Investors that put money into the emerging cryptocurrency market got some welcome news last week thanks to the Federal Reserve Bank of St. Louis. The bank is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the United States’ central bank.
Cryptocurrencies, like Bitcoin and Etherium, have garnered a lot of attention in recent months as the debate has raged on about their value. On one side, proponents of cryptocurrencies have touted the new technology and currency as secure and preferable to a traditional currency like the dollar. Alternatively, critics have claimed that the currency is essentially valueless.
Now, with one small blog post, it seems that the Federal Reserve has come down favor of cryptocurrency, publishing a brief list of ways that bitcoin and the like are exactly like the greenbacks that American consumers use daily.
As many have noted, including Economists Aleksander Berensten and Fabian Schär, bitcoin and similar cryptocurrency units have no intrinsic value. Intrinsic value is an economic term that simply means that it doesn’t hold any value of its own. Basically, what that means is just like bitcoin is a series of code in a digital wallet, an actual dollar is just a piece of cotton and linen. Neither one has any actual value, the only value that the currencies have is the value that consumers assign to it. Because the federal government declared that the dollar is legal tender, it’s what’s known as fiat currency.
The St. Louis Federal Reserve points out that the Federal Reserve doesn’t print money, but that doesn’t mean that the central bank doesn’t determine how much those dollars in consumer wallets are worth. The Fed applies a very complicated algorithm to determine exactly how much money is in circulation at any given time. That’s because it’s important to maintain the appropriate amount of money in circulation to keep prices stable and encourage employment.
Bitcoin isn’t controlled by a central bank, and therefore its price fluctuates, sometimes to the extreme. That doesn’t mean that there isn’t a limited amount of bitcoin available. In fact, the number of bitcoin should ultimately converge to a cap of 21 million.
Cutting Out the Middle Man
Bitcoin’s similarity to cash also includes the ability to transfer it from person to person without having to go through a financial institution. Cash, unlike a check, can be transferred from one person to another without a bank ever knowing about it. That’s why criminal enterprises deal in cash to a large extent. There is no intermediary required to process a transaction.
Overall, the Federal Reserve Bank of St. Louis has provided a lot of legitimacy to bitcoin specifically but to cryptocurrencies in general.