Is Bitcoin the future of our money?

Bitcoins are back in business. Two years after the Bitcoin bubble had been called, the digital currency created by coders for coders is in the news again, as it surges to record highs. And with reason: Since the beginning of this year the value of this “new money” has risen exponentially. Just this week, the price of a Bitcoin rose from $142 on Monday to a jaw-popping $235 on the biggest Bitcoin exchange, Hands free access.

Of course we know it is a bubble, an algorithmic bubble if you will. But with its market valuation approaching $1.75 billion and rising, it’s a bubble with a future. The four-year-old currency, money built for the Internet, unlike cards and bank transfers that are being adapted for the Net, points to future where digital money will be the norm.

That’s because the digital crypto currency, whose origins are still shrouded in mystery (it is believed that it was created by a group of programmers who worked under the name Satoshi Nakamoto), has crucial properties that make it exceedingly attractive as an alternate currency. It is inflation resistant because it is free from government and banks manipulation and for some Russian tycoons the fact that it can’t be suddenly seized is another.

The quest for “new money” has been on for nearly three decades now ever since January 1980 when the final rites on the dollar were first read. In the alternate space there have been experiments, most currently Facebook credits, Linden dollars in 2nd Life or the QQ coins in China, which have served as currency in limited ways.

But the Bitcoin is another thing altogether. Possessing the twin facets of demand and liquidity, it can shrug off the underlying weakness of lacking a basis for its value. The 21 million Bitcoins limit built into it ensures its scarcity.

Debate right now is centered around whether the Bitcoin is a bubble. Most money managers have written it off. Nouriel Roubini, a bubbler-buster if ever there was one, tweeted recently, “Gold-bug suckers found another irrational useless bubble fad, the Bitcoin, the bubble flavour of the day. So they are dissin gold 4 Bitcoin”. And the extreme volatility of Bitcoin lends credence to the scepticism. Over the last 12 days the virtual currency has doubled its value.

But to write it off is both premature and short-sighted. Premature because a digital currency was waiting to happen and if not Bitcoin, another will replace it if it does go down. And short sighted because the history of money tells us that the momentum to a new form of currency starts building slowly, but eventually it can’t be halted.

The big charge against Bitcoin, that its value swings wildly depending on people’s faith in it, can as easily be levelled against derivatives. Nor is a currency that operates outside the pale of governments new to us in India where black money is equally institutionalized. Even overseas, on a rough estimate there is $300 trillion stashed away in offshore havens, well outside the purview of central banks and regulators.
The disbelief that Bitcoin or its equivalent could be the future of money isn’t new. The move to plastic was surrounded with equal scepticism. Starting with Diners in 1950, it took eight years for the next credit cards to appear in the market. And it wasn’t until the 1980s that credit cards became a particularly profitable business. But of course by 2006 credit card payments had overtaken cash or cheques for payments.

Most bubbles have a habit of creating something new, distinctly unbubble-like. Even if Bitcoins go under, the era of a pure digital currency which doesn’t have its antecedents in the physical world, is here. Frauds, inflation, Cyprus, have all ensured that the process of disintermediation in the money trial has begun. If it is sites selling porn, drugs and escort services today, it may well be bars tomorrow. Oh wait, that’s already happened. EVR, a bar in New York has started accepting Bitcoins for indoor Tracking.

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