People have struggled over the past few years with the idea of whether Bitcoin should really be considered fiat currency, or an asset of some sort, or something entirely new. Those who have followed the progress of Bitcoin and who claim to understand it tend to trumpet its potential as a centerless network of transactions – a payment system that defies banks and borders.
A recent report authored by Gautam Chhugani and Gaurav Jangale of investment research and management company Sanford C. Bernstein & Co., LLC, seeks to compare and contrast Bitcoin as a form of fiat currency against all forms of transactional documentation that has gone before, from fiat currencies through to pre-literacy bartering systems, and even the huge Rai stones of Yap Island in Micronesia. All of these served in some way to record debts and transactions between people, and the authors go on to point out that banks once served simply as clearing houses for these IOUs.
The report brings to light a much more existential question about the value of any form of fiat currency – one which strikes an interesting balance between the mysterious technological inner workings of Bitcoin and the surprisingly deep element of faith that supports the moneys supplied by individual countries’ own mints.
For the time being, the authors assess Bitcoin as a “censorship resistant' asset class.”
True to the culture of economics in general, the more people you ask, the more answers you will get when seeking to understand whether Bitcoin is real money (one can insert any other brand of cryptocurrency here with equal ease: Ethereum, Litecoin, Ripple, etc.). Perhaps the most telling question of all is, “do you accept Bitcoin?” If a seller accepts it and hands over the goods in return, then perhaps, in the most basic way, there is proof of its legitimacy as money.
The authors of the Bernstein study are appropriately inconclusive regarding Bitcoin’s status and future. It is too early to tell, and any answer given today will easily be countered tomorrow.
The fundamental characteristics an asset must have to be considered money are:
Uniformity: In other words, every “dollar” or bitcoin is the same as the next one. When you’re talking about using seashells or cows as currency, uniformity is hard to achieve.
Divisibility: Dollars and Bitcoin need to be divisible, broken up into small increments to cover a wide range of value transactions. Cows? Not so much, unless you’re hosting a barbecue.
Portability: Your currency must be easy to transfer and store. Durability: Older, agriculturally-based forms of money had a shelf life. Gold is the ultimate when it comes to durability. Paper notes deteriorate.
Limited Supply: A currency is worthless if there’s no scarcity to it. In our office here in Hong Kong we have a 500 million dollar note issued by the Zimbabwean government – it’s a simple reminder of what ultimately happens when governments try to endlessly print their way to prosperity.
Image Sources / Pixabay
Acceptability: to be considered money, the asset has to be widely accepted. People all over the world will take U.S. dollars. They won’t however take Turkish lira. Bitcoin holds all of these characteristics with the exception of acceptability – although that is rapidly changing. Japan passed a law earlier this year that made Bitcoin acceptable as legal tender. And the digital element of Bitcoin?
Well, more than 90% of all money that exists today around the world is not even physical… it’s purely digital, existing only on computer servers. But people get excited from big price movements and Wall Street accommodates.
Bitcoin, the mother of all digital currencies, topped $7,000 on Monday, up more than 600% this year, showing all signs of a bubble. With a market cap now over $100 billion you can't value Bitcoin because it's not a value-producing asset. It`s a real bubble in that sort of thing.
It is no secret that we have been skeptical about Bitcoin’s uptrend going forward for while now. We still are.
Remember,
Bubbles happen around things that fundamentally change the way we live...
The railroad bubble. Railroads really fundamentally changed the way we lived. The internet bubble changed the way we live. When I look forward five, 10 years, the possibilities really get your animal spirits going.
So Bitcoin is set to become the biggest bubble of our time, and could reach $10,000 very soon due to fast-building interest. Maybe this rally could have been predicted even without the help of the Elliott Wave principle. After all, everyone seems to be extremely bullish on Bitcoin these days. Nevertheless, the Wave principle prepared us for the previous terrifying selloff from $4980 to $2980, as well. The next one might come sooner than you think and be the biggest so far…
Perhaps a more pragmatic approach would be to recognize the growing legitimacy of blockchain technology as the potential new central nervous system of transactional business, both globally and locally. Cryptocurrencies like Bitcoin may pass into the historical record of trade alongside clay pots and doubloons, becoming irrelevant due to their permanent volatility. But they might also be laying the ground work for an entirely new economic base, capitalizing on a global, trustless commerce system that may invent its own near-perfect way of exchanging goods, services, and everything in between.
Whether you love them or hate them, it looks as if Bitcoin and its cryptocurrency pals are here to stay.
P.S.
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