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.
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Others, however, are less than sure. Its blockchain-based verification system is difficult to understand, alien in nature, and has been prone to some high-profile losses through the actions of hackers, illicit money-launderers, bad luck, or ignorance. Added to this is its extreme volatility – although it is once again breaking records, having passed the $4,000 US ceiling and continuing onwards, its ragged pattern of climbing and falling by significant amounts make it difficult for retailers, investors, and industrial buyers alike to accept it as a stable form of fiat currency.
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.
But for an item of any sort, be it a gold coin or an Ethereum token, to be accepted as fiat currency, such an activity must be universally performed without hesitation. Very few people question the validity of a paper denomination like a twenty-dollar bill (even though they should, since it might be counterfeit). Similarly, consumers have become comfortable waving their “tap” debit cards or making online purchases, reassured by the apparent safety of banking systems and their own personal limited liability in case of theft.
People who are willing to pay with a card or with a phone app use faith in their country’s currency, and willfully ignore the profound risks involved, from card skimmers right through to data breaches. Modern consumers still overlook the fact that the greatest fiat currency of all is their personal data, since this becomes the entry point to a wider range of activities.
Thus, the nervousness around cryptocurrency is illogical. The same risks and reassurances exist within Bitcoin as within a coin or a card. If a billion people used Bitcoin daily, there might be greater chance of it stabilizing, or at least climbing along a smoother trajectory, less impacted by individual flash sells or market rumors. Overall, its value would continue to climb, based on its 21 million BTC mining limit and its consequent deflationary power.
Furthermore, increased usage might also open up the world of mining and fiat currency handling to a much wider audience, presumably diluting the influence of the criminal element, who have so artfully jumped in and exploited every facet of cryptocurrency with blinding speed.
Again, there is a social paradox here, given that every form of currency that preceded Bitcoin was, and still is subject to every form of criminal behavior known to humanity, including daylight robbery to laundering, counterfeiting and fraud. The fear people hold regarding Bitcoin’s potential for misuse seems not to apply to the fiat currency they currently use.
The slow acceptance of cryptocurrency has a parallel in the markets, specifically the faith placed by political leaders in the Dow Jones Industrial average, a bellwether collection of companies whose relevance is by and large a century out of date, and was arbitrary to begin with. When the Dow Jones closes high, peoples’ faith in the economy at large soars, even though there are many other indicators that would deliver a much clearer picture.
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.
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.
