Exit, Trust, and Bitcoin

Eurozone crisis. Referendum. Stay or Leave.

Sound familiar? No, this isn’t Brexit. It’s Grexit.

Around this time last year, Greece faced a debt crisis and the looming possibility of leaving the Eurozone if it did not accept EU sanctioned austerity measures. Ultimately, voters decided against defaulting on the growing debt of $271 billion, opting instead to stay in the Eurozone. In recent months, that bailout deal has finally been approved and Greece received its first payment in mid-June.

The growing reality of Brexit and possibility of Grexit has provided a renewed focus on digital currencies. In particular, eyes have been on Bitcoin, a cryptographic currency built on a decentralized ledger system called the blockchain that uses an algorithm to verify ownership and secure transactions. It does this through the network in which a majority must agree on a transaction in order for it to be written into the public ledger (or database).

One central idea in the discussion of Bitcoin and Greek’s financial troubles is trust. The inherent value behind fiat currencies is based on the expectation that the state will not default or fail to pay back its loans; in other words, merchants accept dollars or euros because they expect them to still have spending power in the future. The establishment of the euro essentially solidified this trust by tying together the fates of nineteen countries. However, this allows countries such as Greece and Cyprus to rack up debt knowing that other European countries will continue to lend to them. You can see in recent events what happens when this trust is unraveled as in the cases of Greece in 2015 and Cyprus in 2012 which saw citizens pouring into banks to withdraw their money. A year ago, the Greek government put in place capital controls, closing banks to prevent a bank run, which raised concerns about the legitimacy of the government’s control of money. This distrust has spread throughout Europe as more and more people are turning to digital currencies (i.e. Ether, LiteCoin, etc.), which are not controlled by a central entity, but rather a distributed network of computers. As result, these currencies are free from such capital controls.

Coinbase– the largest federally regulated Bitcoin exchange- announced that the number of purchase of Bitcoins across Europe increased by three-fold in the weeks leading up to the Grexit debate. Since this time last year, the price of Bitcoin has more than tripled with the increasing anxiety of Brexit and the falling Euro contributing to its rise.

My Take

As more and more people are moving to decentralized service platforms such as Uber and Airbnb, we can see the power of this idea of crowdsourcing trust, rather than reliance on an established third party. Uber builds trust between drivers and passengers through a rating system that incentivizes both parties to provide the best mutual experience. Airbnb, on the other hand, revolutionized the hospitality industry by enabling homeowners to rent out individual rooms to travelers and promoting honest behavior through customer reviews.

I believe that the blockchain technology will enable that same decentralization of trust by allowing companies like Uber and Airbnb to disrupt traditionally centralized industries such as the insurance and money transfer industries. Bitcoin is just one example of an application built on the blockchain platform that has gained traction as people begin to distrust in central control of the money supply (drawbacks discussed in future post). Thus, while Bitcoin may not be the solution to Greece and Britain’s financial troubles, it will be interesting to see how the value of the Euro, the Pound, and Bitcoin will fluctuate in the next couple of years.