While the global economy was panicking about the financial crisis in 2008, a strange computer programmer called Satoshi Nakamoto posted a message: “I’ve been working on a new electronic cash system”. Nobody bothered. But what he had coded threatened to become the world’s alternative currency: Bitcoin. Economists, entrepreneurs and even criminals were inspired across the world. The online launch in 2009 nearly-revolutionised the notion of currency, and early takers minted millions.
Money, the universal buzzword, is poised in the digital race. The crypto-coin pops up in headlines and whips up endless media debate. The supporters believe that Bitcoin will do to banking and finance what email did to the postal service, and destroy old monopolies and create opportunities for the masses.
Can cyber-money reinvent traditional financial and social structures while bringing the world’s millions of “unbanked” individuals under a new financial umbrella?
What is a Bitcoin, anyway? A decentralised digital medium of exchange, Bitcoin is a blend of stock and currency. Stock, because there is a fixed number of Bitcoins in the universe (21 m), the demand-supply directing the market. A $1 Bitcoin in 2009 is presently valued around $15,000. Currency, because it facilitates payment for exchange of value, of course with its inherent limitations.
You can remit abroad. Instant payment. No exchange rates. No need to divulge your credit card or personal information. Sounds good? The caveat: transaction completed is irrevocable.
Bitcoin, the digital gold
Believers from Bangalore to Beijing see the potential for a financial system free from banks and governments. The cryptocurrency made big news in late-2016 when there was a China-led buying spree, mainly from people trying to escape Yuan’s devaluation. Its simplicity, anonymity and transaction-ease made it popular among the Chinese.
The Bitcoin environment is now more distributed around the world. As the ‘currency’ is stored and traded on a decentralised network of computers, it is attractive to people in countries like China, Zimbabwe etc., where the governments have a history of seizing bank accounts and assets.
As there are hundreds of cryptocurrencies that are around less than a dollar, will users turn to others that are eager to grab market share and challenge Bitcoin’s dominance? The proliferation of digital currencies has come up with the goal of handling transactions more cheaply.
While trading has taken off in South Korea and Japan, in recent months, it was on Korean exchanges the price first hit the 10,000-mark, the rapidity of the ascent raising many eyebrows. Exponents argue that they see the emergence of a new asset class that could join stocks, bonds and commodities in the investment portfolios of ordinary people.
Remember, while the Chicago Mercantile Exchange and the NASDAQ stock exchange have recently added Bitcoin Future contracts in their listings, in many places, the trading is happening with no transparency.
All is not sunshine
Why the currency is controversial? Unlike traditional currency, the unregulated nature makes it hard to be sure you are dealing with a credible party. It carries a notoriety for instability, wild fluctuation, and illicit business. While Bitcoin has led to untold riches for some, prison terms also granted for some others.
Money is not a simple topic. Most people understand how gold is mined, refined and shaped into coins, and cherished over the centuries. Paper money is more complex. Countries like the United States, no longer link their currency to the gold, anyway, allowing the dollar value to be determined by market forces.
After all, true investing requires a rational approach of an asset’s value and that’s simply not possible with Bitcoin. How can we even start estimating the fundamental value, with its stunning market value of about $300 b. Any such efforts will be absurdly inaccurate.
Feedbacks suggest that getting out of the cryptocurrency can be harder than getting in. The price has been pushed up by a flood of new buyers from around the world, under the “fear of missing out”, and frenzied into the untethered price upsurge. Sceptics from Jamie Dimon, Chief Executive of JP Morgan Chase, to Warren Buffet, have called it a fraud, a bubble and a Ponzi scheme.
As ‘currency’ function is in central bank’s domain, how will government tolerate rivalry? Individual governments can enforce a ban at the point of conversion from state money to crypto-money without attempting to crack the coin’s infinitely complicated algorithm.
Simultaneously, if internet has essentially transformed our lives, can the ‘virtual’ money, be far behind? Having dared to decentralise some of society’s basic institutions, will Bitcoin be a global game-changer? Or, a re-run of the dotcom craze? What, if Bitcoin is replaced by something different and better? Is it possible in this cyberspace to visualise a world without identity theft, an internet without passwords? Just like you, I don’t have clarity, now.
(The views expressed by the author in the article are his/her own.)
