The Fed Should Buy BitCoins

Editorial note: I know I said I was going to write about other things, but the following point just occurred to me.

The Fed is currently committed to purchasing $88 billion USD per month in assets.

Regardless of whether you agree with their policy, they should set aside a million dollars per month from that amount (which is so small that it couldn’t be represented in the error bars of their purchase) and use it to purchase BitCoins, on a cost-averaged basis, at whatever the exchange rate happens to be on that day. There’s basically no risk for them at all at that small volume, even if those BitCoins wind up being worthless.

Why, you might ask.

Sounds like a silly (even childish) endeavour for so serious an institution as the US Federal Reserve Bank. After all, the entire BitCoin economy is only a billion and a half dollars.

Here’s the thing: at least some BitCoin enthusiasts believe fervently that BTC is going to be a multi-trillion dollar economy some time soon, and will in the process displace fiat currencies. I would be overjoyed if that were to be the case, but I’ll reserve judgement for now.

At the very least, BTC is a very interesting beasty, and it has some exceedingly useful properties in terms of what the Fed claims to be trying to accomplish.

Here’s why:

  1. It would provide a floor for the BitCoin market, in addition to lots of liquidity.
  2. It would ipso facto allow BitCoin to grow into what it theoretically can become. With major involvement, other big parties would feel more comfortable jumping in, more eyes would be on the markets (theoretically driving out the crooked players), and there would be impetus to build scalable exchanges (and to regulate away the pump and dump nonsense)
  3. Key issue, from the Fed’s perspective: It would provide a highly effective trickle down effect to places the current stimulus doesn’t reach – many ordinary people on the street mine BitCoin, which would be made more valuable by the purchase; this would also trickle up to a wide variety of hardware manufacturers (some of them niche) as well.
  4. If (or when) BitCoin finally does become a global reserve currency of sorts, the Fed would have enough of a stake in the market to allow the US economy to still be relevant.

A similar argument applies to all other world economies.

9 responses on “The Fed Should Buy BitCoins

  1. hapritchie

    Wouldn’t that much money streaming into the BitCoin market drive the exchange rate through the roof?

    According to:

    There are ~ $300 million USD of bitcoins in circulation. You’re talking about the fed purchasing ~$12 million per year of bitcoins… that’s 4%!

    1. Jeremy Lichtman Post author

      As of yesterday, there were about $1.6 billion USD of BitCoins in circulation. The peak, a few weeks ago, was $2.6 billion.

      BitCoins are theoretically designed to have built-in deflation that pushes up the exchange rate constantly. It isn’t clear whether the ramp-up this year has anything to do with theory, or whether it is purely speculation.

  2. Rob Gallo

    Jeremy, the Fed will never buy into the BitCoin currency. This is a HUGE conflict of interest for them. This completely undermines the “hold” the Fed currently has over the US economy. Any time you see a published report speaking badly of the BitCoin currency, you can bet your BitCoin it is the establishment behind the story.

    BitCoin has the ability to completely disrupt the everything we currently know about the world of finance, banking and Wall Street . Then let’s not forget about taxes… This is the exact reason the government would prefer everyone use electronic payments (I.e credit and debit cards) for all their transactions…

    So wish as you might, but I would be willing to bet 100 BTC that the fed will NEVER embrace BitCoins. At least not in my lifetime. Control is everything to the Fed, and with BitCoin they would lose it, so that reason alone is enough for them to try to put the kibosh on it.

    Instead of occupying Wall Street, if you really want to make a statement that “you are not going to take it any more” adopt the BTC as your full time currency. That’s the way to start a revolution.

    1. Jeremy Lichtman Post author

      Rob, I agree that it is unlikely that they would do so right now, primarily because their attention is elsewhere.

      I’m not sure I agree that it is a matter of conflict of interest, or that they would lose control in some way by buying into BTC.

      From a technical standpoint, BTC isn’t nearly as anonymous as people might like to think, and it has numerous weak points that would be trivial for a state government to exploit if it wished (look up sybil attacks, for one example). It disrupts some aspects of retail banking (which isn’t a big profit center for banks anyhow), and it might be PayPal’s worst nightmare, but it isn’t much of a threat to a government.

      As a regular user of BTC, I honestly don’t think it is a replacement (at least any time soon) for fiat currencies (one example: we always seem to denominate transactions in fiat, and convert into BTC). I believe that it will carve out its own set of niches in time though (some of which we can’t predict right now at all).

      One last note: according to Google Analytics, a number of hits on this (and related) posts on this blog have come from government offices from various countries (mostly Europe and Asia). I don’t get the impression that anybody is looking to replace their own currency, but everyone wants to know what makes BTC tick, and whether they can learn from it, and potentially adopt aspects of it.

    2. Jeremy Lichtman Post author

      By the way, it would be great if I was able to buy groceries or pay rent with BTC. I think they’re getting close to making that feasible in parts of Europe. Long way off still in North America.

        1. Rob Gallo

          Jeremy, the biggest problem at the moment that I see with the currency is the continued comparison to fiat currencies. I know that it is because BTC is in its infancy, but once enough real business is transacted in the currency, it may gain the traction that is needed.

          Case in point. Let’s say I wanted to use BitCoin to play poker online… If the blinds and antes are 1/2 BTC, and I convert say $1000 USD to BTC today before I sit down to play and the conversion rate is 1BTC = $125… Sitting next to me is someone who has been on the poker site for months, and when he converted his USD to BTC the exchange rate was 1BTC = $25… That creates, even if it is in the coin holders mind, a big difference in th value of those chips on the table, and will affect someone’s play.

          Anyway, until it becomes more stable, through use and volume of transactions, it is going to be hard for merchants to sell an item that they would have acquired using a fiat currency and have to transact in BTC, and then convert back to fiat in order to pay other bills…

          1. Jeremy Lichtman Post author

            I suspect that volume won’t result in the exchange rate stabilizing, any more than the rates between post-Bretton Woods fiat currencies do.

            The exchange rate between CAD and USD fluctuates continuously, and causes all kinds of pricing issues here in Canada, for example.

            Another example are property markets in many countries around the world, which are often denominated in USD instead of the local currency, for a variety of historical reasons that include hyper-inflation in the past. The problem is that large movements in the exchange rate to the local currency cause big movements in the “value” of a property.