The Bitcoin bull and bear: who is right?

A leading financial advisor says inflation will drive Bitcoin skywards as India prepares for Bitcoin regulation, and Taleb says Bitcoin is worthless

“The US Federal Reserve’s failure on inflation will help drive the price of Bitcoin skywards,” says Nigel Green, CEO of deVere Group.

He made the claim as India’s prime minister, Narendra Modi, calls for global regulation of Bitcoin, and Spain begins the process of regulating Bitcoin advertising. Meanwhile, in Turkey, people are attempting to hedge against the falling Lira with Bitcoin. Yet, last year, Nassim Taleb, author of the Black Swan, said Bitcoin’s true value is “exactly zero.” Also, last year, Nouriel  Roubini, the professor of economics at the Stern School of Business and economist who predicted the 2008 crash more accurately than just about anyone else alive, said of Bitcoin: “I predict that the current bubble will eventually end in another bust.”

Nigel Green said: "Inflation is everywhere, and it could be around for longer than anyone would like. So, why didn’t the Fed – the central bank of the world’s largest economy – not see what was coming? Could they seriously not see how supply chain bottlenecks and a shortage of qualified workers would drive up prices and erode people’s and firms’ spending power?” He continued: “Surely, this must be the biggest miscalculation in the history of the US central bank. It shows how the traditional fiat system, which is a key component as it is charged with maintaining price stability, is dangerously out of step with reality. I believe this will fuel the demand – and therefore the price of Bitcoin and other cryptocurrencies.”

Or, to paraphrase Green in one sentence, you can’t trust central banks, so buy Bitcoin.

The analogy with Turkey is clear. The Turkish government has reacted to rising inflation by cutting interest rates — a move that had economists scratching their heads around the world. In fact, Turkey’s President Recep Tayyip Erdogan has made a habit of firing bosses of the country’s central bank when they refused to comply with the President’s wishes to cut interest rates. Turkey is plagued with a massive balance of trade deficits, leading to a collapse in the Lira and surging inflation.

“Turkey’s economic crisis has pushed millions of curious observers to actually sink their savings into Bitcoin, Ethereum and other coins.’ says a report on Aljazeera.

In many ways, Turkey is the perfect example of the rationale behind Bitcoin. The cryptocurrency supporters don’t believe governments should control currencies or interest rates; they say it will inevitably end in tears, and that is why you should buy Bitcoin.

But others warn of the risks in hedging against a volatile currency like the Turkish Lira with an asset like Bitcoin or other cryptocurrencies, which are among the most volatile assets in history. They liken it to swapping the devil with the deep blue sea.

And while some onlookers see similarities between how the Fed and Turkey’s government manage the money supply in their respective currencies, in truth, Fed chair Jerome Powell and President Erdogan come from opposite ends of economic thinking.

Nigel Green’s narrative hinges on the view that the Fed has messed up and inflation will surge, but it is far from certain this view is correct.

Some people always see inflation. The inflation hawks flew down from their lofty perches in 2008 and said that inflation was set to surge thanks to central banks. Well, it did pick up for a couple of years before crashing to earth.

Two men who came out of the 2008 crash with global fame were Nouriel  Roubini, who repeatedly warned of disastrous consequences of sub-prime mortgage securitisation and collateralised debt obligations and Black Swan and Anti-Fragile author Nassim Taleb.

But one thing Roubini never predicted post-2008 was inflation.

He has repeatedly suggested that he thinks Bitcoin is a bubble.

Last year, in a piece for the FT, Roubini said: “Since the fundamental value of bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production, I predict that the current bubble will eventually end in another bust.”

He concluded: “Risky, volatile bitcoin doesn’t belong in the portfolios of serious institutional investors. Many of its retail backers are suckers being manipulated by an army of self-serving insiders and snake oil salesmen.”

Ironically, Nassim Taleb is a famous critic of central banks and fiat currencies. And indeed, for that very reason, was initially supportive of cryptocurrencies. But last year said: “Few assets in financial history have been more fragile than Bitcoin.” Then, after saying the true value of Bitcoin was “exactly zero,” he contrasted the cryptocurrency with gold. He said: “Gold and other precious metals are largely maintenance-free, do not degrade over a historical horizon, and do not require maintenance to refresh their physical properties over time.”

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Libertarians versus authorities

Taleb is something of an outlier — as he is in so many ways. He is both anti-central banks and anti Bitcoin — a very unusual combination. But at heart, the Bitcoin rationale is libertarian; it says you can’t trust government and a currency’s supply is far too important to be left in the hands of authorities.

India, China and Spain are, by contrast arguing for regulation or, in the case of China, outright bans. This is because China fears that Bitcoin undermines its economic policy, which actually supports the cryptocurrency narrative that Bitcoin is anti-government control.

Spain's position is more akin to a financial regulator. In the UK, advertisements for investing carry a warning about how shares can go down in value. Bitcoin is not subjected to the same restrictions or indeed taxation. These are principles that are an anathema to Cryptocurrency supporters.

But do the legions of cryptocurrency investors understand this clash between libertarian thinking and the need for regulation? How many people believe in unbridled capitalism? Most would agree that some regulation at least is in order. How many cryptocurrency supporters know the history of central banks and what happened in the 1930s when the Fed failed to increase money supply after a stock market crash?

Blockchain of some sort may well be the future, but whether the blockchain that comes to dominate should be 100 per cent free of government influence and left to markets red in tooth and claw is an important debate that the public is not engaging in.

Bitcoin’s biggest test will occur if its supporters are right about central banks causing inflation. Hyperinflation is unlikely, however. Instead, if inflation starts creeping up to ten per cent or looks likely to become embedded at five per cent plus, central banks will respond. Remember that in many countries, such as the UK and Germany, the primary responsibility of the central banks is to control inflation. (In the US, the Fed has a dual mandate, unemployment and inflation). If central banks do indeed conclude inflation is becoming a severe problem, they will hike rates. If the worse predictions of the Bitcoin supporters prove prophetic and inflation approaches ten per cent or more, then interest rates will probably rise to their highest level in a quarter of a century. This may well spark a stock market crash. If this were to happen, we would surely get a definitive answer to the question: are Roubini and Taleb right about Bitcoin?

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