Page 15 - The Economist20171214

The Economist December 16th 2017 Leaders 15
Bitcoin
A bit on the side

Bitcoin isa speculative assetbutnotyet a systemicrisk
INANCIAL markets rarely true currencies are used to denominate liabilities as well as as-
Bitcoin price Fmiss opportunities to make sets; imagine the ruin faced by those who had taken out a bit-
$’000
money. That is as true of crypto- coin mortgage orbusiness loan earlierthis year.
20
15 currencies as anything else. Bitcoin might triumph if currencies like the dollar and the
10 Trading in bitcoin futures began euro succumb to hyperinflation, but there is no sign of that. A
5 on the Chicago Board Options more likely scenario is that the technology that underpins bit-
0
JF M A M J J A S O N D Exchange thisweek; CME Group coin—a distributed ledger called the blockchain—proves so
2017
will launch its own futures on useful that it becomes widely adopted. Ifso, bitcoin would be-
December18th (see page 67). That has given a further boost to come a vehicle for other services, and people would need to
the digital currency’s price, which is up by 1,550% this year. ownsome,orafractionofone, to use them. Butthe original ap-
Suchphenomenalreturnsaredrawinginwavesofspeculative peal of bitcoin was to the libertarian fringe and those who
money. But is there a fundamental case to invest in bitcoin? wanted to trade illegal commodities, like drugs, out of sight of
The usual tools offinance are no guide. An equity is a claim the authorities. Bitcoin’s anonymity and opacity do not much
on the assetsand the profitsofa firm; a bond entitles the inves- appeal to big banks (or to their regulators). They are develop-
tortoaseriesofinterestpaymentsandrepaymentonmaturity. ingtheirown blockchains.
Bitcoin brings no cashflows to the owner; the only return will
come via a rise in price. When there is no obvious way ofvalu- Hysteria on all fronts
ing an asset, it is hard to say that one target price is less likely Ifthe bitcoin boom looks like a mania, calls for it to be banned
than another. Bitcoin could be worth $10 or$100,000. are also over the top. Regulators are right to watch “initial coin
Instead, investors must weigh the scenarios that enthusi- offerings”—attempts by companies to raise money by issuing
asts posit: what if, say, every pension fund invested 1% of its digital tokensoftheirown. Theyare right, too, to warn retail in-
portfolio in the cryptocurrency? One argument made by bit- vestorsaboutthedangersofa thinlytraded marketfor an asset
coinnoisseursisthatitisa type of“digital gold”. Storesofvalue with no inherent value and scant recourse if things go wrong.
are supposed to keep their value; bitcoin, by contrast, is ex- But it is hard to see how the currency is a source of systemic
tremely volatile. Its code ensures that no more than 21m coins risk; by one measure, the value of bitcoin is less than half that
can ever be created; that sets bitcoin apart from fiat money, of Apple’s market capitalisation. Real economic damage oc-
which central bankscan create atwill. Yetbeinglimited in sup- curs when a plunge in asset prices is combined with the wide-
ply is a necessary, but not sufficient, condition for having val- spread use of money that has been borrowed, particularly by
ue; signed photographs of Economist journalists are rare but, banks. These elements are not yet present.
sadly, of negligible worth. Nor is supply really limited. Plenty For those who believe that cryptocurrencies could be the
ofothercryptocurrencies exist. nextbigthing,buyingbitcoin islike an option contract: itmight
Might bitcoin replace ordinary currencies in everyday tran- just pay off. For everyone else, the wise course is to watch. In-
sactions? Not soon. Who wants to part with (or accept in ex- vestorshavehadalotoffun pilinginto bitcoin; the real testwill
change) a currency that can rise or fall by 20% in an hour? And come when they suddenly need to get out again. 7

Energy subsidies in America
Abuse of power

Regulators should rejectRickPerry’s plan to subsidise coal-fired and nuclearplants
INTER is coming to Amer- sion (FERC) wasgiven a 30-daygrace period to decide whether
W ica. That simple statement to supportMrPerry’splan. Itshould refuse to do so, or substan-
of fact ought not to send shivers tially amend it. His scheme is a confection ofbad policy, faulty
down policymakers’ spines. But economics and thinly disguised patronage. But it also raises a
Rick Perry, the energy secretary, genuinely difficult question: how to keep grids working
sees it as a call to arms. To de- smoothlyin an era ofcheap natural gas, which ishard forbase-
fend Americans from blizzards, load power plants to compete with, and renewable energy,
polar vortices and other treach- which is dependent on the vagaries ofthe wind and sun?
erous weather which, he says, threatens the country’s electric- The FERC’s decision, by contrast, ought to be an easy one.
ity grid, he proposes throwing a multi-billion-dollar lifeline to The rationale behind Mr Perry’s proposal is weak; just
struggling coal-fired and nuclear plants if they can keep emer- 0.00007% of power cuts in 2012-16 were caused by problems
gency fuel on standby for90 days. with fuel. In emergencies the biggest risk to grids is not power
On December 8th the Federal Energy Regulatory Commis- generation at all, but the poles and wires along which electric- 1