By design, stability comes in differing flavors for Bitcoin, Libra, and Fiat


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Critics of Bitcoin have often pointed to its price volatility as an issue and reason why it could never be considered a secure “store of value”, but a Wall Street veteran of 22 years, Caitlin Long, has built an intellectual argument, which posits that, by design, the world’s favorite cryptocurrency provides systemic stability versus price stability. She also contends that you cannot have both in one medium. For that reason, Libra’s stablecoin venture and all other fiat currencies for that matter may provide the illusion of price stability, but they do so by being susceptible, again by design, to systemic stability.

Per Ms. Long’s own words: “Bitcoin’s price swung wildly this week, causing many to conclude bitcoin is unstable. But this conclusion misses a key nuance: Bitcoin was designed for systemic stability, not for price stability. Indeed, as a system Bitcoin is highly stable even though its price may not be. Bitcoin is the opposite of fiat currencies, which generally exhibit price-stability but are susceptible to periodic bouts of financial system instability.” By extension, Facebook’s new stablecoin, the “Libra”, will be in the same category as any fiat currency and thereby subject to “financial system instability”.

While BTC prices behaved chaotically over the past two weeks, Bitcoin advocates were actually rejoicing over another statistic that reflects upon the power of the system’s network – Hash Power. Hash power is defined as: “The processing power of the Bitcoin network to perform calculations necessary to confirm transactions”, and it hit an all-time high last week. Per the techies, the more hash power, the more secure the network. In fact, according again to the experts, this high level of hash power has made the Bitcoin network “the most secure computer system ever created”.

On the opposite side of the coin, so to speak, fiat currencies in today’s world have what can be called “stability mechanisms”, i.e., central banks. The mission of these banking entities is to maintain short-term price stability at the expense of long-term systemic stability. Their “tools” moderate interest rates and the amount of fiat in circulation in an attempt to constrain natural market forces. Eventually, however, the ability to service debt breaks down, causing a fracture in the overall financial system.

Central banks across the globe have been experimenting with these “tools” in unique ways for the past decade in ways that were intended to be temporary. Financial targets of low inflation and gradual growth may have been met, but potentially poor resource allocations have been made by businesses, based on near-zero interest rates, and with an eventual return to more normal conditions, many of these entities will fail.

Again, in Ms. Long’s own words:

The real world isn’t stable. Unpredictable events happen. Consequently, demand for money is inherently unstable too, influenced by factors such as earthquakes, droughts, hurricanes, technology breakthroughs, the sudden discovery of large oil/mineral reserves, tax/tariff/regulatory changes, population trends and even simple seasonality. To cajole price stability within fiat currency systems, central bankers counteract these demand fluctuations by intervening in markets—in an attempt to steer the economy to perform within a target rate of price inflation, a currency peg or interest rates.

By design, Bitcoin will not suffer from any of these central-banking machinations. At some point in time and many analysts believe that it is already happening, Bitcoin prices will rise as a result of fiat currencies buckling under the weight of increasing interest rates and ill-conceived monetary policy. Expanding the money supply, a staple of all fiat currencies, as well as with the planned Facebook Libra venture, will have inestimable consequences. Bitcoin “hodlers” will have, by design, a “hedge” against these ills.

Caitlin Long’s conclusion is both compelling and sobering:

The real beauty of Bitcoin is that it offers each of us a choice to own financial assets outside of the traditional fiat-currency system, if we choose to. From a system design perspective, Bitcoin and fiat currencies are fundamentally different. One way to ponder that choice is to ask yourself how much you value price stability, and whether the systemic stability of Bitcoin is valuable to you as an insurance policy. Only in retrospect will it become clear how valuable that choice turns out to be.

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By design, stability comes in differing flavors for Bitcoin, Libra, and Fiat

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