Cryptocurrencies

Fed Chair: Cryptocurrency Investors Are 'Unsophisticated'

Chairman Jerome Powell says they are putting their money in risky, unbacked investments built on reckless speculation.

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Dado Ruvic/REUTERS/Newscom

Cryptocurrency investors are "unsophisticated" bumpkins who wouldn't know what money was if it hit them on their heads, Federal Reserve Chairman Jerome Powell suggested during a House Financial Services Committee hearing on Wednesday. No need to worry, however, because sophisticated folks like Rep. Brad Sherman (D-Calif.) believe Congress should "have the courage to ban cryptocurrencies" and save us from our misguided "animal spirits."

During Powell's semiannual testimony to Congress, Rep. Patrick McHenry (R-N.C.) turned the conversation to the subject of cryptocurrencies. At first, Powell merely echoed his comments from last November, saying cryptocurrencies are not significant enough to threaten the financial system. But then he took a cheap shot at investors who have backed cryptocurrencies like bitcoin and ethereum.

"Relatively unsophisticated investors see the asset go up in price, and they think, 'This is great; I'll buy this,'" Powell said. "In fact, there is no promise of that."

All investments carry risk, and investors in any currency, stock, or bond should be aware of that. But that doesn't make cryptocurrency investors any less sophisticated, as a group, than other kinds of investors.

That said, it's important to understand the source of Powell's skepticism. He derided cryptocurrency as an "investment with no promise." Later in his testimony he said cryptocurrencies are not really currencies because they don't "have a store of value," have no "intrinsic value," and are not commonly used for payments.

It's clear that Powell, like his predecessor and many of his colleagues, believes bitcoin and its various cousins are built entirely on speculation. Driven by the Keynesian animus toward speculation, they cannot reconcile its potential with its speculative value. While cryptocurrencies lack the widespread use that defines a medium of exchange as money, their investment value encourages their use and brings us closer to a reality where bitcoin is money.

Contrary to what Powell said, cryptocurrencies already constitute a store of value, although generally not a stable one. Two Federal Reserve economists, Michael Lee and Antoine Martin, found that cryptocurrencies "provide a store of value" in "environments where trust is a problem." Lee and Martin also pointed out that Federal Reserve notes, like cryptocurrencies, are not backed by physical commodities and have no intrinsic value.

Powell's other comments about cryptocurrencies further illustrated his misunderstanding of their potential value. He called attention to money laundering through cryptocurrencies. There is no denying that cryptocurrencies such as bitcoin are used for less-than-legal activities, largely by virtue of their anonymity and radical decentralization. But that fact does not disqualify them as serious alternatives to the present monetary system. Nor does it mean that cryptocurrencies should be banned, as Sherman suggested. "Yes, it is true that criminals have used bitcoin," says Norbert Michel, director of the Heritage Foundation's Center for Data Analysis, "but it's also true that criminals have used airplanes, computers and automobiles."

There is an upside to Powell's bearishness. As long as central bankers don't believe cryptocurrencies pose a threat to the monopoly of state-sponsored fiat money, we can expect fairly lax regulation of the industry. Powell made it clear that he has no intention of pursuing jurisdiction over cryptocurrency. It's better to have government officials mocking bitcoin than trying to regulate it out of existence.

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  1. Cryptocurrency investors are “unsophisticated” bumpkins who wouldn’t know what money was if it hit them on their heads, Federal Reserve Chairman Jerome Powell suggested during a House Financial Services Committee hearing on Wednesday. No need to worry, however, because sophisticated folks like Rep. Brad Sherman (D-Calif.) believe Congress should “have the courage to ban cryptocurrencies” and save us from our misguided “animal spirits.”
    […]
    “Relatively unsophisticated investors see the asset go up in price, and they think, ‘This is great; I’ll buy this,'” Powell said. “In fact, there is no promise of that.”

    More idiocy from TOP MEN.

    I bought Bitcoin under $100 each and sold at its high.

    I buy stock at low points and sell high.

    I buy stocks at low points and hold for dividends.

    Yeah, real tough concepts at work here.

    1. The Federal Reserve also does not know what money is, and hasn’t since 1971.

      As for your points, not only do I agree, but I have done everything except the Bitcoin one. Even then, I bought Bitcoin, then sold enough to more than recover my investment, and nowhere near its high. Why do I hold onto the rest? Not for a profit, but for the same reason I keep gold, silver, ammo and insurance: In case something goes wrong. BTC is a good hedge against the possibility of hyperinflation, as Venezuelans are doing now.

  2. Chairman Jerome Powell says they are putting their money in risky, unbacked investments built on reckless speculation.

    This from a banker that ‘knows’ what the ‘correct’ interest rate should be.

    If this guy would just admit that he has zero understanding why people would invest in cryptocurrencies, I would be happy to explain some reasons.

    1. This from a banker that ‘knows’ what the ‘correct’ interest rate should be.

      Hey, we don’t want the ‘economy’ to ‘overheat’!

      1. Hey, watch where you stick that thermometer!

    2. I don’t think he is or he doesn’t seem to be speaking on this level, or at least not directly, but he is correct. If you wake up tomorrow and your stocks have gone up 50% that’s great, if your dollar is worth $1.50, that’s a problem.

      1. Its called speculation in capitalism and it happens in real estate, stocks, bonds, Bitcoin….

        Its risky and people should make bank if they risked correctly and go bankrupt if they risked incorrectly.

        This douche should be more worried about junk bonds.

        Remember junk bonds? Yeah, they are making a comeback being ignored by federal regulators and the federal reserve.

        Just like the federal reserve conspired to set in motion the banking finance scam of the millennia.

        1. Its called speculation in capitalism and it happens in real estate, stocks, bonds, Bitcoin….

          And forex markets/speculation are a thing as well. I don’t disagree with the issues regarding junk bonds.

          More my issue is that bitcoin has been touted and still, to a degree, touts itself as some sort of techno-magic solution to a/the anonymity/privacy/trust paradox that has kept governments in power these long years. Because simply calling it a somewhat novel modestly-liquid asset isn’t nearly as sexy.

          People should be free to make all the good/bad investments they like. Bitcoin (advocates) shouldn’t be able to claim that it’s something it’s not. Especially if they themselves are mining, investing, managing exchanges, etc.

          1. Bitcoin has a bunch of fans who try and pump and dump. Like any real discussion, you can easily tell the respectful people with supported positions and the trolls.

            As you say, Bitcoin is not a magic currency. It is an interesting start to breaking government manipulation of currency at the levels they do. Gold can be hard to actually buy and governments want that. If governments control currency and gold, finding alternative in the old World was difficult.

            Bitcoin is pretty easy to buy and use.

            Blockchain is another exciting tech to keep track of manipulations by banks, hackers, etc.

  3. It’s better to have government officials mocking bitcoin than trying to regulate it out of existence.

    You know — the way they do with conventional currency.

    1. Nice going, summoning the gold fetishists.

  4. “Relatively unsophisticated investors see the asset go up in price, and they think, ‘This is great; I’ll buy this,'” Powell said. “In fact, there is no promise of that.”

    “Relatively unsophisticated citizens see the dollar go down in value, and they think, ‘This is bad; I’ll audit the Fed.’ In fact, there is no promise of that.”

  5. Well, my 9 year old son IS trying to convince me he should start mining Dogecoin, so the argument isn’t totally lame.

    1. My kid’s been mining since the furthest you could get was the Moon. He got out once he got past Jupiter.

    2. Dogecoin is awesome, but FWIW, it is widely known within the crypto community that it isn’t worth mining Doge. I forget the explanation why, it has something to do with the supply (which isn’t capped like Bitcoin) or the mining power required.

  6. Honestly, I just heard an interview with Powell on Marketplace last week. I rather liked the guy — he was quick to point out that he doesn’t consider himself in charge of the economy, and is the first Fed chair I’ve heard willing to admit he doesn’t know (and it’s not his job to know) why something in the economy is happening. That suggests to me that he’s a weaker Keynesian macro-economist than his predecessors, which can only be a step in the right direction.

    He’s not entirely wrong — crypto’s got a ways to go before it’s unequivocally a currency, and it IS a risky investment because it’s not backed by anything. But that doesn’t mean we should save people from their own willingness to take risks with their money.

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