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TOO SMALL TO MATTER

Most economists think bitcoin won’t bring down the global economy—yet

Reuters/Dado Ruvic
No fires to put out, yet.
  • Preeti Varathan
By Preeti Varathan

Video Journalist and Economics Reporter

This article is more than 2 years old.

Google “bitcoin bubble” and you’ll get at least 16.9 trillion results—ranging from mildly concerned to outright alarmist.

But most leading European economists believe there’s little reason to worry.

Only 21% of 48 economists polled by the Center for Economic Policy and Research believe cryptocurrencies, like bitcoin and etherium, could jeopardize the economy and cause a crisis.

The top cryptocurrencies are worth about $350 billion (paywall)—less than the $513 billion market value of Facebook. If they disappeared tomorrow, banks would barely notice. “Despite recent growth, the market cap of cryptocurrencies remains modest, compared to the size of ‘conventional’ financial markets,” argues Robert Kollman, an economist at Université Libre de Bruxelles. “Cryptocurrencies do not seem to represent a threat to financial stability – for now.”

That’s partly because it’s not so widely used, especially by large investment groups, says Michael McMahon at the University of Oxford. Ethan Ilzetski, of the London School of Economics, agrees: “Bitcoin and other cryptocurrencies remain a toy for a very narrow segment of investors and are detached from the financial system and the real economy.”

According to a 2015 working paper from the European Central Bank, “there is no material risk for any of the central bank’s tasks as yet.” Jerome Powell, the US Federal Reserve chair elect, agrees. “They don’t really matter today; they’re just not big enough. There isn’t close enough volume to matter,” he told the Senate Banking Committee during his confirmation hearing on Nov. 28, 2017.

Crypto remains small partly because it’s costly to use. Visa can process 47,000 transactions a second, compared to the seven-transactions-a-second processing power of bitcoin. Economists Jonathan Chiu and Thorsten Koeppl found that when they modeled bitcoin behavior (pdf) with one of the most common economic models, bitcoin was 450 times more likely to hinder consumption than cash.

Some economists think bitcoin will only be widely adopted if conventional currencies fail. ”Cryptocurrencies would become attractive if central bank issued currencies became very unstable,” notes Jürgen von Hagen of the Universität Bonn. “Their widespread use in the financial system would be a result, not a cause, of instability.”

In the wrong hands, bitcoin could threaten the financial system. ‘The LTCM (Long Term Capital Management) crisis has taught us that it takes just one key financial institution taking on large risky positions to put the system at risk,” cautions Wouter den Haan of the London School of Economics. LTCM was a hedge fund with $126 billion in assets run by Nobel laureates; it nearly collapsed due to risky derivatives bets and had to be bailed out by the Federal Reserve to avert an economic meltdown.

Crypto’s spreading popularity, however, has convinced a majority of economists (61%) that it’s time for it to be regulated.

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