{"id":84308,"date":"2018-02-22T16:18:15","date_gmt":"2018-02-22T15:18:15","guid":{"rendered":"https:\/\/www.erasmusmagazine.nl\/en\/?p=84308"},"modified":"2025-12-19T11:22:56","modified_gmt":"2025-12-19T10:22:56","slug":"als-een-cryptobeurs-omvalt-kun-je-fluiten-naar-je-bitcoins","status":"publish","type":"post","link":"https:\/\/www.erasmusmagazine.nl\/en\/2018\/02\/22\/als-een-cryptobeurs-omvalt-kun-je-fluiten-naar-je-bitcoins\/","title":{"rendered":"\u201cIf a cryptocurrency exchange crashes, your bitcoins will be gone for good\u201d"},"content":{"rendered":"
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\n\t\n\n<\/svg>\n<\/span>\n\tImage by:<\/span>\n\n\t\t\t\n\t\t\t\t\t\t\tBas van der Schot<\/a>\t\t\t\t\t<\/span>\n\t<\/p>\n<\/figcaption><\/figure>

Is it simply speculation or will cryptocurrencies revolutionise our financial system? Monetary economist Ivo Arnold says: \u201cIf even your hairdresser mentions he bought into Bitcoin, it\u2019s time to worry.\u201d<\/p>\n\t

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Ivo Arnold is Professor of Monetary Economics at Nyenrode Business Universeit and Professor of Economics Education at the Erasmus School of Economics. He was awarded his doctoral degree in 1996 for his dissertation on European monetary policy; he is an expert on monetary policy, European integration and the pass rates in Economics.
\nIf you would like to hear more about cryptocurrencies, come to Studio Erasmus<\/a> on 27 March, when Ivo Arnold will be interviewed by Geert Maarse.<\/p>\n\n\t<\/div>\n

How is your cryptocurrency portfolio doing?<\/strong><\/p>\n

\u201cNothing\u2019s happening \u2013 I didn\u2019t buy any.\u201d<\/p>\n

Why not?<\/strong><\/p>\n

\u201cI really hate taking risks and, in the unlikely case I invest anything in very risky products, I wouldn\u2019t choose cryptocurrencies anyway. With bonds, you are paid interest and with shares you are paid dividend. But a Bitcoin won\u2019t generate a cash flow at some point in the future \u2013 it\u2019s pure speculation and you can compare it to other speculative investments, such as postage stamps or gold. It\u2019s alright if you like to gamble.\u201d<\/p>\n

Last year was the year of the cryptocurrency and the mother of all cryptocurrencies, Bitcoin, skyrocketed, from a thousand dollars at the beginning of 2017 to twenty-thousand dollars in December, and then collapsed. What\u2019s going on?<\/strong><\/p>\n

\u201cFirstly, you need to realise that Bitcoin has been around for quite a bit as a means of payment, since 2009, in fact. Initially, it appealed to people because of its high-tech image and because it\u2019s a bit anti-establishment. But its huge success can\u2019t be explained by such libertine motives, or else the bubble would have appeared sooner. It can\u2019t be explained by its supposedly being new, wonderfully modern and efficient payment technology either: we still can\u2019t use it to buy bread.\u201d<\/p>\n

What does that mean?<\/strong><\/p>\n

\u201cWe should ask ourselves: what does<\/em> explain the coin\u2019s success? The answer is that Bitcoin has become invaluable for one particular sector of society: crime<\/a>. The anonymity of cryptocurrencies makes them extremely useful for online illicit trading, such as drugs trafficking.\u201d<\/p>\n

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\n\t\t\u2018If your hairdresser mentions he bought into Bitcoin, it\u2019s time to worry\u2019\n\t<\/blockquote>\n\n\t\t\t
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By now, a number of alternative cryptocoins have emerged that are becoming almost as popular. These alt coins are being churned out onto the market one after the other, by means of things like Initial Coin Offerings. What are your views on that, as a monetary economist?<\/strong><\/p>\n

\u201cLast year, it suddenly became an exciting investment product for the masses: once prices have risen spectacularly, everyone\u2019s interested. You can \u2013 if you have time for it \u2013 throw yourself into an unending study of cryptocoins. Investing is presented as a kind of game, too. These aspects are typical of a soap bubble\u2019s course: success stories, people who are afraid of missing the boat, price trends that go through the roof. At a certain point, loads of people appear with books on Bitcoins and workshops on how to trade them. At that point, there\u2019s not much money to be made with the actual product but it has produced a whole industry devoted to it.\u201d<\/p>\n

In a recent column, you claimed that the hype is a sign that this phenomenon has already peaked.<\/strong><\/p>\n

\u201cAt a certain stage, the bubble could burst. The warning signs are when people start making money by giving courses to novices instead of trading. If your hairdresser mentions he bought into Bitcoin, it\u2019s time to worry.\u201d<\/p>\n

I invested a thousand Euros in Bitcoin, Ethereum and Ripple around Christmas, exactly when the prices reached their peak. Was that a bad move?<\/strong><\/p>\n

\u201cI don\u2019t give advice on investments. General feeling can\u2019t be predicted, and anything might happen. Regardless of that, you should ask yourself whether you want to invest in a coin that\u2019s used to conduct illegal activities. It\u2019s not a sustainable investment either, if you look at the energy consumption.\u201d<\/p>\n

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Many people say that the underlying technology, Blockchain, is going to start a revolution. Surely that means that investing in cryptocurrencies isn\u2019t simply speculation?<\/strong><\/p>\n

\u201cI\u2019m no expert on Blockchain, but keeping a decentralised ledger of transactions, which is what Blockchain does and what most of the major cryptocurrencies are based on, may have a large impact in the long term. But not necessarily, and even if it does turn out to be a revolution, that\u2019s not to say that everything involved will immediately turn to gold.<\/p>\n

\u201cAround the millennium, Internet companies were given valuations that were completely unrealistic, even though the technology on which the tech bubble was based has indeed proved to be invaluable. Another, much older, but just as famous example dates from the nineteenth century. When electricity was discovered, there were all sorts of private generators whose shares commanded very high prices on the American stock exchange, until the whole thing collapsed. We need to distinguish between the value of the underlying technology and the valuation of the product based on that technology.\u201d<\/p>\n

A researcher from Goldman Sachs recently said that he expected nearly all cryptocoins to crash, with a few exceptions which would skyrocket. In other words, we need to look for the Googles or the Facebooks of the cryptocurrencies.<\/strong><\/p>\n

\u201cIf there are any.\u201d<\/p>\n

I can see you\u2019re sceptical. But, from the monetary perspective, what might be the value of a decentralised digital coin?<\/strong><\/p>\n

\u201cAccording to the fans, its value is that it cuts out the middle man: institutions like the banks, credit card companies and Western Union. But in many cases, those institutions are still more efficient than Bitcoin, a coin involving high transaction costs, which is slow and which guzzles energy. Remember, the middle men actually do a lot of good: they provide stability and security. If you put your savings in the bank, your deposit is guaranteed up to a hundred thousand Euros. If a cryptocurrency exchange crashes, your bitcoins will be gone for good. It\u2019s like the Wild West. Exchanges have been hacked and even shut down without any money being repaid. It\u2019s investing without a safety net.\u201d<\/p>\n

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The need for decentralisation is noticeable everywhere. Surely, it\u2019s not odd that the general feeling is we\u2019d rather do business without the intervention of the finance sector? The banks haven\u2019t been popular since the credit crunch.<\/strong><\/p>\n

\u201cThat\u2019s right. But I think you need to distinguish between the banks and the central banks. The cryptocurrency enthusiasts tend to focus on the ECBs and the FEDs of this world \u2013 mistakenly in my opinion. A lot went wrong in the banking industry but, broadly speaking, the central banks of the United States and Europe have succeeded quite well in keeping inflation down over the past decades. Pursuing a decent monetary policy means ensuring that the amount of money corresponds to an economy\u2019s needs. The price stability that it produces is extremely important for a modern economy, because if you do business with a country, you want its currency to keep its value. The free market where cryptocurrencies are traded can\u2019t do that any better than a central bank, as you can tell from the drastic fluctuations in exchange rates over the past year.\u201d<\/p>\n

Financial authorities are struggling to regulate cryptocoins. The AFM, the Dutch Authority for the Financial Markets, has issued warnings about the uncontrolled growth of Initial Coin Offerings and is worried about the gamification, which is supposedly making trading \u2013 and consequently losing \u2013 too easy. What would be your advice for the policy makers?<\/strong><\/p>\n

\u201cThey should at least make sure that the financial system is not exposed, that cryptocurrencies do not threaten the stability of the real economy. We\u2019re talking about hundreds of billions here, which is nothing compared to the trillions in junk mortgages that lead to the subprime crisis<\/a> in 2007. Nonetheless, if a bank invests in bitcoins, it needs a larger capital cushion, simply because it\u2019s an extremely risky investment. Besides, we should be asking ourselves whether the government shouldn\u2019t clamp down harder on a system that facilitates illegal activities. A while ago, the European Central Bank decided not to print any more five-hundred Euro notes because they were mainly used by criminals.\u201d<\/p>\n

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