial capitalism is not yet dead, and unfortunately Bitcoin has arrived when it still works. So it was absorbed as a classic asset, for now.
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