By guest author Paul Krugman, Opinion Columnist at the Wall Street Journal.
|There’s a financial joke, whose origin I don’t know, that has been making the rounds lately. It goes like this: If inflation continues at current rates, the purchasing power of wealth held in dollars will be cut in half over the next eight years. But cryptocurrencies can beat that: They can lose half their value in just a few months.|
|Haha. But crypto enthusiasts have indeed marketed their products as an inflation hedge. Coinbase, the biggest United States crypto exchange, declares that cryptocurrencies are appealing because “they’re more resistant to inflation than fiat currencies like the U.S. dollar.” This is, not incidentally, the same argument people used to make for holding gold.|
|But a funny thing happened as fears of inflation grew, as seen in this chart showing Bitcoin’s price in U.S. dollars over the past year:|
|So why have crypto prices crashed at exactly the moment inflation has taken off? To some extent it may be a coincidence: If you believe, as I do, that crypto is to a large extent a Ponzi scheme, this may just happen to be the moment when the scheme has run out of new suckers.|
But there’s also a more fundamental issue: People who touted cryptocurrencies as a hedge against fiat-currency inflation — sort of a digital equivalent of gold — fundamentally misunderstood how fiat currency systems work, and also, for what it’s worth, misunderstand what has historically driven the price of gold. It was, in fact, predictable that an upsurge in inflation would drive the price of Bitcoin down — although maybe not that it would produce such an epic crash.
|The key point to understand is that while the dollar is indeed a fiat currency — that is, the authorities can issue more dollars at will, without the need to back those additional dollars with some kind of collateral — America isn’t Venezuela or the Weimar Republic, a nation that prints money to pay the government’s bills. Our money supply is a policy tool used by the Federal Reserve to help keep prices fairly stable — actually, rising around 2 percent a year — while avoiding recessions. Sometimes the Fed gets it wrong, as it did over the past year, when it (and I) failed to see the inflation surge coming. But when it does, it tries to correct the mistake.
So another crypto myth bites the dust. And it’s hard to avoid wondering what myths are left.