A Federal Reserve Bank of St. Louis official has signaled confidence in bitcoin's potential to hold value over the long haul. David Andolfatto, vice president of research at the regional Fed, discusse
A Federal Reserve Bank of St. Louis official has signaled confidence in bitcoin's potential to hold value over the long haul. David Andolfatto, vice president of research at the regional Fed, discussed his views in a recent podcast appearance on Epicenter Bitcoin. Andolfatto has previously written about Fedcoin, a hypothetical digital currency that would track fiat at a 1-to-1 ratio. He sees merit in both that option and bitcoin itself, treating bitcoin as a sort of digital equivalent to gold.
The long view
Bitcoin's price swings in the short term obscure a larger trajectory. Since 2010, the asset has experienced large gains. The late-2013 peak of around $1200 looks distant now, but the current price of about $240 still dwarfs where bitcoin traded in 2011 or 2012. Andolfatto frames this distinction between immediate moves and lasting value:
"I wouldn't go so far as to say that bitcoin is not a good store of value. I think that it could potentially be a good long-run store of value, so I make a distinction — and I think a lot of monetary theorists do as well — on the short-run rate of return versus the long-run rate of return of an asset. Of course, it's desireable — if you could — to have [a] high long-run rate of return and a high, stable short-run rate of return, but life is full of tradeoffs."
On adding it to a portfolio, he elaborates:
"My view would be more of — yeah, as a store of value, I mean if people want to put aside some bitcoin in their wealth portfolios (you know, not too much of it) that it might perform in similar ways to gold or something like that. That would be OK. There is a fixed supply of the stuff, and you could imagine with demand growing that, over the long run, it might be a good store or decent store of value."
The volatility problem
Price swings in the short term create an obstacle to bitcoin serving as functional money, Andolfatto contends. A medium of exchange needs short-term stability, not just long-term value. He elaborates:
"To be a good money — a good money needs more than just [the ability to be a good store of value]. It's good if it has a good long-run store of value, but also what's important is that it has a good short-run rate of return. That, in other words, its purchasing power doesn't fluctuate too dramatically in the short run. Or even if it does remain stable for awhile, that it isn't subject to wild swings in its purchasing power."
The problem worsens if bitcoin adoption spreads to multiple nations or even a single country. Andolfatto lays out the scenario:
"I think it's a property of these types of monetary policies — like the gold standard and also bitcoin — that in times of high demand for money (like during a financial crisis) you see these very large increases in the demand for money that if the supply of money is fixed that what's naturally going to happen is that the purchasing power of that money is just going to skyrocket, which is to say it will create a huge deflationary event."
Gold and fiat in digital form
The Fedcoin-versus-bitcoin question mirrors the age-old fiat-versus-gold standoff, except played out in digital infrastructure. One camp argues central banks should print money during crises; Austrian economists see such moments as necessary market corrections. Andolfatto explains his position:
"We know that these unexpected deflationary events are harmful because most people organize their payments in terms of nominal debt contracts. You pay the rent in so many dollars per month, you pay your employees a certain amount of wage. If firms see the product prices plummeting in a big deflation, they're going to have difficulty meeting these nominal obligations. They're going to have to layoff workers and renege on their debts. This is why the bitcoin monetary policy is not necessarily a good monetary policy relative to a well-design, elastic monetary policy that would increase the supply of money during a crisis to alleviate the pressure that there is on the demand for the money. And in doing so, you're able to smooth out the price-level effect and avoid the worst consequences of these unexpected deflationary events."
Critics reject this framework outright. Some individuals resist any form of political control over money. These conflicting views suggest bitcoin and Fedcoin could operate alongside each other for a long time, much like gold and fiat currency exist in tandem today.
