For example, Bitcoin was designed to be a payment method, but more and more people have come to view it mainly as a new investment category.
Because regardless of all the innovation unleashed by the arrival of Bitcoin which appears set to cause permanent changes to the financial system, some of the economic claims being thrown about deserve, at the very least, closer consideration.
Money is frequently defined as follows: something is money if it is generally accepted within a specific society as a unit of account, a payment medium, or a store of wealth.
This group can be likened to a sort of society that is spread across the world and has become pretty big.
In early February 2021, ElonMusk announced that soon, you would be able to buy a Tesla with Bitcoin, but the next person that the same news item interviewed was a Tesla dealer who strongly denied that his business would accept such payments.
On March 20, 2021, the Dutch newspaper NRC reported that approximately 200 companies in the Netherlands accept Bitcoin as a means of payment, noting that, for many, this above all is related to marketing campaigns.
Simultaneously, it’s also possible to borrow money to invest at a predictable interest rate and to, over time, pay the interest and loan repayments from the generated income.
Therefore, the ROI of Bitcoin is only related to the price of the Bitcoin itself, expressed in regular currency.
Because there’s hardly anywhere that they can make a payment in Bitcoin, Bitcoin investors can only claim their return if another user is prepared to invest that amount into Bitcoin at a higher level, in exchange for regular currency, of course.
Of course, the same can be said of an asset class like precious metals, too.
Nonetheless, it’s a cold hard fact that these two means of payment have been in use for thousands of years, even if their significance has declined considerably.
Box 1: Paying Taxes in BitcoinIf the government backs a currency as a means of payment, in a normal economy, it greatly helps to increase general acceptance.
Regular money can be used for more than just payments, it can at the same time be borrowed or invested.
A great deal of attention is going to those people who got into Bitcoin in early 2020; they can now collect a profit thanks to the current, much higher price.
The underlying problem, therefore, is that there is no underlying Bitcoin economy in all costs and revenues are in Bitcoin.
That said, Bitcoin fulfills the function as a store of wealth rather well, but its high volatility also makes it high risk.
One very old money standard was based on massive stones , while the longest functioning money standard throughout a large geographical area was based on Cowry shells.
As noted, Bitcoin shares this characteristic with other types of fiduciary money, like the aforementioned Rai, shells, or currency and fiat money.
It is also true that as long as people trust in the government, regular money’s status as legal tender enjoys some protection.
Back in the 17thcentury when Tulip Mania was sweeping the Netherlands, there was one type of tulip bulb that was worth so much you could trade it for a fine canal house in Amsterdam.
In order to make any claims about inflation in the world of Bitcoin, you would need to identify exactly which goods and services were being traded in Bitcoin globally, how large a share each individual product has of purchases in Bitcoin, and what the price development of every product is over time.
If the amount of money cannot grow in relation to economic activity, it can only be accommodated by either an ever-increasing velocity of money or a structural decline in prices.
The artificial scarcity of Bitcoin is an advantage for Bitcoin investors as long as enthusiasm for Bitcoin continues to grow: rising demand with inelastic supply by definition leads to a higher price.
Considering the fact that the amount of some newer cryptocurrencies is not limited in advance, unlike Bitcoin, the crypto world is neither more nor less inflationary than the regular money market.
That is more than the energy consumption of the whole of the Netherlands and is about thirty times the annual energy production of the Dutch nuclear power plant in Borssele.
Here the crypto devotees seem to be confusing the Bitcoin blockchain with the “currency.” Because as a means of payment, Bitcoin adds no real functionality compared to regular fiat money.
To put it bluntly, for the time being, the speed of the blockchain is to regular payments what a handcar is to an F16 at top speed.
Now there are other cryptocurrencies that have their own networks; some are much faster than the blockchain, with a number of them almost capable of matching the processing speed of the regular payment system, as described here.
Anyone searching the internet for”Egg Bank” today has a good chance of ending up on the websites of companies offering women the opportunity to have their eggs frozen.
But when criminal transactions are conducted via the blockchain, tracking down the criminals requires much more law enforcement effort, although gradually the police are becoming more effective intracing Bitcoin transactionsIncidentally, the number of criminal transactions completed in Bitcoin accounts for less than 1 percent of the total number of Bitcoin transactions, I recently heard on a radio interview.
It was also announced at the same time that Tesla hadpurchased USD 1.5 billion ofBitcoin, the equivalent of 3 percent of Tesla’s balance sheet total and about 8 percent of itsliquid assets.
If Tesla were to lock in the Bitcoin price of a car for an extended period of time, thecompany would run the risk of making its dollar-denominated operating income increasinglydependent onfluctuations in the price of Bitcoin.
Thus considered, it is better to pay for a Tesla in dollars or, should people want to monetize their holdings of Bitcoins to buya Tesla, they shouldsimply do so through a crypto exchange and pay for the new car with the dollar amount released in the process.
Some analysts point out that if Tesla keeps a large amount of Bitcoin in its portfolio, there is achance that its share price could become increasingly correlated with the price of Bitcoin.
The absence of a central regulator for the blockchain is good for privacy, as explained above, butit also means that if anything goes wrong, no central authority can be called upon to fix it.
The internet hasstories to tell about lost passwords, people who deleted passwords while reformatting their harddrives, and people who discarded old computers only to realize their wallet had literally ended upon the garbage belt with it.
But, of course, you could also argue that the people who chooseto hold their assets inBitcoin are aware of this.
It illustrates the inherent tension between, on the one hand, the high degree of privacythat many Bitcoin users see as a huge advantage and,on the other hand, the fear on the part ofthe regulator that this degree of privacy makes it all too easy for criminals to conduct illegaltransactions through Bitcoin.
The Chinese central bank is also considering using DLT for the central settlementofits CBBC,theDCEP,but as far as we know there is not yet a definitive decision.
Contactless payments are also possible in Germany and Austria, but it is not as popular there as itis in the Netherlands.
Given how hard itis to achieve political cohesion in a group of about twenty countries that are similar in many ways,the chancesthat it could be achieved on a global scale are zero.
It would enormously influence the way theinternational financial system is organized and could place restrictions on national monetarysovereignty.
It all remains to be seen, but the authorities immediately recognized that the Diem has thepotential to become much bigger than Bitcoin, thus affecting the monetary autonomy of centralbanks.
The composition ofthe Diem would need to be like the SDR, the InternationalMonetary Fund’s basket of currencies which is comprised of the most important currencies in theworld.
The Diem does not exist yet, but if one day it does, in its original version, possibly supplementedwith various national stable coins , then it is not at all clear what the addedvalue of Bitcoin will be as an international payment means.
Although some of these companies are starting to look like banks in many ways, they rarely are, which makes sense, as they would be directly subject to banking supervision.
So if a Bitcoininvestor has made a nice profit in Bitcoins then, in order to collect this profit, they must find someone else to take the Bitcoins from them.
Who could object to that?Nevertheless, the possibility remains that such measures, which regulators are bound to lean toward sooner or later, will subsequently cause Bitcoin’s light to burn out quickly.
Regulators have worked hard in recent years to strengthen the stability of the banking system and won’t be happy to see it now eroded by shadow banking.
Overall, I get the sense that the DLT, the real innovation behind crypto currencies, is likely to become a permanent fixture in the financial system.