Bitcoin is an asset class, not a currency
I think there is a lot of confused thinking about Bitcoin. I believe today it is an asset and not a currency. That view is supported by first Germany, and now Norway.
It is admirable that many get excited about the potential for an ecommerce medium of exchange that is secure but lets dig behind the hype.
First of Ben Bernanke was quoted as suggesting it and other virtual currencies “may hold long term promise”. Next the BofA report on Bitcoin was taken by many as the herald of the future of eCommerce.
However the hype overtook the content of those reports. In both cases, Bernanke and BofA were very careful to discuss and frame the potential of future virtual currencies and Bernanke particularly in the context of the need for future regulation.
BofA were very clear with this comment from their report.
Bitcoin: a first assessment | Bank of America Merrill Lynch Report
However, as a unit of account and store of a value, it has considerable shortcomings which we believe will ultimately hinder it from ascending to international currency status.
In other words the hype got ahead of the facts.
Here are some things to consider about Bitcoin that are both pro and con relative to thinking of it as a currency:
- interesting technology: provides a means of managing number of Bitcoin units. If we parse that out, it is not dissimilar to gold or silver. A finite market size means that owners are comfortable a flood of new volume will not show up and devalue their holdings.
- Tamper proof: it cannot be forged and users can be sure of its existence
- History and tracking: as the BofA report states “the fact that all Bitcoin transactions are publically available and that every Bitcoin has a unique transaction history that cannot be altered may ultimately limit its use in the black market/underworld.” This is an improvement over Anti Money Laundering tracking with regular currencies.
- Market behaviour: Bitcoin is being amassed as an investment by the current majority of users.
- Price volatility: the volatility of price makes it hard to think of it as cash unless you are storing Zimbawean pounds or 1930’s German Marks.
- Timliness: Again referring to the BofA report “Fifty minutes is the time needed for enough additional blocks to be added to the chain to protect against double spending.” This appears to be a technical inhabitant due to the processing and computing load required to maintain the above advantages elative to tracking, and security of your Bitcoins.
Relevance to Bankwatch:
I believe at the end of the day Bitcoin is an interesting asset and not a currency. it is electronic gold.
The disadvantages of price volatility and timeliness are just too significant. It reminds me of the situation during the banking crisis where eastern Europeans had mortgages denominated in other countries currencies. I am not using this analogy to be pro or anti Bitcoin as a currency. I use it only to make the point that any time you are transacting in something that is not what you receive as salary has deep risks, and could make the cost much different than your family budget allows. You would not buy groceries using a futures contract in Zinc or Beef on the CME just to make an extreme point.
On timliness, making a purchase has to happen now, not in 50 minutes.
Bitcoin is an asset class.
There are elements that are interesting, especially the digital tracking that can follow each and every Bitcoin and its history. The capacity to manage that tracking will give even Werner Vogels (more) grey hair. Clearly such a concept needs significant cloud computing capacity far beyond anything we have today.
With experience and thought, there are other ways that might address the shortcomings, but the big sticker is how to address volatility of an asset that is not tied to something as rock solid as a country, and its GDP, tax base, and government rule of law.
The one thing Bitcoin has done is generate a new and different level of thought on the concept of money way beyond the usual stored value cards etc. There is credence to the idea that and internet based medium could be safer, stronger and better. What if our home currencies were managed this way for example?
Anyhow, that’s what I think. How about you?