Where Do Bitcoin and Crypto Fit Into Monetary Policy?

Where Do Bitcoin and Crypto Fit Into Monetary Policy?

The Money Movement Policy

In episode 39 of The Money Movement, Jeremy sat down with Castle Island Ventures Partner and Coin Metrics Co-founder Nic Carter to examine Bitcoin’s journey from niche cypherpunk experiment to global economic headline, the long-awaited application of centuries of monetary theory, and the potential for a future built on sound money.

Bitcoin Risk and the Integrated Future

For years following the introduction of Bitcoin, the risk and reward profile for holding the unproven asset was insurmountable for all but the most adventurous of investors - those working on the periphery of technology and what a reimagined economic system could entail. Fast forward to 2021 and Bitcoin remains a risk-on asset, but the investor profile and appetite for Bitcoin-based financial products has shifted considerably. When Bitcoin sold off alongside equities and other asset classes near the beginning of the COVID-19 pandemic, Carter explains, it was proof that Bitcoin has evolved beyond theories of a truly uncorrelated asset to one in the early stages of integration into global markets.

As such, the return profile of Bitcoin is notably different from where it sat just a few years ago, in exchange for the security of economic integration and faith in value from an increasing number of traditional investors and even national governments. This represents remarkable adoption by some of the most influential players in modern society, setting the long term foundation for Bitcoin to become even more essential to global economics over the next decade.

Money at Internet Speed

As technical innovations like USDC used for transferring value continue to advance, the prospect for national economies built on full—as opposed to fractional—reserve banking begin to come into focus as genuine mainstream possibilities. The speed, efficiency, and globally accessible nature of stablecoin transactions, for example, delivers an enormous reduction in the overhead for value transfers and the potential capital efficiency of otherwise inaccessible funding sources, like idle cash on corporate balance sheets. 

Such accessibility, Allaire explained, reduces the need for bank-generated money, potentially reducing the overall issuance of dollars and the overall rate of inflation. This evolution of the fundamentals of the existing financial system is still years away, but what once only existed in theory now has a path to becoming a modern reality.

Economic Battles, Platform Wars

Tough decisions on how cryptonomics will play out in the increasingly digital world are already taking place within the Ethereum ecosystem, where protocol level changes like EIP-1559 have the potential to create friction between long-term token holders and the broad-based community using the network for economic access and to push the limits of smart contract logic. As fee burns decrease the rate of issuance of ETH on the network, the value of block space on the network risks becoming prohibitively expensive, pushing potential users and developers to less capital intensive platforms. This in turn threatens the long-term network effects enjoyed by the protocol, potentially requiring new incentives to win over chain-agnostic users and communities as challengers expand their own ecosystems. Smart contract platforms are already in the early stages of a new platform war, and even the deciding factors in the competition are still largely unknown.

A heady discussion on the theory and emerging practice of blockchain economics, ideal for those searching for insights on the long-term outlook of the intersection of the existing financial system and the rapidly evolving role of cryptocurrency and blockchain technology awaits in episode 39 of The Money Movement. Watch it now!

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