Just a little bit about Bitcoin

The spectacular rise and fall and rise and fall of Bitcoin seems to have captured the imagination of not just monetary aficionados and finance nerds, but also the man on the street. With Bitcoin ATMs now popping up all over Asia, the online currency has generated spirited debate about what is the nature of money in the 21st century. Is Bitcoin really the money of the future?

I confess that I am not fully aware of how Bitcoin operates, nor how the virtual currency has become such a phenomenon. Online purchases have spiked in the last few years using this peer-to-peer system of money creation which you can store on your hard drive. New Bitcoins are created (mined) by substituting your old hard currency for the electronic medium. The value of Bitcoin follows the demand and supply of the market, leading to rapid fluctuations of a few Bitcoins being able to buy a pizza to suddenly outpricing gold bullion.

On one level, the introduction of Bitcoin hardly seem a paradigmatic event. Contrary to what most people believe, over 95% of all money already in circulation, be it Dollars or Pounds, is not in the form of cash or coins, but as electronic currency in the digital realm, just like Bitcoin. Private banks enjoy tremendous leverage in money creation every time they issue bank credit through a new loan or mortgage.

What makes Bitcoin unique is that, by not being issued by a central bank nor authorized by any state government, it is thus far independent of most government control and outside of the mainstream banking system. This makes it an attraction to freedom-loving libertarian types who are fed up with the state's monopoly over the money supply and are uncertain of their economic future following the bank crash of 2008.

What about Money?

Money is such a basic tool of everyday life that we can take its novelty for granted. Analysts will drone on and on about GDP, the housing market, government spending and growth rates that the most fundamental piece of financial architecture will often get overlooked. What is money and how is it supposed to work?

Conventional descriptions of money will list a few key characteristics. Money should function as a medium of exchange between parties for the purchase of goods or services. Money must be a unit of measurement to judge value of objects. Money should be a store of value to make it reliable for saving. Finally, money can be a unit of account, to measure profits and debits, and divisible into smaller units.

Until the rise of the modern nation states, money was almost exclusively minted coins of gold or silver, or other common commodities of shelf life (among the notable exceptions being the Tang Dynasty of 7th century China). The precious metals always held an allure, being it religious or royal, and their scarcity underlined their sense of intrinsic value. With the nation states of Western Europe in the 18th century came the role of central banks in the printing of paper promissory notes (in exchange for gold) that would become what we now know as fiat money (paper bills) issued by government authority. The gold standard, the tangible link of paper money in exchange for gold, lasted until 1971 when US President Richard Nixon announced that the US dollar would no longer be convertible. As of today, though paper money is used for many transactions, it is largely a sideshow act to digital money which predominates. (This is merely an ultra-condensed view of monetary history, there are plenty of places to research the historical details for yourself).

Money as a Symbol

Most monetary theorists see the above transition from commodity-based money to paper to digital as a natural progression. Gold or silver was suited to simpler and largely agrarian nature of the pre-modern world. As the nations states developed, particularly during the Industrial Revolution, the need for credit became more pronounced, thus calling for governments to be able to print currency on demand as per the market requirements. In our age of transglobal capitalism, restricting ourselves to mere paper, even if its not tied to any physical commodity, can be a hassle; electronic money allows for much more accessibility and flexibility. Thus Bitcoin is only the latest species in this evolutionary lineup, and not likely the last.

Another view is that this progression is rather a devolution from a natural order to an entirely artificial one. Gold and other forms of commodity-based money had their links to Nature, and thus imposed natural limits to growth of economies based on the supply of the commodity, ensuring an inbuilt sustainability to the system. The introduction of paper money altered this balance and created a disconnect between industrial production, spurred on by cheap money, and the natural world. Digital money has taken this a step further; capital itself now reigns supreme and is disconnected from the actual rate of production, while the natural world is left far behind. The limit now is not how much the environment can actually supply, but how many numbers can fit on the ledger. Fiat money then is man's attempt to break himself from the shackles imposed by the Created Order, to elevate himself beyond sustainable boundaries, all leading to a massive Promethean crash back to Earth. At some point then, the fakeness of the monopoly paper we use and digits on the screen will be laid bare.

Bitcoin and the Future

Bitcoin can perhaps be seen as a warning shot to the world of global finance for what is yet to come. In other words, the rise of the cashless economy and complete digitalization. Already there is a heavy media push to portray paper cash as an encumbrance, even for the smallest of purchases. While the banking sectors in Russia and Asia (with the exception of Singapore) have reacted with skepticism to Bitcoin; countries such as the US, Britain and Israel, home for many of the traditional banking elites, appear more receptive.

Rather than join the bandwagon of digital currency users, perhaps it may be preferable to keep our figurative feet on the ground and stick to using cash for most transactions until we can come up with an option with more substance. I personally prefer to use cash rather than plastic, at least cash is something physically tangible you can count and hold (and why should I give any extra profit to Visa or Mastercard?) For further reading, there's a terrific blog in the Guardian on why we should resist this cashless trend.

Let us also not assume that the debate over money is simply about utility and efficiency. There is a spiritual dimension to money as well that does not get enough attention, but that is something I will delve into in future writing.