March 2022

Thoughts on Bitcoin and Cryptocurrencies

The waning weeks of 2021 and the early ones of 2022 were not kind to the asset classes that led financial markets coming out of the Covid collapse. Non-fungible tokens, Special Purpose Acquisition vehicles and other lightning rods for a roaring episode of risk-taking returned earthward to disappoint their previously ebullient fans. But the ones that received the most attention on the way up were, of course, cryptocurrencies, led by their center forward, Bitcoin. Our purpose here is to consider the merits of this asset and its prospects.

Bitcoin was created with the intent of disrupting incumbents in the financial system and eliminating their expensive cost structures. The most important incumbents are, of course, central banks. A noteworthy feature of Bitcoin is the limit on the quantity that can ever be created, which is understood to be 21 million. The track record of central banks in defending the purchasing power of their currencies in the modern era ranges from mediocre to atrocious. Since the abandonment of precious metals as backing, central bank “paper” money has been vulnerable to debasement and, thus, inflation to one degree or another. Bitcoin has its foibles, including the shadowy nature of its provenance (nobody knows if its putative inventor Satoshi Nakamoto actually exists), but a perpetual cap on its supply is a major differentiator from central bank money.

John R. Gilbert

Senior Research Consultant

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