David Andolfatto, Vice President and Research Director at the Federal Reserve Bank of St Louis, has shared his views on why he considers Bitcoin to be a safe asset.
In a blog post, Andolfatto describes safe asset as an object with attributes that traders can mutually agree on very quickly and at little cost. They are “simple assets”, easily recognizable without much effort.
“I think that Bitcoin could be the world's next great safe asset. At least, it certainly seems to have all the properties that are desired in a safe asset”, he said.
Bitcoin – a simple asset
Andolfatto says that Bitcoin is a simple asset in the sense that it is a pure fiat object and constitutes no legal claim against anything of intrinsic value. Bitcoin is simply a record-keeping technology, pays no interest and possession corresponds to ownership (unless counterparties are involved). Moreover, the ledger has proven itself secure.
Also, Bitcoin has a very simple monetary policy as the money supply fixed (it will grow asymptotically to 21 million units).
Block size debate
Turning his focus on the ongoing “civil disturbance” in the Bitcoin community, Andolfatto presents a hypothetical situation when Bitcoin hits a hard limit on the volume of transactions it can process. He further assumes that the subsidy on block rewards becomes negligible, which will require a fixed transaction fee to be paid as someone has to finance book-keeping costs. He says that in such a situation, it would only make sense to hold Bitcoin for large-value transactions.
“This "Bitcoin as a large-value transfer system" does not destroy my thesis: Bitcoin can remain a desirable safe asset. (Smaller players could presumably get involved by investing in Bitcoin ETFs, although doing so would introduce counterparty risk.)”, he added.
Bitcoin – Lousy money but safe asset
In an earlier blog post, Andolfatto said that bitcoin and gold make for lousy money. Taking the case of bitcoin, he argues that extreme exchange rate volatility and deflationary nature makes it unfit to be an ideal monetary instrument.
“However, even if Bitcoin is not, in my opinion, a particularly ideal monetary instrument, this does not preclude it from serving as a safe asset or longer-term store of value. Once market penetration is complete, its return behavior is likely to mimic the return behavior of any other safe asset, he added.
