JP Morgan, the largest bank in the United States, famously went from saying “Bitcoin is a dead or bubble” to “Here’s what you should look forward to Bitcoin” in less than a year. All the sceptics and their second cousins have started looking at cryptocurrencies more closely, largely because of the enormous price increase in 2o17.
Almost every cryptocurrency performed better than the standard financial instruments like equities, bonds and commodities with returns anywhere from 100% to 50,000% for various cryptocurrency investors. Now that there’s a lot of adoption among the retail investors, the enterprises started studying the effects of cryptocurrencies on the financial world and as part of it, JP Morgan recently released a report on Cryptocurrencies to its investors and employee base.
One note worth discussing in the latest JPMorgan Crypto report is about the concern about whether bitcoin handle the liquidity shock if there’s a financial meltdown. Usually, when there’s a financial breakdown or recession, central bank steps in and handle the liquidity problem by pumping more money into the banks. The 2008 financial crisis is a major example where the central bank took the responsibility. While this is the very situation cryptocurrencies aim to avoid if there occurs a recession indeed and since there is no central party here, there is no option but to increase the price of the bitcoin to handle the liquidity event.
The report also says, “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 (legal tender issued by a central bank), 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.”
This, although is true, would not ideally occur in a true decentralized currency world where you don’t have banks which accumulate Non Performing Assets by giving bad loans to the businesses. One optimistic way to look at this is that absence of central bank is not a problem, but a feature where you don’t have a bank printing money as and when they want.