The vice president of the Federal Reserve Bank of St. Louis, David Andolfatto, considers blockchain, the technology behind bitcoin, is a “stroke of genius.”
According to Andolfatto, bitcoin and the Federal Reserve have some features in common, including both are based on similar computer programs and feature “protocols”. The main difference is that the cryptocurrency is controlled by a distributed open ledger.
Andolfatto considers the blockchain system would solve the main problems of centralized banking. The manipulation of central ledger could negatively affect economy on the whole. For instance, money stored on a certain account could be easily moved and it would remain unnoticed.
As the Federal Reserve lacks such technology as blockchain to monitor transactions between banks, the problems could arise in case the main bookkeeping system breaks down.
He believes the blockchain has the potential to change the Federal Reserve Bank system and make it more transparent.
The blockchain stipulates that each of the member institutions have access to the same records, what makes money transfers more open to the public. In addition to higher transparency and accountability, the use of blockchain would reduce accounting costs and eliminate transaction challenges.
Not only Andolfatto, but many others in the bitcoin industry believe that it is blockchain that can have a positive impact on the economy.
Meantime, financial experts argue whether it’s worth investing in bitcoin now, taking into account its high price volatility and the recent slowdown.
Jeff Reeves, editor of InvestorPlace.com, said: “I’d never recommend anyone ‘invest’ in bitcoins. It’s barely even a functional currency, let alone an investment vehicle, and the risks of volatility are enormous. It’s a quirky little tech phenomenon, not an investment or asset class.”
“A bitcoin has no intrinsic value. There’s no underlying asset from which a bitcoin’s value is derived. Rather, the price is based on the ‘greater fool’ theory. In other words, that someone else in the future will pay more than you did today,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.com.
The problem with bitcoin is that people don’t see difference between money and long-term asset. Most people hold bitcoin as an asset, instead of spending it. This makes it difficult for digital currency to establish itself as a medium of exchange. Still, although bitcoin is a currency, there are not many things that can be acquired with bitcoins.
Mark Williams, former bank examiner for the Federal Reserve Bank, warns bitcoin investors: “If investors, after understanding the extreme price risk, still want to invest in bitcoin, they should only commit amounts that, if lost, won’t impact their livelihood.”