Why Bitcoin is not a currency and why can't it be one just yet? It's because a currency is more than a medium of exchange. A currency represents a value (in equivalent labour or means of subsistence) under a given set of economic and political conditions,
including and most importantly, enough power to defend such value. The first forms of currencies were receipts representing grains stored in temples in Mesopotamia. Their value largely depended on the strength of the armies defending them.
Such is the fundamental role of a currency, to represent the value produced by its holders. If only a cross-border mean of exchange, you might as well use salt. Bitcoin lacks the collateral value provided by a king, a central bank, or even a large commercial
bank, or any form of authority ready to stand and defend it as if it were in Fort Knox.
One should not confuse virtual currency with dematerialised means of payments. All currencies including the US Dollar are virtual -not because we use credit cards instead of notes but since the gold standard was abandonned. Ever since, the value of currencies
has depended on the credibility of governments to roll over their debts into new ones. Thus the mere collateral they are left with is their sovereign credit rating.
This is not to say that only central banks can create currencies. The Hong Kong Dollar was once issued by commercial banks. The Euro is not a basket, hence quite virtual too. Whether it is a bank, a fund or a consortium, some economic or political power
must stand for the value represented by a currency. When it fails to do so, then the currency turns worthless, or actually comes back to the value of its physical support, copper, nickel or paper. From the Weimach Republic to Zimbabwee, countless tales of
abandonned currencies prove that value depends on a perceived balance of collateral and power.
Where does this leave Bitcoin? In recent years, the G7 took their currencies on a rough path, with quantitative easing, political deficiencies and excessive debt. Doing so, they damaged the "credibility collateral" of their currencies, thus increasing their
virtual value. As a result, gold sky-rocketted and an alternative virtual initiative such as Bitcoin could emerge. Both gold and Bitcoin have no central bank, no king, no country. Both can be mined by those who know where and how to find it. Both are rare,
theoretically unlimited in volume and bear a cost to warehouse. But unlike gold, Bitcoin is not material, hence can't be used to rebalance the lost credibility of the other virtual currencies. Unlike gold, there is little reserve disclosure.
Unless a sovereign fund, a central bank or a regulated private institution offers a robust balance sheet as collateral for Bitcoin and discloses holdings to prove its credibility, then the value of Bitcoin will remain purely virtual. As such it merely depends
on the day to day demand, a derivative of media coverage. Will it blossom as Dutch tulips?
Blog updated: 29 May 2015 04:26:44