Among its other consequences, the rise and fall of bitcoin's value in recent weeks has at least gotten people talking about it. There are all sorts of conversations going about. There are doom-seers who think of bitcoin and cryptocurrencies as the end of human civilization, as we know it. And there are enthusiasts who believe the rise of cryptocurrencies is the beginning of a new global possibility where trust on a computer code is the answer to reasons of mistrust on human beings.
Assuming that readers of this column already know how cryptocurrencies are minted as well as the history and concept of currency, let's first establish that cryptocurrencies are not in fact currencies. To be a currency, it ought to have, inter alia, a 'store of value' feature. Which cryptos do not have. You cannot have currencies jumping up and down like children in a playground. Economic history is replete with examples how even sovereign-backed currencies cease to be currencies when they act like that.
The enthusiasts reply to this critique by demanding a gestation period for cryptos to establish itself as a currency, and by pointing towards growing global recognition of bitcoins as means of payment. But allowing payments in bitcoin does not necessarily mean that merchants are accepting payments in the cryptocurrency. According to a July 2017 research note by Morgan Stanley,despite its impressive appreciation "'bitcoin's acceptance is virtually zero and shrinking," with merchant acceptance falling considerably over the year before.
Even if merchant acceptance weren't falling, the question is whether a country can survive long enough with multiple stores of value. At this rate of volatility, surely wages cannot be set in cryptos, save for perhaps wages of those who create this so-called currency. Nor can be it so that one earns in USD or PKR and pays in bitcoin. The notion of 'value' needs to be shared and has to be fairly stable. Consider the following example.
A garments brand recently set up a store in Swat Valley and offered Rs14000 plus bonus and commission to its salespersons, compared to Rs22000-25000 plus bonus and commission paid to its salespersons in Islamabad. But even after being selected for the job, none of the Swatis signed up for the contract. The brand manager eventually found out that because the average pay of salespersons in Swat was Rs6000-8000, candidates couldn't imagine that their work could ever be 'valued' at basic pay of Rs14000, whereas others worried that the work load will be beyond their capacity to justify that kind of remuneration package.
That garments brand eventually hired the same people at Rs9000 per month. Now there can be moral or economic disagreements with the decision of the brand manager, but the lesson from that story is that 'value' is a shared concept in a specific context of time and space. Remember how Dr. Evil in the movie Austin Powers demanded ransom twice too foolishly: once $100 billion and once $1 million. And both times, people laughed at the assigned 'value' of the threat. The point being: unless everyone's wages, prices of goods and services and taxes are also set in a stable bitcoin, the cryptocurrency will remain a fancy version of the barter economy.
Giving value to bitcoin will also require that international trade between countries is set in bitcoin; so are FDI, aid, loan and grant flows, because prices of currencies set by these international flows provide the benchmark basis of exchange of value. In order for this to happen, countries will have to agree, or at least major countries will have to agree to an international store of value. If anyone really thinks that this would be possible without some kind of global meltdown, they should read up on the history of Bancor and how the US used its influence to ensure that Bancor never saw the light of day. They should also ponder over why London kept its pound, despite then being part of the EU.
Currency is deeply related to sovereignty. Sovereigns have knelt before bankers in both pre- and post-Westphalian System to finance wars, or to help the economy, etcetera. In turn, the sovereigns have agreed to bankers' demands. However, the same cannot be expected in the emerging story of bitcoin.
For one, bitcoin producers are not an organized and relatively monolithic body like bankers are; which, if they did, they would become the antithesis of cryptocurrency'skey USP:anonymity. Second, the cryptocurrencies enthusiasts do not have any strong reason why they expect leading sovereigns to bow before cryptocurrency producers, and ask for help in exchange of which they would replace their own currency with bitcoin. Is there really a global chaos on the horizon?
The third possibility that might give cryptocurrency the volume, the stability and the acceptability to become a currency is voluntary legitimization by nation states;like the Bank of England is reported to set up a research unit to explore cryptocurrenciesmechanism. But no government would ever want to legitimise an underground undocumented untraceable payments system, which is what bitcoin really offers at the moment - a glorified version of hawala/hundi. Therefore, voluntary legitimization by nation states will come at the cost of transparency, accountability, a fixed tender of value against an actual currency, and other regulations that will erode the very reason for the existence of cryptocurrency in its current shape and form.
Ergo, to become a currency, bitcoin will have to stop pretending to be a currency and instead be a good technology for value transfer by way of using blockchain, or other similar advanced technology. Which by the way it is.The 'value', however, will still be decided by the sovereign and/or the markets duly allowed by the sovereign - unless of course we are talking about a world of cyborgs and servers ruling humankind or any other form of sovereign-less world.
Until such time bitcoin becomes a mode of payment like digital payment or a currency, it may or may not be a good investment depending on your outlook. But before putting your money in cryptocurrencies it would be useful to dwell on some basic concepts.
When people buy/sell a stock they are trading their perceptions of the future performance of a certain company. When they buy/sell stock futures they are trading what the perceptions of the future performance will be after a certain amount of time say 90 days. Likewise, for bonds and commodities. Even in the case of FX trading, people are not trading their expectations of the currency, but their perceptions of the future performance of the economy in question. All of these securities, and their respective derivative products represent a value down the road, whether the average trader is conscious of it or not, and however remote that value relationship may be (in the case of derivatives).
What is the value that bitcoin represents? None! Not until such time it is adopted and widely accepted as a stable currency that offers a 'store of value', whereas achieving that medium of 'value' is a tall task, as flagged in preceding paragraphs. "But it's so popular, and everyone is making money in it," oft comes the reply. Well, in some places casinos are more popular than bonds and equities, and with many success stories behind them. That does not mean you invest your hard-earned savings in a Bingo.
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