Bitcoin, Bitcoin, Bitcoin. The chant grew louder with every passing day!
Anyone who follows me on Twitter @marks_thinking will have seen my occasional tweets on Bitcoin and the closely related crypto currency called Ethereum or Ether. Now call me a dinosaur, but when I was a boy, ether came in a spray can and we used to help start old diesel engines on a cold frosty morning.
OK, so I might not be up with all the latest Bitcoin mining techniques, but I have been around through a few financial bubbles, studied many of the past financial bubbles and given enough advice to know about human nature.
That experience tells me that people are going to get hurt.
Let’s circle back to what Bitcoin claims to be. It is a crypto currency. Put simply it is another form of payment system, but instead of being able to be converted into secure bank notes, its allure is that it can be transmitted from person to person using a globally distributed ledger. Just as a bank has a ‘ledger’ to track who has cash on deposit and who owes the bank money, this global ledger does the same for Bitcoin. The difference is that no single bank or organisation ‘owns’ the Bitcoin ledger. The ledger is also referred to as a ‘blockchain’ system. The globally distributed ‘ledger’ is what enables anonymity of transactions using Bitcoin.
That last factor makes Bitcoin incredibly useful if you don’t want your transactions traced! Handy if you are dealing in drugs, arms or any other weird stuff that is usually outlawed. Perversely, in spite of toughening identity checks that banks are now required to do, the Federal Government just made it easier to deal in crypto currencies by announcing in the Federal Budget that from July 1, investors buying cryptocurrencies would no longer be paying GST on their initial purchase. Talk about double standards! Sorry, I digress.
So, let’s come back to the principal purpose of any currency. It is a means of exchanging labour for goods and a means of storing past labours for an indefinite time until we want to again convert that labour into current goods. One would assume therefore that there should be a stable relationship between the labour and the currency. Our Australian dollar does that fairly well. If we get $25 for an hour’s work, we know that we can buy five coffees or a kilo of average steak and so on. Of course when our buying power increases we are happy, not so much a decrease.
So how does Bitcoin stack up on terms of stability?
Well, had you taken all your salary as Bitcoin during 2016 you might be pretty happy today.
The chart below shows the explosive rise of Bitcoin since then.
Bitcoin’s absolute high (so far) was $3,003 USD per coin, back in early June. However, since then it has declined to $2,516 or a 16.2% decline in about a month. That hardly seems like a stable store of value. Back in 2013/14 Bitcoin halved in value following a series of exchange blow-ups. Again, not a very useful store of value. That could easily happen again!
In addition, the architecture of Bitcoin means it is on a slow road to gradual extinction. With a maximum of 21,000,000 Bitcoins can ever be created thanks to the way it was originally conceived. When that ceiling is met, the only reward to the participants who use huge amounts of computing power to maintain the ledgers will be transaction fees. Sometime before then Bitcoin will go into a death spiral as owners try to exchange into other crypto currencies, or heaven forbid, real assets.
However, with limited supply Bitcoin may still increase in value if the ‘value’ placed on anonymity increases. We cannot know for sure. While I have a healthy mistrust of Central Bankers, and banks in general, I trust them more than I to the shadowy geeks in dark rooms that control today’s crypto currencies.
Apart from speculative value as a trading item, (as you might trade tulip bulbs) I view Bitcoin as the principal currency of those who need their transactions to be absolutely secret and un-traceable.
Having said that, currencies like Bitcoin and Ethereum have contributed greatly to the advancements in using ‘blockchain’ or de-centralised ledgers to track ownership of assets. I think we will see huge changes to banking systems using this technology in coming years.
But for now, I’m old fashioned, drug free, don’t carry no illegal firearms, and I don’t need no crypto-currency.