How a bubble in bitcoin could lead to hyperinflation

Libertarians hope that cryptocurrencies will undermine central bank control of monetary policy. They should be careful what they wish for, warns author and analyst Bernard Connolly.

Alan Greenspan: upending our equilibrium
Alan Greenspan
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The volume of central-bank warnings about the rise of private cryptocurrencies – and the potential impact on the ability of central banks to conduct monetary policy – has become ear-splitting. This criticism only serves further to convince libertarians that reducing the power of central banks and governments is desirable. Certainly, the hostility of China’s authorities towards private cryptocurrencies can be presented as evidence that they are viewed by the state as a defence against intrusive social control. But whether that point of view is correct, or – where it concerns monetary control rather than social control – it is dangerously naive, there is another, undeniably serious problem with cryptocurrencies. It’s a problem so far only hinted at by central banks, but about which libertarians should be the most worried. The problem is about bubbles.

There are now many bubbles in the world but they differ in nature and consequences. An equity bubble can be perfectly rational. The price of equities can keep rising without end, assuming that “real” (adjusted for inflation) interest rates do not go up and stay up. Assuming a growing global population, the supply of “greater fools” to sell to at a higher price is theoretically endless. The idea of a “bond bubble” is harder to rationalise. Unlike equities, virtually all bonds have a terminal date – their maturity date. If you buy a bond with a negative interest rate (a negative “yield”), you know for sure that you will suffer a nominal loss if you still own it when it matures (the loss will be even worse in real terms). So if you are worried that other assets are overvalued and might crash, why not just hold cash?

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Oxford-educated economist Bernard Connolly is the author of The Rotten Heart of Europe: The Dirty War for Europe’s Money