What is Bitcoin Really? The Currency of the future? Gold 2.0? A bubble that’s about to burst?
This article explores these questions
Bitcoin- the term is now widely recognised around the world and is well and truly rooted in our day-to-day discussions. But it is easy to forget that it was only just under a year ago when it started to enter the mainstream narrative (In South Africa at least). Before January 2017, Bitcoin was generally characterised as ‘ dodgy internet money’ and a means for dubious and illegal activities to take place. In fact, experienced and knowledgeable people often wrote it off as a currency for drug dealers and money launderers. The Bitcoin brand was firmly intertwined with the Dark Web Marketplace ‘Silk Road’, which further entrenched the view that this was not a means for legitimate transfer of value.
But then suddenly the tide turned. In May 2017 the price of a Bitcoin reached $2 000 and then the mainstream craze really took flight. Brave backers began to realise that this was a new revolutionary technology that was gaining traction amongst a growing number of people. However, there were still many detractors, who saw various problems with Bitcoin. The most common questions posed by the detractors were as follows:
1. What is Bitcoin backed by? At least I can see my traditional cash and I am safe in the knowledge that it is protected by my financial institution or central bank.
2. What is driving the price growth? Does this digital coin REALLY have any intrinsic value or is it merely a result of supply and demand without any fundamentals behind it.
3. What if governments and other Regulatory bodies ban Bitcoin? Surely then the price will tank as the coin will have no more legitimate value in the real world
The steadfast Bitcoin enthusiasts were inclined to answer these questions as follows:
1. Bitcoin backing? This tended (and still tends to be) a sticky question. The common answer by Bitcoin supporters is that it is backed by a combination of complex mathematics as well as cryptography. However this would still leave people scratching their heads regarding the true intrinsic value of the coin.
Perhaps the more pertinent question for us all to ask is ‘what is the price of the US dollar backed by?’ Surprisingly, the answer appears to be nothing — other than pure supply and demand of course. It officially dropped off the gold standard in 1971 and a recent estimate showed that a $1 and 2$ bill costs just 4,9 US cents to make and a $20 and $50 dollar bill costs just 10.5 US cents to make. Therefore the tangible piece of paper that a US dollar is printed on is essentially worthless (unlike gold or other commodities, which cost considerably more than paper money to produce) and the full value of a US Dollar is garnered simply by what society deems it to be worth, much like Bitcoin.
2. What is driving the price growth? Again this appears to be simply down to supply and demand. There has been a major increase in demand for Bitcoin in 2017. With the total supply being limited to 21 million Bitcoin and the difficulty to produce (mine) Bitcoin increasing at an exponential rate, combined with the FOMO (Fear of missing out) reflex being kicked into overdrive, the demand has far outstripped the supply, which has resulted in the colossal increase in the price of Bitcoin.
3. And what about government and financial institution intervention? Every week, it seems, more and more money is being funnelled from traditional asset classes such as cash, bonds and equity stocks into the uncontrolled and largely ungoverned digital currency market. This transfer of funds undoubtedly poses a massive threat to governments, central banks and financial institutions. When money leaves the traditional markets and enters the crypto markets, the funds become very difficult to control, regulate and tax. This will not sit well with these institutions that have had a monopoly on the issuance and taxation of money for decades.
However even if governments decided to intervene, would they be able to stop Bitcoin and other crypto currencies? Bitcoin’s decentralised nature makes it very unlikely/ impossible that they will be able to ban Bitcoin itself. The Bitcoin ledger has been distributed to millions of computers all around the world and even if it were banned in one geographical location it will still survive and continue to function in all the rest. Additionally, Bitcoin does not have a central head office that can be shut down (it’s ‘offices’ are spread throughout the world), it does not have employees in the traditional sense of the word and the founder of Bitcoin, Satoshi Nakamoto, has never been identified in person and is completely anonymous.
However there is definitely scope for governments to ban certain aspects of the digital currency cycle, which could hamper the growth of crypto currencies, even if this is just temporary. For example in September 2017 the Chinese government made a decision to ban all Initial Coin Offerings (public capital crowd raises of funds for new crypto currency ventures). This briefly caused the crypto currency market to become edgy and the Bitcoin price did drop off in the wake of this news but it very quickly continued its steep upward rise.
Another way that governments could severely impede the rise of Bitcoin would be to shut down companies that provide crypto currency exchanges as well as digital wallets, such as Coinbase. This would likely be devastating for the crypto currency market in the short term as there would be very limited market places in which to exchange traditional currencies for crypto currencies. But my expectation is that the people behind these exchanges will simply take their knowledge and intellectual property and register similar functions in a more ‘crypto friendly’ location. Therefore it appears unlikely that any one, or two, or ten governments can sustainably ban crypto currencies. However we can expect large resistance from governments and financial intermediaries as crypto currencies permeate further into the mainstream.
Despite these questions and concerns the price continued to rise. Between May 2017 and December 2017 it has risen to $4 000 per Bitcoin, then $6 000, then $10 000 and it is now sitting at around $14 000 per Bitcoin, even after a large recent correction from its all time high of around $20 000.
But the question remains: Is this enormous price justifiable or are we about to witness the popping of one of the largest bubbles in recent history?
I will be the first one to admit that I do not know the answer. However, in thinking about this question there are two further questions that I have been posing to myself and to others.
1. Is Bitcoin solving a problem? For me the answer is an unequivocal YES. For the first time in human history Bitcoin, and other crypto currencies, have meant that we can finally transfer wealth securely from one person to another, over the internet, without the need of a third party intermediary, such as a bank, government or credit card company. This technology is absolutely revolutionary and should in theory make transactions cheaper, easier and quicker (especially cross border transactions)
2. Are there better alternatives to Bitcoin? Perhaps. Bitcoin was the first ever, functioning crypto currency and certainly paved the way for all the rest, but its detractors will say that it utilising out-dated technology and protocols, which other crypto currencies such as Dash, Monero and NAV Coin have vastly improved upon. NAV Coin, for instance, has far quicker transaction times, uses the much more eco friendly and cheaper Proof of Stake validation procedure rather than the incredibly expensive and resource heavy Proof of Work protocol and facilitates private payments, unlike Bitcoin.
Therefore there may be scope for other crypto currencies to dethrone the giant that is Bitcoin.
Through all the chaos of 2017 , a fierce War of Words has been waged. Bitcoin Proponents vs Bitcoin Detractors. Each side has been vigorously expressing why they believe that they will reign supreme.
The Proponents -characterised by computer programmer John Mcafee and the Winklevoss twins (best known for their role in the Facebook saga) believe that Bitcoin is essentially Gold 2.0 and fully expect the market capitalisation to reach parity with that of Gold. If this is the case then we may see the Bitcoin price hit truly astonishing heights.
The Detractors, lead by the very outspoken CEO of JP Morgan Chase, Jamie Dimon and more recently, the Nobel Prize winning economist, Joseph Stiglitz, claim that Bitcoin is at best a bubble and at worst ‘a fraud’ and ‘worse than Tulip bulbs’
Will it be a battle to the death or will there be some sort of consensus or middle ground reached between these two opposing forces? My feeling is that it will be the former. Just like all battles, the path to victory will not be smooth. There may not be blood but there will be sweat and there will undoubtedly be tears. The victor will be able to hold their mantle up high and with a grin the size of the Bitcoin Blockchain itself, proclaim ‘I told you so’ to all the rest.
Who will emerge victorious? Only time will tell. All we can currently do is strap in, hold on tight and enjoy the ride.
