Bitcoin is a solution looking for a problem
Almost one year ago, billionaire Peter Thiel threw $100 bills into the crowd from the stage at a cryptocurrency conference in Miami, likening fiat currency to toilet paper and touting 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 proclamations, bitcoin’s price has fallen by nearly 40%, though in the last few weeks after Silicon Valley Bank’s failure it has had a resurgence. That suggests people think that Thiel is onto something. Those following his advice are sorely misled.
Thiel’s venture capital fund quietly dumped almost all its own holdings shortly before that Miami speech, according to the Financial Times. But others are buying. Former Andreessen Horowitz investor Balaji Srinivasan made a bet with a pseudonymous Twitter user last week that bitcoin would reach $1 million in the next three months while hyperinflation takes hold. At first glance, his prediction seems wildly optimistic but directionally reasonable – bitcoin has surged by 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 that surge is that cryptocurrency will replace government-backed dollars. The trouble is bitcoin has benefitted precisely because of actions taken by central banks. The Federal Reserve, by the faith and good standing of the U.S. government, has stepped up to stabilize the system with new programs. Fed Chair Jerome Powell has also tempered his comments about plans to raise rates. What’s more, bitcoin may never have surpassed $60,000 to reach its highest-ever price level in 2021 had the Fed not kept interest rates consistently low. It’s the prospect of lower rates – not the lack of government stability – that is opening the door to riskier bets like those on bitcoin.
The second snag is that contrary to Srinivasan and Thiel’s claims, bitcoin is too volatile to protect investors against inflation by preserving its purchasing power over long periods of time. U.S. inflation continues to spike even as the Fed raises rates. Gold is a tangible asset, unlike bitcoin, and that’s precisely what makes it an inflation hedge. In theory, as the price for goods goes up, gold follows. If investors hope to inoculate their portfolios against a weakening dollar, they should heed Thiel’s actions, not his words.
Bitcoin’s price has appreciated by over 35% since Silicon Valley Bank collapsed 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 nearly 70% in 2023.
