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Digital Currencies Won't Kill the Dollar

Jamie Dimon, the CEO of JPMorgan Chase & Co., recently slammed bitcoin in no uncertain terms: It “won’t end well,” he said, calling the cryptocurrency a “fraud” and “worse than tulip bulbs.”

Is Dimon right? It depends. In at least two important ways, bitcoin and other cryptocurrencies will probably fail to achieve the dreams of their creators and enthusiasts. They are unlikely to usher in a hard-money revolution, and are also unlikely to supplant national fiat currencies as the standard means of payment. But that doesn’t mean they won’t change the world.

Many bitcoin enthusiasts believe that the digital currency will create what amounts to a new gold standard. The basic logic is that the number of bitcoins in existence is limited, while the number of dollars is not. Simple intuition says that if you create more of something, its value goes down -- in other words, central bank money-printing makes the dollar slowly lose value over time through inflation. The great economist Milton Friedman summed it up when he said that “inflation is always and everywhere a monetary phenomenon.”

Faced with a choice between money that slowly depreciates and money whose supply is permanently scarce, bitcoin bulls reason, who would choose the former? The availability of this sort of “digital gold,” they believe, will force central banks to hold down inflation in order to keep the dollar and other fiat currencies competitive. If they fail to do so, everyone will switch to bitcoin, central banks will become powerless, and inflation will fall anyway. This is an attractive scenario not just for hard-money supporters, but also for libertarians, who would rather the government didn’t have control over the value of their bank accounts.

But this thinking is flawed in at least two important ways. First, the number of bitcoins may be limited, but the number of cryptocurrencies is not. People are constantly c...

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