Bitcoin is a solution in search of a problem
NEW YORK, March 24 (Reuters Breakingviews) – Almost a year ago, billionaire Peter Thiel threw $100 bills into the crowd from the stage at a cryptocurrency conference in Miami, comparing fiat currency to toilet paper and naming bitcoin as the best alternative. Thiel has said that central banks are “bankrupt” and that the fiat money regime is coming to an end. Since his Miami announcements, bitcoin’s price has fallen by nearly 40%, but in recent weeks after the failure of Silicon Valley Bank, it has enjoyed a resurgence. It suggests that people think Thiel is onto something. Those who follow his advice are greatly misled.
Thiel’s venture capital fund quietly dumped nearly all of its own holdings shortly before that Miami speech, according to the Financial Times. But others buy. Former Andreessen Horowitz investor Balaji Srinivasan made a bet with a pseudonymous Twitter user last week that bitcoin would hit $1 million in the next three months as hyperinflation takes hold. At first glance, his prediction seems very optimistic, but directionally reasonable – bitcoin has risen over 35% since SVB’s collapse on March 10. The tech-heavy Nasdaq Composite Index (.IXIC) and gold both rose less than 10%.
The philosophy behind this increase is that cryptocurrency will replace government-backed dollars. The problem is that bitcoin has benefited precisely because of actions taken by central banks. The Federal Reserve, in the faith and good standing of the US government, has stepped up to stabilize the system with new programs. Fed Chairman Jerome Powell has also muted his comments about plans to raise interest rates. Also, bitcoin may never have crossed $60,000 to reach its all-time high in 2021 if the Fed hadn’t kept interest rates consistently low. It is the prospect of lower interest rates – not the lack of government stability – that opens the door to riskier bets like those on bitcoin.
The other downside is that, contrary to Srinivasan and Thiel’s claims, bitcoin is too volatile to protect investors from inflation by preserving purchasing power over long periods of time. US inflation continues to rise even as the Fed raises interest rates. Gold is a tangible asset, unlike bitcoin, which is precisely what makes it an inflation hedge. In theory, when the price of commodities goes up, gold follows. If investors hope to inoculate their portfolios against a weakening dollar, they should follow Thiel’s actions, not his words.
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CONTEXT NEWS
Bitcoin’s price has risen more than 35% since the collapse of Silicon Valley Bank on March 10, while the Nasdaq Composite Index has traded up less than 5% over the same period, according to data from Refinitiv. Bitcoin’s price is up almost 70% in 2023.
Editing by Lauren Silva Laughlin and Sharon Lam
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