EDITORIAL: Is bitcoin truly a new ball game?
A key feature of people who argue ‘this time it’s different’ is that their evidence is often temptingly convincing
There are two phrases no person should ever utter. The first is, "Do you know who I am?" and the second is, "This time it’s different." The first suggests vanity beyond reality, since obviously the person being spoken to doesn’t know who you are or, even worse, doesn’t care.
The second suggests naivety about history and humanity. So when anyone says bitcoin, for example, is unprecedented, your scepticism levels should zoom into the red zone.
One of the key features of people who argue that "this time it’s different" is that their evidence is often temptingly convincing. Bitcoin prognosticators argue that the virtual currency’s chief virtue is that its design is attuned to the modern digital era and consequently contains utilities that "fiat currency" does not. The key to that design is a distributed ledger that records every debit and credit instantly, frictionlessly and freely. The ledger constitutes a threat to institutions that impose themselves between creditors and debtors, otherwise known as banks.
This is true in a way, but cash is also a kind of distributed ledger. When a cash transaction takes place, the debtor’s account is reduced and the creditor’s account is advanced instantly, frictionlessly and freely. The fact is that over the years, people have been discovering new ways to solve an old problem: how to ensure that transactions between people physically distant from each other are credible to both. And in doing so, they face the same problem. Creditors want money to grow slowly, debtors want it to increase quickly.
Over the past decade, debtors have been winning at an alarming rate. In the US, for example, since the start of the recession in 2008, the amount of cash and near-cash — the thing economists describe as M2 money supply — increased from $7.5-trillion to about $10-trillion in 2012. That increase would normally take about a decade.
In some sense, bitcoin might be a response to this predicament. It seeks to solve the tension between creditors and debtors by coming down squarely on the side of creditors. There is a limit to the number of bitcoins that can be mined — it’s just less than 21-million, about double the number that have been minted so far. Hence, the currency is designed in such a way that its value will increase.
Yet, if you were to claim that bitcoin is absolutely, fundamentally different from "fiat currency", you might be surprised. People who own computers that mine bitcoins want fees for doing the mining to increase. Users want them to stay low. Recently, they could not agree and bitcoin "forked", unwittingly illustrating that it has some of the characteristics of the fiat currency it claims to despise.
The recent massive increase in the value of bitcoin has made the currency a global talking point, and of course everybody wants to know whether it is a bubble or not.
The problem is that the usual metrics of valuation don’t apply: historical prices are too recent since the first was traded just eight years ago, and the supply demand ratio is skewed because buyers are almost entirely speculators. Like gold, the current value of its future cash flow is zero. It has some sort of scarcity value, but that is unquantifiable.
Often the key to deciding whether a market is in a bubble or not is to ask: is debt being abused to take advantage of the buying opportunity? In other words, are people borrowing to buy bitcoin, as they did for example during the property bubble? It doesn’t seem they are – at least not yet. So we are obliged to accept that the stratospheric increase in value is something akin to a genuine result of supply and demand, as long as you accept there is no intrinsic value and all the buyers are speculators.
While it remains a curious oddity, governments seem happy to let the future find itself. But historically, governments have jealously guarded the power to control their creditors. That point has not been reached yet, but it will.