Could Bitcoin be the Victim of Its Own Success?

  • As cryptocurrencies attract broader appeal and perhaps even institutional adoption, governments concerned over decentralization of economic life may be forced to intervene
  • The possibility of a decentralized medium of exchange and store of value controlled by no centralized entity may force some governments, particularly totalitarian ones, to act 
 
When Borders was first confronted with Amazon (+0.43%), executives at the book retailer were quick to dismiss the digital upstart as being nothing more than a fad, and nothing to take too seriously, until it was too late.
 
Similarly, Bitcoin and cryptocurrencies were initially dismissed by Wall Street and governments when they first appeared on the scene over a decade ago, confined to the tech fringe and unlikely to ever have any significant impact on mainstream financial markets.
 
Fast forward to our present epoch, and it appears that the risk posed by decentralized currencies has crystalized to a point that according to the Bank of International Settlements, no less than 86% of central banks globally are exploring their own central bank digital currencies, with both Bahamas and Beijing already having issued their own CBDCs.
 
And as Bitcoin has grown in significance over the past year, governments are no longer taking the threat to their seigniorage (the difference between what it costs to print currency and the face value of the currency) lying down, with even the initially dismissive U.S. Federal Reserve now actively studying a digital dollar.
 
Over the past week, Beijing has also reminded its financial institutions that they are not to deal in cryptocurrencies or accept them as payment.
 
But what has changed really?
 
Unlike the possibly complacent central banks of the west, Beijing actually sees the risks from a global decentralization of currency, especially when the economic lives of people can increasingly be lived divorced from the state.
 
Consider this scenario, if you used your Metamask wallet to send some dollar-backed stablecoin to a merchant in exchange for their goods and they were happy to accept it, there’s nothing really the state can do to stop you from making that transaction.
 
Bitcoin and its brethren facilitate and enable these sorts of exchanges and they are already happening on a daily basis.
 
Which is why billionaire hedge fund manager Ray Dalio’s warning about Bitcoin being a possible victim of its own success is so timely.
 
The founder of Bridgewater Associates, Dalio said in a recorded interview presented yesterday at Coindesk’s Consensus 2021 conference that should cryptocurrencies continue to gain traction, governments may lose control over their ability to raise money.
 
Dalio even went as far as to declare that he’d rather have Bitcoin than a bond and admitted to holding some Bitcoin, without revealing the amount. 
 
 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

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