In a recent note American bank JP Morgan has suggested that one of Bitcoins biggest features may actually end up being its downfall. The bank pointed out that since it is decentralized, it would hit a speed bump if there were a shock to the economy.The bank that since bitcoin are released at a set rate, there’s no way for the system to handle a liquidity crisis during such an event.
In the US, when such shocks have occurred, central banks pump additional cash into the economy to address declines in lending and spending in the private sector. However, such a liquidity infusion would be close to impossible with bitcoin because there is no central institution that controls the network and the number of coins released each year is fixed at a certain rate.
JP Morgan stated:
“The ability to provide adequate liquidity is a hallmark of a well-functioning market, but more so during times of crisis. One benefit of fiat money is that it can be used to provide emergency liquidity from the outside. This is the role central banks play as the lender-of-last resort.”
Bitcoin supporters have hit back at the claims made by the bank, arguing that their case is built on the assumption that printing money to shore up an economy is something that is beneficial.
Aaron Lasher, the chief marketing officer at cryptocurrency tech company Breadwallet, said:
“This is a classic case of creating the problem you offer to solve, and exactly why bitcoin exists. Why do we have the need for “emergency liquidity” in the first place?”
Mr Lasher hit out at the fact economies are based on fiat currency which can be printed at the whim of central bankers.
Mr Lasher said:
”So banks have no incentives to manage liquidity risk precisely because the marginal cost of printing more dollars by the central banks is zero, providing a guaranteed backstop against sustaining losses incurred by excess risk taking.”
Arthur Hayes, the chief executive peer-to-peer crypto trading platform BitMEX, also argued that such policies ultimately translate into inflation in other financial assets.
“If money printing solved the ills of economic collapse, Weimer Germany, Zimbabwe, and most recently Venezuela would be the most productive and economically sound societies on earth. Money printing delays the inevitable. Without the ability to print base money at all, any institutional that extended credit would be evaluated by the market on its ability to responsibly originate loans.”
Business Insider senior correspondent Pedro da Costa has, however, argued it is crucial to make the distinction between countries with failing economies that print money “willy nilly” and economically developed countries implement certain monetary policy.
He claimed: “The US is not Venezuela. “From a monetary standpoint, the US dollar is the reserve currency.
“Venezuela is exposed to currency risk, needs to sell oil in dollars. Apples and oranges.”