Bitcoin – The next major currency?
Mathew Kaleel, Diversified Alternatives Portfolio Manager, discusses the rise of Bitcoin and the six properties it must exhibit to become the next major currency.
With a 41,000-fold rise in value since inception, Bitcoin’s future is reliant on completing its transition from academic whitepaper to legitimate currency.Chart 1: Bitcoin in US dollars
Source: Bloomberg, As at 30 June 2017.
To achieve success, Bitcoin will need to overcome the reputational issues that stem from its association with criminal activity, teething issues as it gains scale and address the low levels of understanding amongst the general population of its features and benefits. However, it will ultimately be the ability to demonstrate its worth as a currency that will determine success.
The six properties of currencies
There are a number of characteristics that an item must exhibit in order to be considered a viable currency. Bitcoin can demonstrate most, but not all:
|Durability||✓||Bitcoin can’t break down in the way that a physical item can degrade and tarnish as it is kept online, so it could be argued that Bitcoin’s durability is absolute.|
|Portability||✓||The ‘BlockChain’ (a shared global record) keeps track of ownership and transactions online. As such, portability is not a consideration in a physical sense, unless the owner takes their holdings offline.|
|Divisibility||✓||While one Bitcoin currently equates to approximately US$2500, there is a maximum level of divisibility to eight decimal places that currently applies, approximately US$0.000025 – ample divisibility for any scale of transaction in today’s terms.|
|Uniformity||✓||One Bitcoin in Australia is equal to one Bitcoin in Russia (and the world over for that matter). While uniform products may vary in price between markets, Bitcoins exhibit global uniformity in the value.|
|Limited supply||✓||In order to maintain its value, money must have a limited supply. Bitcoin is limited to 21 million Bitcoins, and neither institutions nor individuals can produce more Bitcoins. As the total supply is permanently capped at 21 million, it is likely to grow in value as a result.|
|Acceptability||✘||If Bitcoin can become universally accepted or widely accepted across key sectors, without fees to users, its utility and value as a currency will grow.|
Whether Bitcoin becomes the success story of digital currencies or is destined to be a pioneer in a long line of iterations remains to be seen. The reality of digital currencies is that there are relatively few barriers to setting one up, compared to other forms of currency. Regardless, it is the six properties of currency that must be cracked in order for any currency to flourish.Glossary
Bitcoin: Bitcoin is a decentralised digital currency that uses peer-to-peer technology to enable instant payments. Bitcoin uses cryptography to control the creation and transfer of money, rather than via central authorities.
Blockchain: Blockchain is a decentralised, public ledger of all confirmed Bitcoin transactions in chronological order.