Volatility in the cryptocurrency market must be regulated with a “bitcoin standard” akin to the gold standard abandoned in the 20th century, says ETF Securities.
Investors’ mistrust in central bank-regulated currencies is a key reason for the increasing interest in bitcoin, ETF Securities global FX and commodity strategist Martin Arnold has argued in a new blog post, likening it to the popularity of gold in the early 20th century.
The London-based investment strategist quoted former US President Herbert Hoover, who said: “We have gold because we cannot trust governments.”
Mr Arnold wrote: “Many investors are buying bitcoin for precisely this reason and feel that central bank intervention is devaluing fiat currencies.
“Others invest because the potential widespread acceptance and usability of bitcoin will see prices rise over time.”
Should bitcoin “or another cryptocurrency with limited supply” be more widely adopted, prices would increase in the beginning.
However, according to Mr Arnold, eventually we would see “the growth of the global economy… theoretically limited” as bitcoin would slow money supply growth and thereby “inhibit the growth of the economy”.
In order to prevent a crash in bitcoin prices that moved with the decline of the economy, a bitcoin standard would “eliminate volatility”, the commodity strategist argued.
A bitcoin standard is a notion put forth by Bank of Canada research consultant Warren E. Weber of a hypothetical monetary system in which bitcoin would be the predominant medium of exchange between a group of countries, akin to the gold standard that was used until its abandonment by Western governments after the Great Depression.
“Such a monetary system will very likely be similar to the gold standard,” Mr Weber wrote in a paper released in 2016 titled A Bitcoin Standard: Lessons from the Gold Standard.
“The gold standard was a monetary system in which countries’ currencies were tied to gold. The bitcoin standard of my thought experiment is a monetary system in which countries’ currencies are tied to bitcoin.”
In his blog post, Mr Arnold said that currencies that were backed by bitcoin would “move in line” with the price of bitcoin, but also cautioned that other factors would come into play.
“The problems of money supply growth adversely affecting production would remain,” the strategist said.
“Additionally, investors would not see price gains because bitcoin is backing the fiat currency.”