In case you hadn’t noticed, bitcoin has made a major comeback. After falling below $4,000 for much of 2018, the price recently reached almost $14,000. It’s still volatile, and fell sharply later, but some bitcoin optimists believe it will soon approach its late-2017 high of $20,000.
The obvious question is this: If bitcoin was just a bubble to begin with, why has it been bouncing back in this manner? The answer is that cryptocurrencies, in some form or another, are probably here to stay.
One reason for the rise in bitcoin’s price may have to do with the U.S. and China and the trade war. It no longer seems that China will join the international economic order as that term might have been understood 15 years ago. Instead, there will be an ongoing cold war; China will not liberalize, and capital controls may persist. In that world, bitcoin will continue to prove a useful way of getting funds out of China. The Chinese communist government may or may not crack down on that practice, but outright liberalization would have ended this use of bitcoin.
For related reasons, a China that does not liberalize may influence the broader tenor of the global economy away from freedom, again giving bitcoin additional uses around the world for evading central authorities.
A second development is that the Democratic Party in the U.S. continues to shift to the left, including on the possibility of a wealth tax. As America’s fiscal deficits grow [due often to the Republicans, I might add], there will be a long-term need to restore fiscal sanity. Presidential candidate Sen. Elizabeth Warren, D-Mass., for one, advocates a 2% wealth tax [over $50 million] toward this end.
No matter what you think of this idea, it likely would boost the demand for bitcoin and other crypto assets, as cryptocurrencies are potentially a way to store assets out of reach of many tax authorities. And the U.S. is hardly the only nation that may be looking to a wealth tax in the future to balance the books. In essence, the new and higher price of bitcoin is telling us that fiscal solvency will be hard to come by, and the wealthy will not give up their assets without a fight.
Third, Facebook is now leading a movement to introduce a new cryptocurrency, namely the Libra. I’m not sure Libra will be allowed by the law to get off the ground, but still the new proposal is backed by a pretty striking and radical innovation: the idea that transaction costs on remittances and other fund transfers can be lowered significantly by defining a new medium of payment, piggybacking on older media of exchange. It would be a major advance if the current 7% to 8% remittance fees could be lowered significantly to say 1% or 2%, and crypto still holds this promise.
Again, you may not be convinced by what is on the table. But seeing a major new idea in the crypto space is proving bullish for the sector as a whole. And now one of America’s best-known global companies is putting its imprimatur on the proposal. Think of this as a sign that the crypto space is still evolving. While that means bitcoin likely will face more competition in the future, it lowers the chance of crypto as a sector vanishing altogether, which was starting to look like a risk.
One final possible explanation for the resurgence of bitcoin: Populism is spreading, the Middle East is not calming down, and the world is not solving its geopolitical problems. To the extent bitcoin is a general hedge, much like gold, the conditions for its value seem to be favoring a high future demand for portfolio insurance. Even a small percentage of global wealth put into bitcoin can sustain a high bitcoin price.
It is missing the point to wonder if the new and higher bitcoin price is fully rational. In some economic models, the price of a cryptocurrency can be whatever people think it should be. Whether or not those models are your favored approach, a lot of people seem to believe they are true – and they are buying crypto assets, including bitcoin, accordingly.
So crypto is alive and well these days, even if [like me] you reject the utopian predictions that it will somehow displace money as we know it. If we have had a hard time seeing the resiliency of the crypto space, it is because we are not used to thinking of futures that are radically different from the present. But those futures – for monetary institutions at least – now seem to be closer than ever before.
Tyler Cowen is a Bloomberg Opinion columnist.
