The growth of Bitcoin and other forms of virtual currency is one of the big economic stories of the past decade. Its growth has inspired many people to buy in, driving its value up and encouraging even more investors.
Cryptocurrency is increasingly being accepted as a medium of exchange; in fact, the nation of El Salvador last year officially adopted Bitcoin as official currency, much like the American dollar.
Bitcoin’s success has led to the creation of other forms of cryptocurrency; some are pinned to the value of tangible assets such as the dollar, others are based solely on their market value. It is that freedom from the constraints of traditional currencies that has made cryptocurrency so popular — so popular, in fact, that government agencies already are looking to clamp their regulative hooks into the media.
Doing so, however, would erase the very appeal of those assets — which might be officials’ ultimate goal.
As with many assets that are on the rise, the value of cryptocurrency has been volatile. Speculation on the currency’s market value can inspire large buys, which drive up the price and spur new investors. But when investors think it’s reached its highest value we can see large sell-offs, which can lead to rapid and large declines in value — and losses for many.
Such is the nature of openly traded assets. Risk is part of the investment process, and often commodities that show high growth also have high levels of risk.
Officials within the Biden administration already are talking about imposing regulations on cryptocurrency.
“We really need a regulatory framework to guard against the risks,” Treasury Secretary Janet Yellen said during a hearing before the U.S. House Financial Services Committee. “Really, we need a comprehensive framework so that there are no gaps in the regulation.”
Such knee-jerk reactions usually aren’t necessary. While people new to the market might be alarmed at a commodity’s volatility, informed investors know that while fluctuations often occur, the ultimate goal is long-term growth. Cryptocurrency carries such a promise — if government officials resist the urge to gum up the works.
Regulation could cripple if not kill this alternative form of payment. That would be too bad, because while its growth is largely pushed by investors, it offers many other benefits. For example, most people can use cryptocurrency to transfer funds from one computer or smartphone to another, bypassing exchange media such as Western Union, and its fees. Outside the regulatory realm, cryptocurrency holdings are secure and private, although transactions are transparent. Self-regulation, such as Bitcoin’s pledge that it will never exceed a declared maximum of bitcoins, insulates the medium from inflation, which occurs whenever the government prints more money.
Growing numbers of Americans cite inflation, regulation and other reasons to call for a U.S. return to the gold standard. We doubt that will ever happen — federal wonks are too enamored with their ability to manipulate the economy. Cryptocurrency offers an alternative for those who want such a secure medium of exchange — as long as it’s left alone.
