Bitcoin: The new global reserve currency

Bitcoin. Those wonderful seven letters that elicit the same response from a seven-year-old if you ask about where all the ice cream in the fridge has disappeared.

“I have no clue.”

Bitcoin had started in 2009 but only gained prominence in the last three to four years. This wonderful creation was the result of Satoshi, a gentleman everyone knows as little about as who invented the selfie stick. In both cases, the idea is one to first laugh at and then reflect deeply upon. Bitcoin represents a unique currency that is unregulated by any central body. It is an outcome of peer to peer transaction verification system i.e. blockchain. One way to understand it is like this:

Imagine that in a classroom one bans the process of cheating (something that is there, but nobody cares about). If one student has to borrow a stationery item from another person (someone forgot their ruler for the accounts paper) they have to seek the approval of the invigilator, who verifies that the transaction does not involve any cheating. What if for one second instead of an examiner, every student of that classroom is involved in verifying that the transaction does not involve any cheating. Whichever student is able to verify that transaction first receives a toffee. This system is the block chain system and the toffee is the bitcoin.

It has been forecasted that by 2030, bitcoin will be the 6th largest reserve currency in the world. Any economist worth her salt should ask this question: can bitcoin become the currency of the globe?

There are two arguments for such change. Let’s start with the U.S. of patriotic A.’s dollar. This darling has been the global currency for exchange but suffers from the Triffen paradox. This paradox, which spelt doom for the Bretton Woods system much before it fell, simply states that a country cannot keep international and its domestic market happy at the same time if its currency is a reserve currency. Simply put, if you keep supplying more of your currency to keep spirits high in the world economy, you land up driving up inflation and make your domestic industry less competitive with higher exchange rates. The solution to this was proposed by Keynes was an international currency called bancor as the reserve currency. Bitcoin can be bancor.

Second is that bitcoin is backed by time and algorithm. The economist Friedman once proposed the k-percentage rule. He said that in the future, computer would regulate the flow of money, helping create a stable and predictable flow of money based on certain macroeconomic indicators and inflation targets as per his k-percentage rule. The bitcoin can do just that through its algorithm that monitors and controls money based on the supply. There are only around 21 million bitcoins that are available and the more that are mined the harder it is to mine for new ones. Thus the value of a bitcoin is actually dictated by time itself, the more time that passes, the stronger the currency becomes. Since bitcoin spending is monitored on the blockchain system, though it may not be backed by any commodity, it pretty much acts like the dollar, a medium of exchange.

There are counter arguments to bitcoins emerging as the reserve currency. It is decentralised to start with and therefore nobody is really accountable if the system crashes. A global currency limits government expenditure, since the government cannot print money to finance war or welfare schemes. Also, banks tend to be more wary of lending using such currencies.

Honestly, the world is at a junction where great ideas are becoming reality. Peer to peer systems helps the people rediscover democracy. The online world should be of the people, for the people and by the people. Till today, money has been under a sort of dictatorship regime, where asymmetry of power has led to a handful governing the course of money for the masses. With bitcoin now, even a class V dropout can have an equal say in how money moves. In the end, isn’t that a basic human right, the right to be involved?

  • Aditya G Kovvali
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