Are Cryptocurrencies Inflationary?

Authored by John Rubino via,

There’s a debate raging over what, exactly, bitcoin and the thousand or so other cryptocurrencies actually are. Some heavy-hitters are weighing in with strong, if not always coherent opinions:

Jamie Dimon calls bitcoin a ‘fraud’
JPMorgan Chase CEO Jamie Dimon did not mince words when asked about the popularity of virtual currency bitcoin.


Dimon said at an investment conference that the digital currency was a “fraud” and that his firm would fire anyone at the bank that traded it “in a second.” Dimon said he supported blockchain technology for tracking payments but that trading bitcoin itself was against the bank’s rules. He added that bitcoin was “stupid” and “far too dangerous.”


Peter Schiff: Even at $4,000 bitcoin is still a bubble
One of the best-known among the bears, investor Peter Schiff, is now making his case in even stronger terms for why bitcoin has advanced ever farther into bubble territory.


Schiff, who predicted the 2008 mortgage crisis, famously referred to bitcoin as digital fool’s gold and compared the cryptocurrency to the infamous bubble in Beanie Babies.


Moreover, the recent run-up in bitcoin hasn’t softened Schiff’s view: If anything, it’s reinforced his sense of impending doom.


Schiff told CoinDesk:


“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”


“What it comes down to is that bitcoin ain’t money.”


“Libertarian-minded crypto fans saw this was a way to liberate people from the government,” he said, concluding:


“I think it will have the opposite effect. People are going to lose money. This could really backfire, giving libertarian ideals a bad name by making fiat look good. The downside can be really spectacular.”


Hedge fund manager James Altucher: Cryptocurrencies Could Be Worth $200 Trillion One Day
I’m not exaggerating when I say cryptocurrencies are the biggest innovation since the internet. We’re on the ground floor of an enormous trend that’s going to change the world.


Cryptocurrencies are currencies with no government in the middle. No bank in the middle. No organizations in the middle keeping track of all your payments, or taking advantage of your spending so they can invade your privacy, and on and on.


Cryptocurrencies solve trillions of dollars’ worth of problems, which is why they will be worth trillions of dollars one day.


Consider the potential:


There is currently $200 trillion in cash, money and precious metals used as currencies in the world. Meanwhile, there’s only $200 billion in cryptocurrencies. Cryptocurrencies are eventually replacing traditional currencies.


So that $200 billion will eventually rise to the level of currencies. And probably sooner than we can imagine.


Ask yourself, why does the world need multiple currencies? There’s actually no real reason. The only reason we have a U.S. dollar and also a Canadian dollar is that in 1770 the people in Canada decided not to join the U.S. So an artificial border created two currencies. It’s all dictated by artificial borders.


In the past, an ounce of gold would be accepted almost anywhere in the world. In that sense, unbacked modern fiat currencies are a step backwards.


But in cryptocurrency world, there are what I call “Use Borders.” Every currency is defined by its use. For instance, Ethereum is like Bitcoin but it makes “smart contracts” easier. Contract Law is a multi-trillion dollar industry so this has a huge use case. Filecoin makes storage easier. It’s a $100 billion industry. And on.


Studying the “use” cases, and the effectiveness of the coin to solve those use cases can help us make investment decisions confidently.


This is the great promise of cryptocurrencies and why they will change the world. It’s just getting started.

Don’t try to make sense of the above. Instead, let’s just assume that the cryptocurrency universe will continue to expand for a while and narrow the discussion down to a single question: Are cryptocurrencies inflationary? That is, will their spread lead to higher or lower prices for the average person, and greater or lesser financial instability for the markets, and what does this mean for today’s fiat currencies?

One common opinion is that cryptocurrencies can’t be inflationary because their owners have to pay for them in fiat currencies. So one bitcoin bought means one dollar, yen, or euro sold, with the net effect on prices being zero.

This makes intuitive sense at first glance, but only holds for the moment of purchase. Consider what happened after someone in, say, 2014 exchanged dollars for bitcoins. The dollars held most of their value, which means the total amount of dollar purchasing power in the world remained constant. But those bitcoins went up by several thousand percent, dramatically increasing the purchasing power – and thus the potential inflationary impact – of the bitcoin complex.

A real world example is Julian Assange:

Julian Assange Says Wikileaks Has Made a 50,000% Return on Bitcoin. Here’s What That Means
Wikileaks has seen an amazing return on investments in bitcoin, founder Julian Assange says, and he is “thanking” the U.S. government for forcing the controversial organization to get into bitcoin in the first place.


In a Tweet on Saturday, Assange said the group’s investment in the cryptocurrency has seen a return greater than 50,000% since 2010. Wikileaks began investing in bitcoin back then because global payment processors like Visa, Mastercard, and Paypal were under pressure by the U.S. government to block the ability of the group to take payments.


In fact, Bitcoin has seen a more-than 9 million percent return over the dates Assange references. In certain periods in 2010, bitcoin was trading for mere pennies. According to, one unit of bitcoin is now worth a record high of roughly $5,700. Anyone buying bitcoin through much of 2011 and 2012, when one unit was sometimes trading below $1 and was often under $10, would indeed see a return on investment of more than 50,000%, assuming they never sold.

The difference between Wikileak’s purchasing power pre and post-bitcoin is immense. If Assange decides to spend his windfall on goods and services he’d have, at the margin, an inflationary impact on the stuff he buys.

So the answer to the question of cryptocurrencies’ impact on price levels depends on how their values change. If they rise after people buy them, then they’re inflationary. If they rise a lot, they’re potentially very inflationary.

In this sense, it might be helpful to view cryptocurrencies as assets like houses or stocks rather than as money. When they rise relative to fiat currencies they increase the purchasing power of their owners, generate a “wealth effect” in which owners feel richer and more comfortable with splurging, and in that way push up prices. Based on the following chart, a lot of early adopters are feeling a whole lot richer these days.

Which then leads to what might be the major cryptocurrency theme of the coming year: Why would governments allow such an inflationary supernova to explode right in front of them when they presumably have the power to stop it? Here’s one possible - and of course disturbing - answer:

Will cryptocurrencies trash cash? ‘Fedcoin’ could do it
Economist Ed Yardeni of Yardeni Research asks the obvious question: Why would central banks—which derive their power as the centralized gatekeepers of fiat currency creation, check clearing and payment processing—embrace a movement that’s primary motivation has been to usurp this power in a decentralized way?


Part of that, according to St. Louis Federal Reserve president James Bullard, is recognition that the technology has achieved critical mass. Thus, there’s a fear of being left behind as the very foundations of banking and monetary policy—intermediation, funds transfers, transactions—rapidly change, not unlike the way the creation of mortgage-backed securities and credit default swaps changed housing finance in the mid-2000s.


There’s another, more self-serving purpose: Central banks could use their own cryptos to put the squeeze on paper currency. Why? To facilitate the use of negative interest rate policy, which has been deployed in Europe and Japan in recent years in half-baked forms. Currently, in Switzerland, short-term interest rates are at -0.75%.


When another recession hits, especially if one comes soon, a dive to even deeper rates of negative interest would be hampered by the hoarding of cash since banks would charge for deposits (vs. absorbing the cost of negative rates themselves, as they’re doing now). This is known by the economics cognoscenti as the “zero lower bound” in that interest rates cannot go much below negative before the traditional functions of deposits, loans and fractional money creation break down. Mattress stuffing ensues en masse.


The Fed is clearly thinking about it. In testimony to Congress last year, Fed chairman Janet Yellen admitted policymakers “expect to have less scope for interest-rate cuts than we have had historically,” adding she would not completely rule out the use of negative interest rates.


The BIS­—the central bank of central banks—in its latest quarterly review posited that a crypto backed by the Fed “has the potential to relieve the zero lower bound constraint on monetary policy.” Any distinction between regular dollars and this new “Fedcoin” could be removed by establishing a fixed one-to-one valuation. Any competition from the likes of bitcoin could be squashed by regulation; not unlike how the private ownership of gold was outlawed in the 1930s when it threatened the Fed’s ability to ease credit conditions.

At the risk of being repetitious, pretty much all of the above looks good for gold and great for silver.


Jackson's Luck Code Duello Mon, 10/23/2017 - 19:03 Permalink

No, you're missing the point. Most Bitcoin is in savings, that is, not circulating. If some Bitcoin bigwig decides to go out and spend 10,000 Bitcoin, he is injecting previously uncirculating money into the existing circulating supply. Like if a sunken pirate ship were found loaded to the gills with gold coins and put on the market. This would inflate the supply/lower the price of gold. Rubino can teach you plenty.

In reply to by Code Duello

abyssinian lasvegaspersona Mon, 10/23/2017 - 14:13 Permalink

anyone still bashing bitcoins or most other cryptos have 0 clue how they work... that is like the horse wagon company bashing cars " well how are they going to get gas when they ran out, and what if the tires got hit by a nail and leaking air... good luck!  These car owners will cry like babies when their engine breaks down....etc"  lol get a clue all you BTC bashing clowns. 

In reply to by lasvegaspersona

VWAndy tmosley Mon, 10/23/2017 - 20:42 Permalink

 Remember when they said they needed apple to unlock a particular cellphone and it turned out they always could? Same goes for the blockchain. Its all got backdoors built right in. Why would anyone assume they wouldnt?  We are after all dealing with sociopaths. They never seen a chickenshit stunt they couldnt wait to try!

In reply to by tmosley

in4mayshun Winston Churchill Mon, 10/23/2017 - 15:12 Permalink

My guess is both because the premise that the Gov will let an independent system of currency grow beyond their means to control or regulate it is both naive and stupid. There's absolutely no reason to believe the BC exchanges will not become regulated just like banks. (If BC survives that long...) The idea that ANYTHING electronic is 100% secure and untraceable is pure fantasy; every packet of information leaves a trail. All it will take is one instance of a "terrorist" using Bitcoin and the backlash will send crypto currencies into the regulation wood chipper. Every person using BC will be required to use approved intermediaries, i.e. Government regulated and controlled, to make, process and receive BC payments.

My suggestion to anyone who's bought Bitcoin is to cash em in and be happy with the incredible gains you've made because one major event could send them crashing.

In reply to by Winston Churchill

Winston Churchill DjangoCat Mon, 10/23/2017 - 15:13 Permalink

It doesn't matter what operating system you use.The other backdoors are in the machine code,bios, and firmware.For supposedly tech savvy people,  CCs pumpers ,you guys don't have the first clue as tohow all the machines your tech relies upon work.They can, and will, put you all out of business, or take it over, anytime they want.Not a damn thing you can do about it either.Probably waiting to make sure it really hurts before they do.

In reply to by DjangoCat

OverTheHedge Winston Churchill Mon, 10/23/2017 - 15:22 Permalink

Not mentioned yet is the negative interest rate issue. I know that at least one of the models for a UBI is to have the payments expire within a few weeks or months, so as to encourage / enforce consumption. Would a cryptocurrency be able to have a built in expiry date? If you are forced to have a digital currency only, then negative rates (i.e. stealing a %age of your money) would also encourage consumption. It doesn't do much for savings, which is supposed to be the driving force of innovation and growth, but apparently we are in a post-growth economy these days.All food for thought

In reply to by Winston Churchill

techpriest OverTheHedge Mon, 10/23/2017 - 15:39 Permalink

"Would a cryptocurrency have a built in expiry date"

It would most likely require the coins or the wallet to be serialized in some way, with the age of the coin/wallet being a property. I would see a UBI-type payment set up as a wallet that you draw on, and the wallet has an age multiplier that reduces the coins received in payment each time. i.e. you pull 9, but the wallet has 10 removed, and the other 1 coin goes back to the agency.

Alternatively, the far simpler means of doing this to to have an account per person to draw on, which fills to a maximum amount, and you get no further payments if you don't spend. This would, I think, be an equally effective incentive because you are literally leaving cash on the table.

Of course, these are both terrible because when you consume more resources than you produce, you are reducing both your personal stock of wealth (net worth), and at a larger level the whole community/society is poorer. Spending is an awful and backward way to measure economic activity - it would be far better to measure in terms of "If a natural disaster wipes out this area's electric grid, how long would it take to get back to normal." Or, "If the typical person in this community loses their job, how long can they survive without help from the taxpayer?" We don't need to stimulate spending because we already know the answer to these real, substantive questions.

In reply to by OverTheHedge

S.N.A.F.U. misterb4096 Mon, 10/23/2017 - 18:05 Permalink

If Paul had said "What should scare folks about Monero" or "What should scare folks about ZCash" or had said the same about any other cryptocurrency that actually implements an anonymizing tech you would have had a point (assuming those techs are sound).  But he did not.  He said "What should scare folks about bitcoin", and bitcoin does not implement either of the techs you mentioned, nor any other anonymizing tech.  So what Paul brings up, this concern with bitcoin, is indeed still an issue.

In reply to by misterb4096