Bitcoin as a global standard would be an “absolute economic catastrophe” – Ernst & Young’s global blockchain leader


(Kitco News) If Bitcoin were to become a global monetary standard, it would be an “absolute economic catastrophe,” said Paul Brody, global blockchain leader at Ernst & Young.

The largest cryptocurrency in the world is considered by default to be a deflationary asset in the digital space. This means that in the world of cryptocurrencies its supply is limited (set at 21 million tokens to be minted ever) and when investors buy and hold Bitcoin, the supply shrinks and prices rise.

“Deflation systems like Bitcoin are bad for the economy. I don’t think people spend enough time and attention discussing why. If Bitcoin became a global standard, it would be an absolute economic catastrophe,” Brody told Kitco News in a statement. recent interview. “And there are mountains of evidence.”

Deflationary assets are particularly dire as global monetary standards during economic slowdowns. And one of the clearest examples of the past is gold, Brody added, noting that the gold standard has failed for a reason.

“There is evidence from before WWII that deflationary systems like gold are catastrophic during economic slowdowns. And the reason for this is in a deflationary model. If you believe your currency will be worth more tomorrow than it is. Today, your incentive is to save, not spend. And that leads to a slump in demand, which in turn triggers a further decline in the economy, which makes people even more paranoid, “Brody described.

This becomes what Brody calls a “death spiral” for the global economy. “In the run-up to World War II, nearly all major industrial countries abandon the gold standard. Evidence shows that the sooner you abandon the gold standard, the faster your economy is likely to recover,” he said.

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Many Bitcoin advocates refer to cryptocurrency as Gold 2.0, and Brody considers this analogy to be right. “Bitcoin is digital gold. If you wanted to take the properties of the gold that people love and recreate them in a digital system, you would be making Bitcoin. And in many ways, Bitcoin is better gold than gold. The only downside is that you can.” Don’t bury it in your backyard, “he said.” But if we end up on a gold standard again, it won’t be a good thing. “

With Bitcoin’s popularity on the rise over the past decade and many advocates calling it a solution to the current global monetary policy system, it pays to be cautious about arguments requiring adoption of a Bitcoin standard, according to Brody.

“The system is fundamentally deflationary if the economy it operates in grows faster than the money supply. If the Fed increases the money supply by 1% per year, we have a fundamentally deflationary system. It is true that the number dollars in the system is growing a little, but the economy is growing even faster, which would result in a deflationary cycle in which available goods and services would rise faster than the number of dollars chasing them. goods and services would actually go down, “explained Brody.

How permanent is the current inflation problem?

Fears of inflation and concerns that the Federal Reserve could contain it with aggressive rate hikes have triggered massive volatility in broader markets. However, Brody disputes this narrative.

“During the pandemic, we underwent a massive reconfiguration of the global economy. Overnight, we went from a heavily service-centric global economy to a goods-centric economy. In this space of a year, we reconfigured the whole global economy from doing things to buying stuff, “Brody said. “Now, we’re turning around and doing exactly the opposite.”

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The world has undergone multiple and massive reconfigurations of the entire global supply chain. And this time, it came with large amounts of government stimulus, he added.

The idea that the global economy can get out of this with a smooth landing without inflation is not realistic. But, at the same time, the idea that the world will encounter a stagflation similar to that of the 1970s is also not a foregone conclusion, Brody noted.

“I’m still on what I would call squad transitional. After World War II, we had a similar global reconfiguration. We went from making a lot of weapons and telling people ‘don’t spend and buy war bonds’ to ‘the war is over,’ let’s party “. And the world, particularly the United States, has been through a rather brutal battle against inflation. It lasted nearly three years and peaked at 18%. That was not the beginning of long-term stagnation. It was a transitory event resulting from a massive reconfiguration of the entire global economy. “

Brody sees signs that inflation may have peaked above 8% in the US this year. “That post-WWII inflation cycle was about three years. We are one year in an inflationary cycle. There is good evidence to believe that the cycle may have peaked at around 8% and will slowly decline.” she said.

Brody added that the possibility of a mild recession exists, but unemployment is likely to remain extraordinarily low.

Ethereum to take the lead?

However, despite Bitcoin being the largest cryptocurrency in the world, there are some red flags regarding its future.

“The main red flag is that basically blockchains are not just digital assets, they are technological ecosystems. And the big red flag around Bitcoin is that technology ecosystems live and die from the number of developers who are building products and services on them. And not much of that is happening in Bitcoin, ”Brody said.

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Most of the development and engineering work is taking place in the Ethereum ecosystem. And while Bitcoin appears to be doing well, there is concern about its long-term future, he added.

Overall, Brody doesn’t see a multi-chain future, predicting that Ethereum is the ecosystem most likely to take over everything.

“Network effects mean that the largest ecosystem tends to win over time. Ethereum is the largest ecosystem,” he said. “If you are looking to create a business, you want to build and deploy your business in the ecosystem with more liquidity, more liquidity and more investors.”

Brody compares Ethereum to the internet, noting that the world doesn’t have 20 different networking standards. “If you go back 30 years, the Internet protocol was used to connect different types of networks. Today there are no different networks. It’s just the Internet,” he said.


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article disclaim any liability for loss and / or damage resulting from the use of this publication.

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