The British economist Bernard Connolly has published an article entitled “How a bubble in Bitcoin could lead to hyperinflation”. The author argues that cryptocurrencies could have a negative impact on the global economy if the authority of central banks is undermined. The author believes that these institutions must stop the “crypto bubble” before it is too late.
The global economy has already managed to pull itself into a complicated situation, Connolly said. At the end of the past millennium, the US Federal Reserve, under the leadership of Alan Greenspan, made a mistake and drove an imbalance in the economy. At that time Greenspan:
(…) failed to let real long-term interest rates rise at the right time in response to very lively entrepreneurial expectations in the internet-driven “new economy”;.
Thus, during these decades, there was a “misallocation” of capital that caused a consumption deficit on consumption. In other words, people consumed and were left with no savings to create demand for the “new economy” to support the dot come era.
In the next few decades, many assets will enter a “bubble” phase. In some, such as stocks, the bubble may be “perfectly rational,” the author argues. This is because this asset class lacks a maturity date; their prices may rise forever. With bonds and assets with negative returns, a bubble is “harder to rationalize”.
Connolly believes, however, that the “crypto bubble” driven by Bitcoin and digital assets could have “catastrophic changes in wealth distribution”. Similar to stocks, a cryptocurrency does not have a maturity date. Thus, its price may appreciate overriding a particular time frame. The author adds:
So a bubble can be rational in the same way. However, once the macroeconomic context is considered, it becomes clear that the bubble needs to pop.
Bitcoin to blame for future poverty and world destruction?
Connolly makes a valid point that is tied to the inflationary nature of fiat currencies: Bitcoin will appreciate to infinity, or it will not. There is no middle ground. If the latter is true, the author believes that the price of BTC will eventually penetrate downwards or be supported by large institutions, such as the central banks themselves.
On the contrary, if the price of BTC tends to be infinite, cryptocurrency can be an asset that “exhausts the productive potential of the whole world”. Thus, a conflict could liberate among proprietors to get more BTC, more wealth, and in the process, they could “impoverish everyone else”.
Therefore, Connolly called for immediate intervention by international governments. He argued that the “crypto bubble” should be stopped now. Otherwise, if central banks pull the plug on crypto, if they succeed, the global economy could strike a hit. The author said:
But if the bubble continues to grow, they must understand the stinging nettle and inflict losses now or face a future sharp elbow distortion to convert cryptocurrencies into goods and services that will produce hyperinflation and destroy society.
The crypto community has reacted negatively to Connolly’s article. Users and experts stressed that the publication does not point out the responsibilities of central banks and governments in the current economic outlook. Author and Bitcoin defender Preston Pysh responded with the following statement:
Prepare for this fake media headline going forward: Bitcoin will ruin the global economy. Make no mistake – central banks are causing this mess. Period. They cause the global social unrest, the division, the polarization of prosperity, and so on.
At the time of writing, BTC is trading at $ 33,493 with sideways movement. The first cryptocurrency by market value should hold over $ 34,000 and $ 35,000 to make a push and regain higher territory.