This week the Chicago Board Options Exchange allowed trading in Bitcoin futures. There has been great interest in the Bitcoin phenomenon all year, leading up to this partial recognition of it by the authorities.
Those who had some money to spare for a high risk adventure have been able to do well from buying Bitcoin. This year it has attracted many more new fans. As it is something with restricted issuance, the more buyers there are the higher it can go. Trading in futures for Bitcoin allows more purchasers to emerge, who can now buy a related asset to Bitcoin that settles on a regular exchange.
The problem with Bitcoin is it has no intrinsic value. No state or Central Bank stands behind it. Gold is the traditional global alternative to fiat currencies. The precious metal has an alternative use for jewellery and decoration, and a well-established way of storing and trading it. Some gold is fashioned into gold coins. Bitcoin has no such alternative use, and no long history of acceptance as alternative money.
Bitcoin’s claim to fame is as a substitute for state backed paper currencies. Its supporters point out that its supply will be much more limited than the supply of dollars or yen. Some imply that it will keep its real value. It has done far more than this so far, by rising hugely. It has also occasionally fallen back very sharply. Bitcoin does not represent a well accepted long term store of value that just protects you against the inflationary tendencies of official money. Buying Bitcoin takes you on a volatile ride.
There are no deposit guarantees and no bank regulations to fall back on if something goes wrong.
Money has three main uses. It is a store of value, a means of exchange, and a unit of account. Some Bitcoin enthusiasts claim it is able to do all these things. In practice not many shops or businesses accept Bitcoin as payment. It is a very variable store of value, with most of the volatility so far being on the upside. Because the price is so erratic, it is not much of a measure of the worth of other things.
It is possible Bitcoin will battle through to greater acceptance as a mean of exchange. The more it is talked about and the more people decide to own some, the more likely it will grow more of the characteristics of money. People are not yet valuing their properties or other assets in Bitcoin, sticking with pounds or dollars. Most shops still want cash or card money based on the national currency.
There is nothing to stop private interests trying to create a competitor money to the monopoly monies run by all the main countries of the world. That in turn creates a problem for those who do. There are many other private monies being created as rivals to Bitcoin. Individuals interested have to decide which if any of them will be long term winners.
Regulators and many professional investors are wary of these developments. All can see that artificial scarcity can lead to higher prices. But all can also see that creating money requires instilling confidence about its origins and likely future. Anyone putting money into Bitcoin has to rely on its blockchain technology and keep their keys safe to access their holding. There are no deposit guarantees and no bank regulations to fall back on if something goes wrong.
People used to accept that only governments and Central Banks could literally print money. Today the digital revolution brings closer the ability of others to literally print money. They will discover that it all depends on gaining the confidence of enough people. Only if a large number of people believe in the traded items that want to be money will they start to have money like characteristics. People expect the dollar and sterling will be here in 50 years’ time, backed as they are by complex and regulated banking systems and by the taxpayer resources of the US and UK economies. Who knows which of the challenger private monies will still be here, and what will by then stand behind them? Individual crypto currencies could plunge in value leading to a wide ranging loss of investor confidence. The rises and falls of the dollar, pound, yen and Euro against each other will probably look modest in comparison to some of the huge swings we will see in challenger money.
The above article was first published by Charles Stanley on 12th December 2017