Ray Dalio (Trades, Portfolio)'s impressive track record at the helm of Bridgewater Associates, a major macro hedge fund, has earned him a considerable following. Dalio's audience has grown in recent years, as has the scope and range of topics on which he is wont to muse publicly. Even so, he has continued to return to favorite themes from time to time. One such topic is Bitcoin.
Fear the long arm of the law
Dalio has long been a skeptic of Bitcoin and other cryptocurrencies. As I discussed in a recent article for GuruFocus, Dalio believes Bitcoin's historical volatility disqualifies it as a serious store of value and medium of exchange, properties that are prerequisites for any effective currency.
But according to Dalio, that is not the only black mark against Bitcoin and its ilk. Perhaps more troubling is the prospect that Bitcoin could become a victim of government intervention, as he claimed in a Nov. 17 Twitter post:
"If it becomes successful enough to compete and be threatening enough to currencies that governments control, the governments will outlaw it and make it too dangerous to use."
In other words, Dalio suspects that Bitcoin could end up a victim of its own success. If it actually threatens to become a meaningful parallel currency, or to actually supplant national currencies, governments may well choose to intervene in order to maintain their domestic currency monopolies.
Depression-era lessons for 21st century tech
Of course, Bitcoin advocates oppose Dalio's views about potential government intervention, highlighting the cryptocurrency's resilience to such pressures. Moon Capital, a leading Bitcoin booster in social media circles, summed up the counterargument succinctly:
"Banning Bitcoin wouldn't kill Bitcoin. You'd have to physically find every Bitcoiner and destroy their computer(s) to kill Bitcoin."
However, this is a rather simplistic view of what a government intervention in Bitcoin would look like. Currency confiscations are hardly new in history. In fact, one need only look to the era of the Great Depression to see similar actions taken against another "alternative" currency - gold.
In 1933, the Roosevelt administration actually banned the private ownership of gold, forcing citizens to hand over their gold coins and gold certificates, which were then exchanged for paper currency. In other words, the federal government successfully broke a currency form that had been established since antiquity, all because it threated to partially supplant the dollar. Perhaps Bitcoiners should think twice before they conclude their novelty asset is immune to a similar fate.
Bitcoin is not the new gold
The lessons of 20th century gold confiscations notwithstanding, there are other reasons to suspect that Bitcoin will be vulnerable to government interference. As Dalio pointed out, Bitcoin lacks the institutional support that gold enjoyed in the Depression era, and continues to enjoy today:
"Unlike gold which is the third highest reserve asset that central banks own, I can't imagine central banks, big Institutional investors, businesses or multinational companies using it."
Bitcoin boosters can point to the growing acceptance of cryptocurrencies, such as the recent announcement that PayPal Holdings Inc. PYPL will allow cryptocurrency transactions beginning in 2021. But that is still a drop in the financial bucket compared to the broader currency system. If a national government, especially a strong one like that of the United States, ever feels threatened by Bitcoin's ascendance, there is little doubt in my mind that it could quite effectively stamp it out through policy. It would not require confiscating every last Bitcoin. All it would take would be a ban on financial institutions accepting it as a means of payment, or even creating penalties for those caught using it in private transactions.
My verdict
With Bitcoin's legal status still in flux in many jurisdictions, it is difficult to make a reliable long-term judgment of its value as a tradeable security, let alone as a true alternative currency or store of value. Cryptocurrency is a young technology and there is much still to be decided. Should its rise to prominence threaten existing national currencies, it could precipitate a serious, and potentially fatal, government response.
In my assessment, while Bitcoin and its fellow cryptocurrencies remain fascinating speculative vehicles, they are not so secure from government interference as their advocates believe.
Disclosure: No positions.
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