On June 11, 2017, Michael Harris, proprietor of the Price Action Lab trading system and blog, published a post Cryptocurrencies, Helicopter Money and The Dangers of Hyperinflation, arguing that crypto currencies will create hyper-inflation and that it’s the equivalent of ‘helicopter money’:
This is money created outside of the system through software. It is equivalent to helicopter money for those who are up to speed with the technology. Although mining bitcoins has become a lot more expensive, the rise in value with respect to established fiat currencies in an exponential fashion has provided high purchasing power to a lot of people that could not obtain it via traditional means of having a job, or starting and operating a business.
Helicopter money has the potential of igniting inflation and even hyperinflation under certain conditions. Although it seems that we are not close to that point, wider acceptance of cryptocurrencies in commerce could lead to a surge in inflation.
This article is wrong on several counts:
The post was written 7 months ago and despite the total crypto-currency market cap rising from $100 billion (when the article was published) to now over $700+ billion, inflation has not risen. Although this does not prove there won’t be hyperinflation in the future, it casts doubt on his thesis.
Second, the production of crypto-currencies is not free, at least not in the sense that money printing is ‘free’ for the US government. Mining currency costs money, namely in the form of electricity and computing hardware. Coin mining operations tend to have slim profit margins and only become largely profitable if the mined currency rises a lot. It’s not like these coins are created ex nihilo or, metaphorically, dropped from a helicopter, but rather are a business transaction in which purchased electricity and computing power is converted into digital currency.
In the unlikely event crypto-currencies become inflationary, the fed can easily adjust their monetary policy accordingly, such as gradually raising rates.
Crypto-currency has seen very little penetration into the overall economy. Although nearly a hundred billion of dollars of coins are traded daily, with the exception of Bitcoin and some others, the vast majority of coins are seldom used for commercial transactions. The vast majority of coins, also, are in offline storage and will never be used.
For crypto-currencies to become money and hence inflationary, businesses and banks need to treat them as collateral. Again, there is little evidence this is happening, unlike the 2003-2006 housing market boom in which inflated home equity was converted into cash that could be spent, ultimately proving to be the undoing of many financial institutions. Due to the extreme volatility of Bitcoin and other crypto-currency, it seems unlikely this will happen.
I view cryptocurrencies as a move by technology to counter austerity and diminishing purchasing power from many years of failed central bank policies but an unbalanced stimulation of demand could have serious consequences.
Again, crypto-currency is not ‘free’. It’s not a printing press. Either you have to spend fiat to buy coins, sell an existing service or good in exchange for coins, or convert fiat into computing power.