Can you believe Bitcoin is ten years old already? I’m sure there are some of us who, in 2009, were wringing our hands and gnashing our teeth over our 401K balances when we read about this new-fangled funny money that would someday disrupt sovereign currency regimes. Well, the dollar is still a dollar, the Euro still a Euro, the renminbi still a renminbi and so on, but Bitcoin and its brethren in the cryptocurrency space have surely disrupted financial systems and long-held monetary belief systems around the world. Just to give you an idea…in 2009, a Norwegian man bought $27 dollars’ worth of Bitcoin as a bit of a lark. That small purchase got him 5,000 bitcoins. Today, that stake would be worth almost $58 million dollars!
Suffice it to say that cryptocurrencies are here to stay, but we still don’t know how or whether they will achieve the ubiquity of national currencies. Without a doubt, people fear the lack of backing for cryptocurrencies. However you feel about a particular nation or zone (the Euro), the full faith and credit of a sovereign nation is fundamentally less risky and psychologically more comforting than a currency that literally sits in the guts of your computer. But, value is determined by what human beings say a thing is worth. Why is gold worth $1,500 an ounce? No government backs gold. As a material, gold has some very interesting applications, especially for space travel, but 75% of all mined gold is used in jewelry. It’s shiny and we like it so it’s worth $1,500 an ounce.
It’s no different with Bitcoin and other cryptocurrencies. The “mining” of cryptocurrencies costs real money, especially the electricity expense to run the mining computers. But, unlike gold, these digital coins will, over time, likely have wider-ranging applications across myriad of industries, especially in financial services. So, where there is value in the application of the cryptocurrency, there is value in the cryptocurrency itself. Why else would Bitcoin, despite its recent volatility, be worth nearly $12,000 per coin?
In the end, currencies, whether they are shells, metal, paper, electronic, or crypto, are used to pay for things. There is nothing new with this human construct which we invented to complement bartering over 3,000 years ago. Currency was and is a substitute for value; the value of goods and services. What’s new are the different ways we will use this new type of currency to pay for those goods and services. Financial regulators all over the world are gearing up to manage this financial ecosystem and there has been and continues to be pushback from national governments and the central banks they support. Don’t be surprised, however, if you someday read about crypto-dollars or crypto-yen. It seems logical to this writer that countries will catch up with the technology and recognize the efficiencies that come with a blockchain-based cryptocurrency financial system. And when I write “efficiencies,” I mean more tax revenue, which would be inevitable with the elegant, virtually errorless nature of cryptocurrency processing.
Managing Director of Private Banking
Orange Bank and Trust Co.