Bitcoin – The First Disruptive Currency?
The current era is one characterised in large part by disruptive technologies, business models, social trends and constant economic crises. It's not inconceivable that even the most traditional bastion for storing wealth and conducting transactions -- money – could itself be challenged. Enter the virtual world of Bitcoin.
When a country such as Zimbabwe so debases it's currency so as to make it worthless such an economy often becomes dollarised. Why because US dollars are internationally recognised and trusted as a medium of exchange. But what would happen if the credibility of the dollar and other major currencies were to come into question?
The world's major central banks are engaged in an unprecedented and dangerous monetary experiment in the form of quantitative easing, which could still go horribly wrong if it is mis-managed. Then there was the debacle over Cypriot bank depositors with over €100,000 being forced to help to fund the bailout of the country.
These events hardly inspire confidence in the traditional financial system.
The attraction of Bitcoin in particular is that only a limited number of these 'virtual' coins are created and done so in a way to avoid debasement. They're also not controlled by a country, central or political authority and can circulate outside the traditional banking system and are borderless in terms of acceptance. And a growing number of businesses are accepting them as payment.
Technology, the ibiquitousness of the Internet, cloud computing, ever cheaper data storage, the explosive growth in web-connected devices has made it much easier and cheaper for new currencies such as Bitcoin to emerge.
A challenger to gold?
However, Bitcoin stumbled in its first major foray into the limelight – it was beset by hacker attacks and wildly fluctuating prices, which hardly inspires confidence. But what it did demonstrate is that there are possible alternatives to traditional currencies and intriguingly to gold. There are e-currencies backed by gold, but the value of the yellow metal is heavily influenced by central banks and mine output. Virtual currencies such as Bitcoin aren't.
Growing political interference in monetary policy and should depositors ever lose confidence in banks, the scene would be set for independent virtual currencies (IVC) to challenge the role of traditional money created by government mandated institutions. To be sure the world is still far from that happening. And arguments over the deflationary nature of Bitcoins along with their portability only makes them more attractive to those wanting to preserve their wealth.
However, any widespread move towards using IVCs may not happen via Bitcoin as it is still basically a cottage industry. But what if a large well regarded organisation(s) such Google or Amazon decided to create an IVC with similar characteristics to Bitcoin? At that point it could really catch on.
The widespread abandonment of traditional currencies would leave governments with some very difficult dilemmas and potentially make it harder to collect taxes. They could declare IVCs illegal, try and block their use on the Internet and use other draconian measures, in which case more physical alternatives such as gold may retain their attraction after all.
Bitcoins was potentially a shot across the bows for policy makers and they ignore it at their peril. The crowd can chose alternatives.