Despite the clamour, Bitcoin has NO CHANCE of becoming a reserve currency – Op Ed
The latest parlance from the Bitcoin fraternity is the speculation that the digital currency may become enlisted into the ranks of the International Monetary Fund’s esteemed reserve currencies. Not a chance….. Pundits, commentators, experts, mavericks – call them what you will, that have taken to the mainstream media in order to peddle the notion that […]
The latest parlance from the Bitcoin fraternity is the speculation that the digital currency may become enlisted into the ranks of the International Monetary Fund’s esteemed reserve currencies.
Not a chance…..
Pundits, commentators, experts, mavericks – call them what you will, that have taken to the mainstream media in order to peddle the notion that Bitcoin may become one of the majors, backed by global authorities, have not stated any rational reason why this could happen, or how the intrinsic method by which Bitcoin is issued – it is by nature a peer-to-peer mining process – can be changed (which it cannot) in order to be generated by a central issuer which could become the reserve bank for the currency.
It is simply not possible to extricate Bitcoin from its peer-to-peer modus operandi, as that is the entire purpose of its existance.
The massive upward direction that the value of Bitcoin has taken over the last few days is just another surge in the upward direction against the US Dollar, the same as many other dramatic fluctuations over the last two years.
The upward moves of significance can be attributed to just a few circumstances:
1) The demise of the Bank of Cyprus and Laiki Bank in 2013 when Bitcoin was in its relative infancy and nobody cared about the alternative applications of the blockchain technology that it is built on. The controversial ‘bail-in’ imposed on bank deposits held in Bank of Cyprus and Laiki Bank plus the temporary capital controls caused Bitcoin to go up to $247 to 1 BTC. At that time, this was unprecedented.
2) Establishment of Bitcoin exchanges in New York, Switzerland and Japan. By the end of 2013, the value was $1000 to 1 BTC.
3) Capital controls and instability of sovereign currency in despotic countries with basket case economies yet an intelligent population such as Argentina. In early 2014, Bitcoin was worth 30% more in Argentina than in neighboring Uruguay due to the draconian capital control laws and a peso that nobody wants, whose value drops like a falling girder every day.
The downward moves have been just as dramatic:
1) MtGox, the first commercial Bitcoin exchange, failed, losing 750,000 Bitcoins. Initially this was considered to be an outside hack which was possible due to compromised security measures within MtGox’s cold storage wallets, but actually it turned out to be an inside job and now Mark Karpeles is in very big trouble indeed as the long arm of the law has been feeling his collar for quite some time and will not let go. MtGox went insolvent in 2013 and one year later, its parent company, Tibanne, went into official receivership.
2) Ironically, if something slightly naughty becomes legal, then it loses its edge. Bitcoin was previously the preserve of mavericks and anarchists wishing to circumvent the system and create their own sub-economy which no central government could have any influence over.
With widespread acceptance and licensing, the establishment of Bitcoin exchanges and firms taking the technology to new levels all the way from Tel Aviv to Silicon Valley via London, it is no longer an outlet for those wishing to stick it to the reserve banks, but indeed a very clever electronic instrument which now has the infrastructure and government approval to go mainstream.
3) The noise has died down. Simply, it is not new anymore. Not obsolete, just not new. The wow factor has gone. I think that the Tesla is the biggest step forward in automotive engineering in the last 50 years. Would I buy one? Yes without doubt. Would I pay $100,000 for it? Probably. Would I pay $100,000 for it in 10 years time when 50% of all cars are electric and have 500bhp? No. (I still drive a 14 year old Oldsmobile which probably explains why I never took up Bitcoin trading).
There are three talking points currently surrounding the banal notion that Bitcoin can become a reserve currency:
Bitcoin has posted its biggest three-day rally versus the Dollar since December 2013
Among the reasons being offered are Europe’s VAT ruling, China capital holes and ‘reserve’ talk
The fledgling fiat alternative can reflect a fledgling market, Chinese FX gap and SDR evolution
Whilst it is a fiat alternative, that is all it will ever be.
To be a reserve currency, a unit must be issued by a central bank, and the central bank must fulfill certain criteria. For example, the Yuan may well become a reserve currency, but only the Hong Kong based offshore Yuan (CNH) and NOT the mainland Yuan (CNY) because China is a communist country and has capital control laws, and is not aligned with other IMF reserve banks in the free market nations.
The fact that China is a powerhouse and has adapted communism in such a way that the entire country is the epitome of modern efficiency and quality is not the point.
China’s industry, whether small or large, must be minimum 50% owned by the state. The government departments effectively invest in your business and drive it forward completely free of charge, then the government makes its revenues from profit on business. Genius. However it is an internal system and therefore reserve status will never be achieved, as China wants it.
China would lose its competitive edge if it opened up to the rest of the world. The world needs China, and China knows that, so it maintains control which means full employment, and ability to buy stakes in foreign firms at government level and then manufacture the products in China under license for the domestic market.
It benefits the country to block the outside, and the same applies to Bitcoin.
The only reason that Bitcoin technology ventures have been so successful this year in securing such gigantic rounds of funding is due to the blockchain technology which underpins Bitcoin.
Mainstream fintech companies, payment processing firms and banks can use this technology for other purposes, however it is completely integral part of Bitcoin and cannot be separated, therefore the two come as a package, with the currency part of it being superfluous in most commercial applications – its the blockchain that is the important part.
Companies such as 21 Inc have received vast venture capital investments. In that particular case, a record $116 million round of funding was secured just a few months ago.
This is a tangent, however. The two aspects bear no similarity because technological innovation and large scale venture capital investments in blockchain does not qualify Bitcoin for reserve status.
That would be like going to a high street bank in a country whose tender is not a reserve currency in the 1980s and saying “your NCR cash registers are top of the range, therefore we can make the currency inside them a reserve.”