Decryption | Bitcoin, Dollar and Inflation: Myths and Realities

Aspiring Conservative Party leader Pierre Poilievre promoted cryptocurrency by offering a choice between bitcoin and the Canadian dollar. That’s a bad idea, according to the experts we interviewed.

Helene Baril
The Press

A haven against inflation?

Replacing the Canadian dollar with bitcoin would not protect consumers from inflation, says Alexandre Roch, a financial system specialist and professor at the University of Quebec in Montreal. ” It’s quite the opposite. The Canadian dollar is a very stable currency. We have had an inflation rate of between 5 and 6% for a year, but the value of bitcoin varies more than that in a few days, ”he illustrates.

There is no reason to replace a stable currency like the Canadian dollar, the US dollar or the euro with bitcoin, also believes Martin Lalonde, president and founder of Rivemont, a portfolio management firm that offers strategies alternative investments in cryptocurrencies. “But in countries where there is hyperinflation or capital controls, like Venezuela or China, it can be justified,” he tempers.

A threat of deflation

The Bank of Canada, like other central banks, is responsible for regulating credit and money. It has the power to increase the number of banknotes in circulation, which is sometimes called the power to print money. This is not the case with bitcoin. From its inception, it was decided that there would be 21 million units of bitcoins, no more, of which 90% have already been created by minors. This may suggest that bitcoin, unlike the dollar, is not inflationary.

That’s true in a way, says Stephen Gordon, an economist specializing in monetary issues at Université Laval. Too much money in circulation is a problem, but not enough too, he says. “In a growing economy, we need more money to do our transactions,” he explains. It is the role of the Bank of Canada to increase or reduce the money supply according to the evolution of the economy.

On the contrary, bitcoin exposes the economy to deflation, according to him, or a long decline in prices that slows consumption and ends up paralyzing growth.

Facilitate transactions

The direct transactions, without intermediary and without fees that bitcoin allows, is a bit of a myth, believes Alexandre Roch. In fact, every transaction made in bitcoins must be validated, which takes time and involves fees. Intermediaries are needed.

“Without wanting to defend the banks, we can say that the payment system works well,” he says, observing that most transactions are done virtually, with electronic payment tools that require less energy than mining. of bitcoins.

In fact, the payment system we use every day is more efficient and less expensive than bitcoin, argues Stephen Gordon.

For certain types of transactions, such as transferring money from one country to another, proceeding in bitcoins can be less expensive, notes Alexandre Roch.

However, bitcoin provides its users with anonymity that promotes illicit transactions and tax evasion, which is the main drawback of cryptocurrencies. “The reason there are rules is to protect the population,” says the professor, who notes that almost half of cryptocurrency exchanges are used for illicit activities.

More and more countries are considering regulating the use of cryptocurrencies to prevent their use for criminal purposes, which could prove difficult because the system was designed to exist outside the regulatory system.

What’s the use, then?

Designed as an exchange currency, bitcoin and other cryptocurrencies are used very little to make transactions.

According to him, cryptocurrencies emerged when interest rates had been low for a long time. “People are always looking for yield opportunities,” he says, and many have jumped on bitcoin.

This is also the opinion of Alexandre Roch, for whom the bitcoin craze has all the appearance of a speculative bubble. “The value of bitcoin is based on the network, a bit like Facebook, he illustrates. If another network comes along and becomes more popular, it will lose its value. »

Manager Martin Lalonde sees things differently. The future of cryptocurrencies is to be a custodian of value, he says. “Bitcoin could become digital gold,” he says. Accepted everywhere, it has all the advantages of gold without the drawbacks. But, no, it will not replace currencies that do their job well, he says.

I want to take control of money away from politicians and bankers and give it back to the people. […] We need to give people the freedom to choose another currency. If the government wants to abuse our cash, then we should have the right to switch to another better quality currency.

Pierre Poilievre