Betting on Dystopia

Kenneth Rogoff

The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. That means that cryptocurrencies are not entirely worthless.

CAMBRIDGE – With the price of Bitcoin down 80% from its peak a year ago, and the larger cryptocurrency market in systemic collapse, has “peak crypto” already come and gone? Perhaps, but don’t expect to see true believers lining up to have their cryptocurrency tattoos removed just yet.

At a recent conference I attended, the overwhelming sentiment was that market capitalization of cryptocurrencies is still set to explode over the next five years, rising to $5-10 trillion. For those who watched the price of Bitcoin go from $13 in December 2012 to roughly $4,000 today, this year’s drop from $20,000 is no reason to panic.

It is tempting to say, “Of course the price is collapsing.” Regulators are gradually waking up to the fact that they cannot countenance large expensive-to-trace transaction technologies that facilitate tax evasion and criminal activity. At the same time, central banks from Sweden to China are realizing that they, too, can issue digital currencies. As I emphasized in my 2016 book on the past, present, and future of currency, when it comes to new forms of money, the private sector may innovate, but in due time the government regulates and appropriates.

But as I also pointed out back then, just because the long-term value of Bitcoin is more likely to be $100 than $100,000 does not necessarily mean that it definitely should be worth zero. The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. It is no coincidence that dysfunctional Venezuela is the first issuer of a state-backed cryptocurrency (the “Petro”).

The ultimate obstacle for any cryptocurrency is that eventually there has to be a way to buy a range of goods and services beyond illicit drugs and hit men. And if governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse.

Many crypto-evangelists insist that Bitcoin is “digital gold,” in part because the long-term supply is algorithmically capped at 21 million. But this is nutty. For one thing, unlike gold – which has always had other purposes and today is employed widely in new technologies from iPhones to spacecraft – Bitcoin has no alternative use. And even if Bitcoiners manage to find a way to lower the phenomenal energy cost of verifying transactions, the very nature of decentralized ledger systems makes them vastly less efficient than systems with a trusted central party like a central bank. Take away near-anonymity and no one will want to use it; keep it and advanced-economy governments will not tolerate it.

The evangelists dismiss such concerns: Bitcoin can still be incredibly valuable as long as enough people perceive it as digital gold. After all, they argue, money is a social convention. But economists (including me) who have worked on this kind of problem for five decades have found that price bubbles surrounding intrinsically worthless assets must eventually burst. The prices of assets that do have real underlying value cannot deviate arbitrarily far from historical benchmarks. And government-issued money is hardly a pure social convention; governments pay employees and suppliers, and demand tax payments in fiat currency.

But it is too soon to say how the new world of digital currencies will play out. Central banks will get into the game (their reserves are already a form of wholesale digital currency), but that is not the end of the story. US Treasury Direct, for example, already offers retail customers an extremely low-cost way to hold very short-term Treasury debt for amounts as little as $100, tradable to others in the system. Still, heavy security makes the system relatively cumbersome to use, and just maybe governments might adopt one of today’s private digital technologies.

For the moment, the real question is if and when global regulation will stamp out privately constructed systems that are expensive for governments to trace and monitor. Any single large advanced economy foolish enough to try to embrace cryptocurrencies, as Japan did last year, risks becoming a global destination for money-laundering. (Japan’s subsequent moves to distance itself from cryptocurrencies were perhaps one cause of this year’s gyrations.) In the end, advanced economies will surely coordinate on cryptocurrency regulation, as they have on other measures to prevent money laundering and tax evasion.

But that leaves out a lot of disgruntled players. After all, many today – including Cuba, Iran, Libya, North Korea, Somalia, Syria, and Russia – are laboring under United States financial sanctions. Their governments will not necessarily care about global externalities if they encourage cryptocurrencies that might have value as long as they are used somewhere.

So, while we shouldn’t be surprised by this year’s cryptocurrency price bust, the price of these coins is not necessarily zero. Like lottery tickets, there is a high probability that they are worthless. There is also an extremely small outside chance that they will be worth a great deal someday, for reasons that currently are difficult to anticipate. /project-syndicate