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JPMorgan: Bitcoin Has No Way to Handle a Liquidity Crisis

Sead Fadilpašić
Last updated: | 1 min read

Bitcoin’s design might have a fatal flaw in that it could not handle a liquidity shock due to its decentralized nature, JPMorgan said in a recent note, Business Insider reported.

In a liquidity crisis, central banks simply print more money to make up for a decline in lending and spending in the private sector. Since there is no institution which sets the rate for Bitcoin creation, such a solution would be impossible. JPMorgan states in their note: “The ability to provide adequate liquidity is a hallmark of a well-functioning market, but more so during times of crisis. One benefit of fiat money is that it can be used to provide emergency liquidity from the outside. This is the role central banks play as the lender-of-last resort.”

In the other corner of the ring, Bitcoin fans argue that JPMorgan assumes that this way of patching up the economy is actually good.

Aaron Lasher, the chief marketing officer at Breadwallet, a bitcoin wallet company, asks why there is any need for emergency liquidity in the first place. In his opinion, it all comes down to the fact that fiat currencies are centralized and thus printable at the whim of a certain group of people – central bankers. These bankers face no risks for themselves – they can always print more money to back themselves up, with the consequence of inflation.

Arthur Hayes, the chief executive at BitMEX, a P2P bitcoin trading platform, points out that money printing is hardly the best solution for economies at the brink of collapse – as Zimbabwe and Venezuela can testify. He adds, “Money printing delays the inevitable. Without the ability to print base money at all, any institutional that extended credit would be evaluated by the market on its ability to responsibly originate loans.”

Although printing money as a last reserve is a viable solution in a controlled environment, like the US did after the recent financial crisis, Zimbabwe and Venezuela are examples of how it can go wrong for everyone else.