Steve Hanke: 'We know the price of bitcoin, but not its value ... it's probably zero'
Bitcoin (BTC-USD) has a price “but we don’t know its value, which is probably zero”, senior economist Steve Hanke has claimed.
Speaking to Yahoo Finance about the difficulty in deriving a value for the world’s preeminent cryptocurrency, the former economic adviser to the Reagan administration said: “From a high theory perspective you end up with a bitcoin that does have a price, that is objective and we know what it is, but we don't know its fundamental value and my guess is it’s probably zero."
The professor of economics questioned how the value of bitcoin can be derived when deciding its rate of exchange with national currencies, such as the dollar (GBP/USD) and the pound, adding that “there is no exchange rate model that would actually rationalise the bitcoin/US dollar exchange rate.”
Watch: What is the value of bitcoin?
It is difficult to know the purchasing power parity of bitcoin. With a national currency, such as the dollar, the price of a market basket of goods can be calculated. But a market basket of goods calculated in bitcoin is difficult to achieve when most retailers worldwide do not accept the cryptocurrency in transactions.
This is similar when using the other basic model for deriving the value of a currency, interest rate parity. Hanke states that there is no way to rationalise the interest rate parity between bitcoin and a recognisable global currency. An experienced currency reformer, Hanke said that the two fundamental models for valuing exchange rates "do not make any sense at all in this bitcoin space".
Watch: 'Cryptocurrencies are fiat money on steroids'
"You have got purchasing power parity and that can't be used for bitcoin, and you have got interest rate parity and that also can't be used for bitcoin."
The value of the world’s fiat currencies, such as the dollar and pound, comes from the backing of nation-states and the level of trust the majority of people place in them. The word fiat is Latin for "let it be done" and comes from the opening lines of the book of Genesis in the Bible. The words“fiat lux” or “let there be light” being God’s prime directive. Thus, fiat money has been issued by an authoritative decree that has absolute sanction, and trust in the value of a fiat currency is intertwined with the trust in the authority of the state that issues it.
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Whereas a common criticism of bitcoin is that it has no intrinsic value, it is stored as computer code, and has no physical properties. However, many bitcoin backers, such as CEO of MicroStrategy Michael Saylor, see it as “digital gold” and a digital asset to be utilised as an inflation hedge.
Watch: Steve Hanke on Milton Friedman's cryptocurrency predictions
Milton Friedman, one of the intellectual leaders of the Chicago school of economics and colleague of Steve Hanke, spoke to the National Taxpayers Union (NTU) in 1999 about a new medium of exchange that was a prescient description of the rise of bitcoin 10 years later. He forecasted there would arise a digital currency, indigenous to the internet, that would disintermediate the middle-men in global finance through peer-to-peer transactions.
In the NTU interview, Friedman stated: "The one thing that is missing but will soon be developed is a reliable e-cash, a method whereby on the internet you can transfer funds from A to B without them knowing each other.”
Hanke described Friedman as knowing "that most of the money was already being produced by commercial banks, most of it was already electronic, and with the internet coming even more would be electronic."
Friedman's discussion of a digital "e-cash" could also be seen as foreshadowing the emergence of central bank digital currencies (CBDCs), where all accounts are held at the central bank and intermediaries are circumnavigated. Hanke believes that it is inevitable that we will see some version of the US dollar being produced as a digital currency by the Federal Reserve.
However, he adds that this will not create the revolution in banking that has been touted in media headlines. Hanke points to the fact that “most of the US dollars that are produced are produced by electronic means right now and the Federal Reserve produces only 10 or 15 per cent of the money held in the hands of the public, the rest comes from commercial banks that produce it electronically”.
Watch: Will a digital yuan threaten the US dollar?
“We talk about digital currency as though it is some new thing, but most of the currency in the world is produced digitally.”
Hanke paints a stark picture of CBDCs in the hands of authoritarian governments that have the potential to create serious privacy infringements. He dismissed the idea that the US dollar could be challenged by China’s digital yuan. Beijing has already trialled its new digital currency in major cities across China, but Hanke remains unconcerned about Beijing’s first-mover advantage in the area.
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“The yuan isn’t even a convertible currency, so the idea that it could compete with the dollar is a ridiculous notion and until it can become freely convertible into other currencies forget it, it’s not going to be a challenge,” Hanke said. He warned that the real concern from the digital yuan is from “the snoop problem, or the privacy problem within China”.
“That’s why the digital yuan is not even being accepted by the Chinese on the mainland, they don't want to be snooped on, they are smart enough to know that the communist party is going to be looking at every transaction they make.”
Watch: The pros and cons of central bank digital currencies?
Hanke then gave a solution to the escalating inflation affecting world currencies. The global economic recovery is expected to slow somewhat in 2022 as downside risks escalate because of new coronavirus variants such as Omicron. Inflation is presenting a challenge to central banks across the globe and is set to stick above the US Federal Reserve's target until 2024. He called for central banks to tighten monetary policy in the coming years. He said the best way to solve the current situation “is to look at the causes and to quote Milton Friedman, the cause of inflation is a monetary phenomenon, it is money creation that causes inflation.”
Read more: Ghost of Inflation Past: How 2021 became the year of high prices
Hanke said the real cause is “too much money in the system”. He said that the way to solve the rising inflation of currencies such as the dollar, “rising to 6 % and maybe as high as 9% by the end of December”, was to “slow the rate of the growth of the money supply now”.