Mohamed El-ErianSummary List Placement
- Bitcoin's surge shows that lawmakers should view its technology more seriously, Mohamed El-Erian wrote in an op-ed.
- Adoption by major players indicates the potential of a growing migration away from traditional money, he said.
- "Too many officials are inclined to look at the cryptocurrency in a rather narrow way. They shouldn't."
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The latest flurry of bitcoin adoption by companies like Tesla and Square has broadened the discussion for other companies to consider using it as a form of payment and store of value, which are the key characteristics of money, El-Erian said.
That sends a clear message to countries with globally-used currencies, like the euro and the dollar: "Take a lot more seriously both the technology underpinning cryptocurrencies and, on the more worrisome side, 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 currency ("seigniorage")," El-Erian wrote.
Apart from corporate endorsement, crypto traders have also been drawn to bitcoin by factors such as fears over an uptick in inflation, risks of the declining dollar, and the consequent search for a safe haven. These reasons bring about higher threats to future financial stability because risk-mitigation is now attracting a more volatile component, El-Erian said.
According to him, the appeal of bitcoin lies in the possibility of making 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 — from record debt issuance and the notable compression of risk spreads on the lowest-rated high yield bonds to the proliferation of celebrity SPACs and the meme-stock phenomenon," he said.
At its nascent stages, the concept of bitcoin was dismissed as short-lived and irrelevant. But officials should no longer view it narrowly, he said. "What is happening to the price of Bitcoin is indicative of broader developments that are relevant to the design and effectiveness of policies," El-Erian said.
Bitcoin sank as much as 11% on Friday, to trade below $45,000, but it is still up 57% year-to-date. More than $150 billion has been wiped off its market since the token hit a record high of $58,000 on Sunday.
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