The other day I was standing in line at a Subway restaurant behind bigfoot, otherwise known as sasquatch. When it came time to pay for my sandwich I pulled up the Coinbase app on my phone and made payment in Bitcoins.

Ok, the part about bigfoot isn’t true, but Bitcoin is for real, and I believe.

Let me tell you what this article is not. It is not a discussion on the technical aspects of Bitcoin or other cryptocurrencies and their inherent risks, nor is it a recommendation to buy or sell. It is a discussion of why the author believes Bitcoin and other cryptocurrencies will continue to gain in popularity and acceptance.

To understand the growing popularity of cryptocurrencies you first have to understand the nature of modern currencies, including the US dollar.

I am a fan of the US dollar. I have written about it in the past. It has a great heritage earned with heroic sacrifice in two world wars. As the world’s reserve currency it gives the US a great advantage in international trade and finance.

But the US dollar like all major global currencies is a fiat currency. There is no gold which backs the value a dollar. That officially ended in 1973. Today a dollar is worth a dollar only because the US Treasury says it is, and because people have confidence in the dollar and the US government.

The purchasing power of a dollar is derived from the supply and demand for dollars. Demand for dollars comes from global trade, businesses, investors and consumers. The supply of dollars is 100% a function of the US Federal Reserve. The US Federal Reserve can literally add or subtract dollars at will from the global economy. They do this under monetary policy.

Having control over the supply of dollars means that the Federal Reserve has great sway over all of our economic fortunes and well-being. Like any commodity, when the supply goes up, the price goes down. And when the supply goes down, the price goes up.

The price of a dollar, or any other currency, is determined by its purchasing power. For example, how many dollars, yen, yuan, euro, etc., does it take to purchase a Big Mac, which is an actual index published in The Economist magazine.

With control over the supply of dollars, the Federal Reserve has control over inflation which is the official measure of purchasing power.

In the view of the author, this is a significant driver of the long-term appeal and price of cryptocurrencies. While the supply of global currencies is determined by a handful of committees at their respective central banks, the supply of Bitcoins, Ethereum, Litecoins, etc. is either finite or set on a pre-determined path. In other words, no central banker or government can inflate away the purchasing power of a Bitcoin.

History has shown that this is a legitimate concern. Many nations have strategically destroyed their currencies in order to inflate away debt. Germany did this in the 1920’s. Venezuela and Zimbabwe are currently doing this.

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Even the United States has not been immune to this concern. On April 5, 1933, President Franklin D. Roosevelt signed an executive order “forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” The objective of the order was to remove the constraint on the Federal Reserve which prevented it from increasing the money supply. At the time, as required by law, Federal Reserve Notes which were issued to manage the money supply had to be backed by and were redeemable for gold. Under the executive order, if gold could not be owned, Notes could not be redeemed for gold, and therefore, the Federal Reserve could increase the money supply unconstrained.

Today, many people are concerned with the Federal Reserve’s and other global central banks’ quantitative easing programs which have led to a huge increase in the global money supply.

In conclusion, the US dollar is a fiat currency. Bitcoin and other cryptocurrencies are fiat currencies. Their values are derived by people’s confidence in them. While my confidence in the dollar remains high, there is the matter of a growing $20 trillion Federal debt, not including unfunded liabilities. The allure to inflate away this debt will not be missed by our politicians at some point in the future. People around the world seem to be having the same concerns in their respective countries as the demand for Bitcoin and other cryptocurrencies is very real.

The list of companies accepting payment in cryptocurrencies continues to grow, including Microsoft, Craigslist, Expedia, and yes, Subway.

As a final note, there are clearly other drivers of the price of cryptocurrencies not discussed in this article. Be careful. Do your research. Form your own views. I own a small amount of Bitcoin.

Barry Nielsen has worked in capital markets for over 20 years with a focus on fixed income portfolio and risk management. He has an MBA from George Mason University and holds the Chartered Financial Analyst designation. He currently works for Opportunity Bank of Montana.


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