Those following and holding Bitcoin and its variants have been struggling recently. Supposedly, Bitcoin peaked at almost $20,000 sometime in December 2017; it is about $6,300 today.
I say ‘supposedly’ because there is, by design, no centralized database on actual Bitcoin transactions. We take what the internet says at face value. You could go to an exchange platform, but a Bitcoin expert has schooled me to say that you’re then relying on the integrity of the exchange platform.
To hold Bitcoin is to keep a secret; to sell it is to tell the world you want out, but then you’re no longer keeping the secret.
But back to basics.
Bitcoin is an asset created by, of, and for the encrypted internet. It is for anonymous transactions, usable as a substitute for ordinary cash or bank notes.
What happens if you want Bitcoin is that you use ordinary cash to buy Bitcoin from an existing holder. Or you can ‘mine’ Bitcoin (but that’s another story). You then hold your Bitcoin directly with your own self-created password, which you input into an internet-connected device, and that device and associated software allow you to transfer your Bitcoin to another. So far so good.
The problem is that the currently available bitcoins certainly fluctuate in price, even as you can’t really tell what that is until you find a willing buyer or seller.
There are no valuation stories, as in the cases of gold (‘intrinsic value’), or stocks and bonds (the present value of future income flows and redemption at maturity, if any; or Keynes’ infinite regress model that says the value is what all other holders think it is at a given moment in time).
Still, it seems that the holy grail is for a bitcoin that is stable for at least a certain determinate or even indefinite time against a major currency, such as the US dollar.
In short, we may want or need an alternative bitcoin that is like a dollar banknote. We imagine this alternative works better than keeping banknotes under the mattress or in a safe deposit box, because it avoids thievery and the transaction costs of going to the safe deposit box.
It is not without problems. If you’re struck by amnesia, your bitcoins are lost forever.
An official alternative to Bitcoin with stable value doesn’t exist. Not yet. But a central bank like the US Fed can create such an alternative.
The Fed could allow anyone to buy something we might call the official bitcoin dollar in exchange for a guarantee that bitcoin dollars are exchangeable into US banknotes.
If this scheme works, it will be because it would reduce the costs now paid by the Fed for printing currency and going after counterfeits.
In this scenario, the blockchain encryption technology ensures that counterfeit bitcoins cannot exist.
The similarity with bank notes will have to be carried to an extreme that meets certain anonymity and privacy standards. The issuer of a bitcoin dollar will have to honor the bearer of the account, provided that said bearer satisfies identity requirements.
However, to deter money-laundering, bitcoin dollar accounts would not be available to corporations. The Fed could also impose limits on how many bitcoin dollar accounts an individual can have.
At the same time, the use of such accounts will have to be protected by bank secrecy rules, but subject to money-laundering limits.
For example, bitcoin dollar transactions in a particular account cannot exceed a limit of $10,000 per day. A maximum-balance limit of, say, $100,000 per account, could be imposed, in parallel with limits now applied under existing deposit insurance schemes.
Interestingly, such official bitcoins could then have the benefit of deposit insurance.
Will the advent of an official bitcoin dollar kill the existing bitcoins? It could, especially if bitcoins continue to be attractive only as speculative investment vehicles rather than as a means of payment.
But those who want private bitcoins could create alternative bitcoins whose “¹mining”º or supply-side arrangements are fully transparent, and whose value could be stabilized in some fashion desired by the bitcoin holders.
In short, there could be different bitcoins for different purposes. Caveat emptor and “¹know your customer”º rules would nonetheless still be needed.
However, such bitcoins would remain without the guarantees of deposit insurance, and they may still be vehicles for speculation.
My best guess is that bitcoins or cryptocurrencies will evolve, i.e., the fittest will survive.
The existing Bitcoin and its present-day variants are pretty much like the legendary Dutch tulips of the 17th century. They may not become extinct but their value would be that of tulips or play internet money.
Take your pick.
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Author’s email: oroncesval4@gmail.com
