Kenneth Rogoff: Bitcoin Will ‘Collapse.’ Oh, And Putin Is Worried Too.

In a devastating blow to Bitcoin day traders who also happen to be Russophiles (if the shoe fits), Vladimir Putin said on Tuesday that cryptocurrencies are risky and can be used for illicit transactions.

“The usage of cryptocurrencies carries serious risks. I know the central bank’s position on that,” Putin said, adding that “cryptocurrencies are issued by an unlimited number of anonymous bodies [and] thus buyers of cryptocurrencies could be involved in unlawful activities.” Yes, “unlawful activities.” Something the Kremlin wouldn’t know anything at all about – “believe me.”

Speaking of Russia’s central bank, First Deputy Governor Sergey Shvetsov told a conference in Moscow that cryptocurrencies are “dubious” and that when it comes to protecting investors, Russia “cannot give direct and easy access to such instruments” to to the retail crowd.

So there’s that.

Apparently, when it comes to worthless “currencies,” Moscow would rather you use the one they print. And they’ve got a point. The ruble may be less valuable than a square of two-ply Charmin, but at least you can buy Facebook ads with it or, failing that, you can burn it to keep warm on a frigid night in St. Petersburg.

Now then, as an introduction to what you’ll read below, recall what we said just a couple of days ago:

The ironic thing about Bitcoin and about cryptocurrencies more generally, is that while proponents consistently use the old “you just don’t get it” defense in an effort to deflect criticism, the most valid criticisms of all are the ones that are based on common sense. That is, you don’t need to “get anything” to know why this is, in all likelihood, doomed to fail.

For us, the most compelling argument against cryptocurrencies is simply that the more of a “threat” to the prevailing order they become, the more inclined governments will be to heavily regulate them or shut them down altogether. You’re already seeing that, most notably in China.

And to the extent the technology – or, the “idea” if you will – is revolutionary and somehow represents “the future” of money, well then you can bet monetary authorities will simply co-opt it and “issue” a government-sponsored version. Indeed, the B.I.S. basically said as much in a their quarterly review. That doesn’t mean they’ll be very “good” at it at first or even that they’ll ever be any good at it – it’s simply to say that’s what will almost invariably happen, because the fact is, governments aren’t just going to relinquish their control over the money supply. That’s not going to happen. As in: never. Sure, empires fall and currencies fail, but outside of that or outside of some dystopian future where we all somehow still have the internet but don’t have governments, there is no way that monetary authorities are going to allow this to supplant the system – no matter how flawed that system surely is.

With that as the backdrop, consider the following by none other than Kenneth Rogoff, who says exactly the same thing we’ve been saying: Bitcoin will collapse under pressure from governments.

By Kenneth Rogoff as originally published by The Guardian

Is the cryptocurrency bitcoin the biggest bubble in the world today, or a great investment bet on the cutting edge of new-age financial technology? My best guess is that in the long run, the technology will thrive, but that the price of bitcoin will collapse.

If you haven’t been following the bitcoin story, its price is up 600% over the past 12 months, and 1,600% in the past 24 months. At over $4,200 (as of 5 October), a single unit of the virtual currency is now worth more than three times an ounce of gold. Some bitcoin evangelists see it going far higher in the next few years.

What happens from here will depend a lot on how governments react. Will they tolerate anonymous payment systems that facilitate tax evasion and crime? Will they create digital currencies of their own? Another key question is how successfully bitcoin’s numerous “alt-coin” competitors can penetrate the market.

In principle, it is supremely easy to clone or improve on bitcoin’s technology. What is not so easy is to duplicate bitcoin’s established lead in credibility and the large ecosystem of applications that have built up around it.

For now, the regulatory environment remains a free-for-all. China’s government, concerned about the use of bitcoin in capital flight and tax evasion, has recently banned bitcoin exchanges. Japan, on the other hand, has enshrined bitcoin as legal tender, in an apparent bid to become the global centre of fintech.

The United States is taking tentative steps to follow Japan in regulating fintech, though the endgame is far from clear. Importantly, bitcoin does not need to win every battle to justify a sky-high price. Japan, the world’s third largest economy, has an extraordinarily high currency-to-income ratio (roughly 20%), so bitcoin’s success there is a major triumph.

In Silicon Valley, drooling executives are both investing in bitcoin and pouring money into competitors. After bitcoin, the most important is Ethereum. The sweeping, Amazon-like ambition of Ethereum is to allow its users to employ the same general technology to negotiate and write “smart contracts” for just about anything.

As of early October, Ethereum’s market capitalisation stood at $28bn, versus $72bn for bitcoin. Ripple, a platform championed by the banking sector to slash transaction costs for interbank and overseas transfers, is a distant third at $9bn. Behind the top three are dozens of fledgling competitors.

Most experts agree that the ingenious technology behind virtual currencies may have broad applications for cybersecurity, which currently poses one of the biggest challenges to the stability of the global financial system. For many developers, the goal of achieving a cheaper, more secure payments mechanism has supplanted bitcoin’s ambition of replacing dollars.

But it is folly to think that bitcoin will ever be allowed to supplant central-bank-issued money. It is one thing for governments to allow small anonymous transactions with virtual currencies; indeed, this would be desirable. But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity. Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime. But cash at least has bulk, unlike virtual currency.

It will be interesting to see how the Japanese experiment evolves. The government has indicated that it will force bitcoin exchanges to be on the lookout for criminal activity and to collect information on deposit holders. Still, one can be sure that global tax evaders will seek ways to acquire bitcoin anonymously abroad and then launder their money through Japanese accounts. Carrying paper currency in and out of a country is a major cost for tax evaders and criminals; by embracing virtual currencies, Japan risks becoming a Switzerland-like tax haven – with the bank secrecy laws baked into the technology.

Were bitcoin stripped of its near-anonymity, it would be hard to justify its current price. Perhaps bitcoin speculators are betting that there will always be a consortium of rogue states allowing anonymous bitcoin usage, or even state actors such as North Korea that will exploit it.

Would the price of bitcoin drop to zero if governments could perfectly observe transactions? Perhaps not. Even though bitcoin transactions require an exorbitant amount of electricity, with some improvements, bitcoin might still beat the 2% fees the big banks charge on credit and debit cards.

Finally, it is hard to see what would stop central banks from creating their own digital currencies and using regulation to tilt the playing field until they win. The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates. I have no idea where bitcoin’s price will go over the next couple years, but there is no reason to expect virtual currency to avoid a similar fate.

 

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3 thoughts on “Kenneth Rogoff: Bitcoin Will ‘Collapse.’ Oh, And Putin Is Worried Too.

  1. Government regulation is indeed one of the biggest trading risks but it also seems somewhat unlikely that in the long run they will crush it. The thing to remember is that while it is very easy to clone BTC’s code that doesn’t really help you. The reason BTC has any value at all is that the community is constantly developing the code, bug testing it, stress testing it and determining how it should be implemented. Given the fact MS and Apple can barely pull off this feat and their products are riddled with holes and exploits… I somewhat doubt the central banks are up to it.

    They may try and that would certainly negatively impact BTC’s price but it would remain very useful for countries without robust money systems. It could serve many third world countries very well if they have a functioning internet via cell networks.

    In the long run I expect central banks and governments will simply regulate the technology, tax the gains on it and probably build their own mining pools which would swing it inline with something like the older gold standard but without the limits that made it untenable. They can maintain a “paper” (electronic) money supply and only accept that for taxes while also allowing banks to use crypto ledgers rather than traditional clearing systems. I expect this outcome would be most likely following a major collapse in the value of a nations currency when they would need to lean on something to reestablish credibility and pegging a dollar 2.0 to something like BTC isn’t a bad idea.

  2. Wrong, H…. But I’m as surprised at the robustness of BTC as anyone.

    FACT: As I type this now, BTC has retraced 92.2% of its big plunge from its all-time high. That is NOT the price action of a waterfall collapse, as any trader knows. Rogofff is no trader; he’s just an economist, and economists generally can’t trade worth sheet.

  3. Wrong, H…. But I’m as surprised at the resilience of BTC as anyone.

    FACT: As I type this now, BTC has retraced 92.2% of its big plunge from its all-time high. That is NOT the price action of a waterfall collapse, as any trader knows. Rogofff is no trader; he’s just an economist, and economists generally can’t trade worth sheet.

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