Economist El-Erian Says Bitcoin’s Speculative Bubble Rally Sends 3 Important Messages To Central Banks

Economist El-Erian Says Bitcoin’s Speculative Bubble Rally Sends 3 Important Messages To Central Banks

Economist El-Erian Says Bitcoin’s Speculative Bubble Rally Sends 3 Important Messages To Central Banks. Mohamed El-Erian speaks during a session at the Buttonwood Gathering on Fixing Finance in New York, Oct. 25, 2010. (AP Photo/Kathy Willens)

Economist Mohamed El-Erian admitted he failed to consider the technical details of crypto trading when he bought bitcoin at $5,000 and sold at $19,000, thinking he “was the smartest person around”.

In an opinion piece published by Bloomberg, the chief economic advisor at Allianz highlighted three important messages to governments on how bitcoin’s speculative bubble rally will impact the design and effectiveness of economic policy.

Bitcoin has risen more than four-fold in the last 12-month, touching an all-time high of $58,000 on Feb. 21, according to CoinDesk data.

Its dizzying rally has largely been boosted by buyers looking to hedge against inflation. Buying into bitcoin, big names such as Elon Musk, Jack Dorsey and Jay-Z have helped increase its adoption and bulls predict it could rise even more.

Here are three important messages bitcoin’s speculative bubble rally sends to central banks, according to El-Erian.

Message to governments

El-Erian says that increased acceptance of bitcoin as form of payment and store of value is a message to governments and policymakers to “take a lot more seriously” the technology underpinning cryptocurrencies.

El-Erian wrote that there was “the potential of a growing migration away from traditional money and its implications for the effectiveness of monetary policy and the ability to profit from issuing (fiat) currency.”

Negative side investment

The inflation risk that has pushed many investors into bitcoin could also be stemming from the low yields on government bonds with riskier assets such as stocks not offering better alternative returns, El-Erian said.

“With that comes higher threats to future financial stability as the risk-mitigating positioning now attracts a more volatile component,” he wrote.

Speculator flows

As in any other bubble, the rising price of bitcoin has attracted speculators who are out for quick outsized gains.

“This is part of a more general phenomenon of excessive risk-taking that is playing out in many segments of the financial markets,” El-Erian wrote.

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“Here, once again, the message to governments and central banks about the risk of future financial volatility and instability is far from reassuring,” he added, warning that regulators should not look at cryptocurrency such as Bitcoin “in a rather narrow way”.

Some readers however disagreed with El-Erian, saying that the bitcoin rally is fully speculative and it is not sustainable into the future.

“Personally I see 2 big flaws,” a Twitter user posted. “1) It is not and never will be a payment mechanism and those that have bought it have now accepted this publicly
2) It is still very correlated with the market so is not a financial risk mitigation It is a speculative asset, simple as that”.