ThoughtBitcoin was a currency? Think again…
Definitionsare useful. They help us understand what we are talking about and by beingspecific and precise we can understand more about our actions and ourbehaviour. So let’s look at Bitcoin and find out what Bitcoin really is.
Is Bitcoin a currency?
No. Thegeneral definition of a currency is that it is a unit of accepted value thatfacilitates exchange. Many argue that because Bitcoin can be used to makepayments, it is a currency – however, stating a price in Bitcoin is largelymeaningless, because the value changes so dramatically. Most merchants who useBitcoin state the price in fiat currency but allow consumers to buy with Bitcoin,and many merchants convert the money straight back into fiat to protect againstloses. This isn’t a currency because it does not reliably store value. This isa PR gimmick. Bitcoin is hi-tech barter. And is little different to agreeing toswap shares.
Anotherproperty of currency is that it is an element of state sovereignty. In otherwords, currency is an instrument of government policy, controlled and regulatedby government. Proponents of the cryptocurrency boast that one of Bitcoin’s keyadvantages is that it is independent of state control. It has a set rate ofinflation, there is no meddling with it’s value, no central bank, and no-onekeeping tabs on where you are spending your bitcoins – this means Bitcoin isn’tmoney, just as Facebook credits aren’t money. For Bitcoin to be a real currencythe whole concept of what money is needs to change. This revolution hasn’thappened yet.
Is Bitcoin an investment?
The focusof many people in the Bitcoin community on the price of Bitcoin is reminiscentto the way people check the prices daily for their stocks and shares. IfBitcoin is anything, it’s got to be an investment. But is it? Watching theprice of Bitcoin climb higher and higher, it feels like you are investing insomething real – an idea, a movement, possibly a financial revolution. What ifit’s just a bubble? At the end of the day, Bitcoin only remains valuable aslong as people are prepared to put money in it. At the moment people believe inBitcoin, they believe in the prospect of a different world, one where currencyis stable, where bank transfers are practically free and where the governmentcan’t meddle. But it is only faith which is keeping the currency alive. Ifsomething happens to the cryptocurrency, it is valueless. It doesn’t represent anythingof intrinsic value.
Peopleargue that Bitcoin is like gold, but gold is a material item with intrinsicvalue – it is used to make jewellery, it is also used in most electronicproducts, and there are a lot of those these days. Gold does have a value whichis driven by its actual productive and manufacturing use.
Similarly,if you invest in company shares, you are putting money into material goods,labour hours and products. If the company goes bankrupt, you at least have aright to the company’s assets. What happens if suddenly the money falls out ofthe Bitcoin market? The currency itself has no base value and you are left withnothing. The movement which we see on the Bitcoin market reflects speculation –and is not something that any serious economist (for a critique ofcryptocurrencies just check out Professor Justin Wolfers)is going to invest in, although plenty of day-traders are happy to use theconstant fluctuations as a way of making a quick buck.
It begs thequestion, if Bitcoin is neither a currency nor a long term investment why areso many businesses getting in on the cryptocurrency? The key behind Bitcoin’sremarkable success is that the technology excites people. Bitcoin is a paymenttechnology which offers huge potential. A cheap and efficient way oftransferring money around the globe is essential to improve trade, and enablecountries to develop. While Bitcoin as a currency has severe limitations, thetechnology which is being developed does not only apply to Bitcoin but can beapplied to the current financial system. As Cointelegraph reported, major banksare already investigatingapplying the currency. Furthermore, the technology has far rangingimplications as a new way of verifying information. Some of the exciting developmentsinclude using it to verifyartworks, potentially using it to ensure fair and accurate voting duringelections. Consequently, it is fascinating to see the number of tech startupsthat are making use of the basic premise of the Bitcoin block. This is the wayof the future and it is the reason people are so excited about Bitcoin, but let’snot get confused about what we are excited about. It is the technology which ischanging the world, the fact that Bitcoin began life as a cryptocurrency isdemeaning to what can ultimately be achieved by the technology.
From thispoint of view, the discussions about Bitcoin price and regulation become smallissues of time and are largely irrelevant. Yes, it would be nice if regulatorybodies gave some more guidelines about using Bitcoin, or made the regulationsmore user friendly. However, as Bitcoin is a proto-type it would be remarkableif the cryptocurrency survives the test of time. However, it has already servedits purpose in establishing a new sphere of computer science which may wellhaving a lasting impact on how society operates and will hopefully lead to afairer and more just system.