A seemingly innocuous comment by a European Central Bank (ECB) official has helped to make the case for cryptocurrency, at least according to some leaders within the crypto community. The comment was part of a series of Tweets issued by the bank as part of its hashtag #AskECB conversational strategy.
According to multiple news sources, the ECB answered a question about quantitative easing by implying that they can create money at will. This set off a firestorm of criticism as well as justification that cryptocurrencies like Bitcoin and Litecoin are more democratic because of the way coins are created and managed.
Was the bank deliberate in its answer to the quantitative easing question, or was it just a careless remark by someone who wasn't paying attention? We may never know. However, the truth of the answer was undeniable. Moreover, it explained one of the fundamental differences between fiat and cryptocurrency.
More about Quantitative Easing
To understand the importance of the ECB tweet and how it makes the case for crypto, it is important to first understand quantitative easing. Also known as QE, quantitative easing is a strategy of increasing the money supply by printing new fiat and using it to buy government bonds. It is a practice that national governments have been engaged in for decades.
Quantitative easing was implemented at unusually high volumes in response to the financial crash of the previous decade. Central banks throughout Europe Asia, and the Americas utilized it to stabilize the world economy. Whether or not it was the right move depends on your view of central banks and fiat.
A fundamental difference
Getting back to the ECB tweet, it came in response to the question, "where did you get the money for the QE?", from Twitter follower @Gianluca844. The ECB's response was as follows:
"As a central bank, we can create money to buy assets #AskECB".
The quote was attributed to ECB board member and chief economist Peter Praet. Assuming his answer was deliberate, Mr. Praet unwittingly made the case for cryptocurrency by explaining one of the fundamental differences between how it works and how central banks do business.
Virtually every active cryptocurrency on the market offers only a limited number of coins as established by its original code. Take Bitcoin, for example. The code that established their world's first cryptocurrency accounted for a total of just 21 million coins. Once all of those coins are mined, there will be no more.
There are only two ways to increase coin supply for most cryptos. The first is for a single mining entity or a number of entities pooling their resources to take control of 51% or more of the mining, thereby having control over the blockchain. That entity can then alter the blockchain to create more coins.
This is very difficult to do, if not impossible. However, there is a second way to create more coins: fork the code, create new cryptocurrency, and then increase coin numbers by altering the forked code. This is actually fairly common. Most of the world's major cryptocurrencies have been forked at least once. Many of them are forks of Bitcoin.
Monetary policy and inflation
We began this post talking about how the EU tweet makes the case for a more democratic cryptocurrency. Now let us get into why that is. For starters, it is difficult to talk about government creating money without also talking about inflation. The two go hand-in-hand.
The ECB controls the supply of money within the EU. If they want more money in circulation, they simply print it. They can reduce the amount of money in circulation by ceasing printing and taking bills and coins out of the supply chain with impunity. The question is, why would the ECB do this?
Monetary policy is almost always adjusted in order to artificially control the strength of the economy. After the financial crash, the powers that be believed the only way to prevent a complete economic meltdown was to encourage people to spend. In order to make that possible, they needed to put more money into circulation.
Sometimes central banks adjust monetary policy in order to hold down inflation. Sometimes they do it to encourage commercial and retail borrowing. Sometimes they engage in policies that purposely increase inflation because they want to see a commensurate increase in consumer prices.
The point of all this is to say that central banks like the ECB manipulate the economy by manipulating money supply. It is not an exaggeration to say that central banks like the ECB and the Fed (USA) ultimately decide the strength or weakness of the economies they control.
Decentralization protects crypto
It should be obvious that cryptocurrency is not subject to the same level of manipulation. You could make the case that is not subject to any manipulation at all. This is one of the strengths of crypto. Its decentralized nature prevents a small handful of government officials from deciding how many should be available at any one time.
Because the supply of coins can only be changed using one of the two means previously explained, cryptocurrency coin supply is a much more democratically controlled process. You need a majority of stakeholders to agree to either fork the current code or pool their resources to take over mining.
Does this make crypto better than fiat in terms of value? That depends on your point of view. It depends on how you measure value as well.
Supply and demand
When you look at something like Bitcoin there is little doubt that its value is controlled by supply and demand. Bitcoin has, for better or worse, become more of a store of value than a monetary system. In other words, people are buying bitcoins as investments - the same way they would buy stocks or bonds - rather than as a means of buying and selling.
In that sense, the value of individual bitcoins is derived by the total number of people who want them and what they are willing to pay for them. That's why Bitcoin's price is so high. It is why Bitcoin peaked at roughly $20,000 per coin in 2018.
But what if you derive value from usability? Well, Bitcoin is the most widely accepted cryptocurrency for buying and selling. You can use bitcoins to play slots online. And when you've had enough of slots, you can use those same coins to play your favorite table games. But that's not all.
Depending on where you live, you can use your bitcoins to take a taxi ride, buy a cup of coffee, get that new pair of shoes you've had your eyes on, and so on. You derive your value not from supply and demand on the investment market, but how easily you can acquire bitcoins and use them to pay for goods and services.
Coin price and stability
One of the primary criticisms of cryptocurrency is the instability of prices. It is a fair criticism. Cryptocurrencies can be subject to wild price swings at any given time and for no particular reason. But limited coin supply will correct that over time.
Right now, bitcoins are being mined at a pretty rapid rate. That means there are plenty of coins to be had. But the system is designed to slow down over time. The more coins mined, the harder it becomes to mine the new coins. Dwindling coin supply and the difficulty of mining will eventually stabilize prices. Perhaps what we are seeing now is even the beginning of that stabilization.
Once all available bitcoins are successfully mined, the supply and demand issue goes away. Finite supply will see to that. It will also see to a more stable value that should not fluctuate very much at all. That is the point at which bitcoins will become a stable monetary system just like its original founder intended.
We will ultimately decide
It is true that central banks would no longer be able to manipulate the world's economies if we got rid of fiat and all went to decentralized cryptocurrency. They would not have the ability to tackle inflation or recession by controlling the money supply. What we have to ask ourselves is whether or not that is a good thing.
There are plenty of those in the crypto community who believe allowing government to manipulate money supply is a bad thing. After all, a government that can control the money supply can also control the economy. This allows government leaders to control their citizens through both direct and indirect means.
Those who think fiat and centralized banks are a good thing cite the inequities of free markets as a basis for their support. They make the point that if left alone to do as they please, free markets would always favor the wealthy and powerful at the expense of the poor and helpless.
In the end, we will ultimately decide our own fate based on our willingness to adopt cryptocurrencies as monetary systems. Central banks are not going to give up control of monetary supply willingly. So if control is to ever be taken away from them, it has to be because most of the rest of us are using crypto instead of fiat.