Bitcoins : it’s new, it’s in, so to speak, and we keep hearing a lot about this virtual money that was created in 2009 and that is breaking record after record. What should we think about it?
Let’s briefly recall its modus operandi : this virtual money circulates on a peer-to-peer network, e.g. without a central server or any « hierarchic authority », without a central bank. To avoid any counterfeiting, each bitcoin is traced since its creation by the electronic signature of each of its successive owners. And this verification work is accomplished by the « miners », who are paid… in bitcoins and also by the (very low) transaction fee. Thus, the system is perfectly autonomous and self-regulated.
The use of bitcoins had been limited to a few alternative computer communities until 2013, when it sarted to gather some steam. The bankruptcy of Cyprus in the spring and the looting of bank accounts opened many people’s eyes about the absolute protection supposedly offered by the banks for one’s savings, whereas no one has any authority to loot a bitcoin account. At the same time, Argentina is implementing currency controls to avoid capital flight, and we discover that bitcoin transfers are not affected at all by borders. On top of that, many articles in the anglophone papers have drawn attention to bitcoins, which value was under ten euros in 2012, and then went up to 100 euros this summer (after a bubble to 200 euros followed by a crash in April). We’re witnessing a new fever since the end of October (almost 300 euros November 13!), after Baidu Inc (NASDAQ:BIDU) (the first search engine in China) decided to accept bitcoins as payment and eBay Inc (NASDAQ:EBAY) (owner of PayPal) showed some interest… bitcoins are being institutionalised, so to speak.
There is also a basic element that pushes it higher : the number of bitcoins in circulation is rising regularly but will never surpass a certain number (21 millions), which is baked into the algorithm itself (this will not impair transactions, since bitcoins are divisible to the eighth decimal). Consequently, this prevents any « printing press » recourse or any inflation. It’s a « commodity money », comparable to some « digital gold ».
But, contrary to bitcoins, gold is familiar to everyone. As more and more users discover bitcoins, some traffic jams happen sometimes. Actually, 12 million bitcoins have been issued, but it is estimated that 80% of those aren’t circulating, they’re being saved. At 300 euros each, all existing bitcoins total 3.6 billion euros (12 million X 300), which is really very little on a global scale. So, some hickups are to be expected! Also, « digital gold » means the use of computers, thus the danger of hackers, and a few thefts have already happened…
Bitcoins offer real advantages as payment intermediaries and for wire transfers (low cost commissions, border-free), but one must exercise caution when investing in them (price volatility and computer security).
Bitcoins having been only recently created, the « financial system » hasn’t (yet?) engineered any derivatives controlled by the big business banks with the loving help of the Fed, in order to « reign in » its price from time to time, as they do with gold. If ever you start hearing about « paper bitcoin », beware! In the meantime, what the strong rise in its value is showing is that there are more and more people using it, as we’ve said, but also that more and more have faith in a non-manipulated currency, a very rare occurence these days.