As we begin the new year, one of the biggest questions has to be whether 2013’s big bubble of Bitcoins will continue or whether it is just a bubble that’s about to burst. Advocates would obviously claim the former and critics the latter, and both have some substance.
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On the advocate’s side, the economy is in its early days and, like any new form of commerce, will have its challenges. The greatest of these is government resistance. Governments, along with the media, have labelled Bitcoin as an economy that fuels the drug trade, terrorism, money laundering and illicit crimes. Much of this spawned from the website Silk Road, which has now been shut down, but any torrent-based web service in the Dark Web can see that Bitcoin is of value, as it is the nearest thing to cash that’s out there. As a virtually anonymous currency, it can fuel illegal activities.
The advocates would defend their position by first saying that Bitcoins are not truly anonymous. They can be tracked and traced as every Bitcoin movement is logged with an IP address exchange to show who sold what to whom.
The advocates would also say that Bitcoin is similar to cash, so do you make cash illegal? No. And as with anything in the world of trade and technology, there are always some people out there who will use innovation for crime. Just as cybercriminals, launderers and paedophiles use the Dark Web to satisfy their needs, they will use methods of exchange in that network that work to satisfy them. That may be Bitcoin but, when Bitcoin did not exist, it was just as easy to use barter, gold, virtual accounts and other forms of value exchange to satisfy them. You don’t shut down the internet just because illegal activities take place on it, so why would you shut down Bitcoin just because some people use it for illegal activity?
If you can't beat them...
The arguments rage on and on, with governments accusing Bitcoin of being used for tax avoidance. Again, that may be true, but tax avoidance is legal. Tax evasion is not. The real issue that government faces is that Bitcoin can be used to move monies without government control. That’s the real reason they’re worried. Maybe they should be or, maybe, they should think about taxing in other forms. Rather than directly taxing income, tax consumption. Tax everyday usage of everyday services. Tax in a different way.
In other words, according to the advocates, Bitcoin Is going to succeed in spite of government blocks, so live with it. That is why we are seeing governments around the world struggling with Bitcoin. Some are advising that it is not used at all (Thailand), some see it as tradable instrument (Germany), others question its legitimacy (the US) and one is starting to see it as the citizen’s choice of stored value (China).
Whatever pans out in the governmental debate, the bottom-line is that a digital currency is here, and the natural question to follow is: is it here to stay? That’s where the real focus should be: not on whether Bitcoin is a bubble about to burst, but more upon what will be the digital currency of choice for the future.
Today, Bitcoin is a virtual economy worth just over $12bn. A year ago, it was worth $1bn. Next year, it could be worth $100bn. In five years, $1000bn. That is the core question: is Bitcoin the one? There will be ‘the one’, so is Bitcoin it?
That’s where I’m not so sure.
The new anything?
I know that Bitcoin is on a great whirlwind ride, and that folks are making a quick buck out of it, but is this the real cryptocurrency for the next generation? Is it the new Visa? I don’t know.
After all, there are an awful lot of other cryptocurrencies out there with names such as Litecoin, Peercoin, Namecoin, Megacoin, QuarkCoin, Primecoin and Feathercoin; and their values are all bobbling up and down rapidly.
In other words, the real point of Bitcoin is that it is leading the rise of a new generation of finance. A generation that is based upon digital exchange and fit for the network age.
Similar to a decade ago, when PayPal was processing a few million and had competition from big banks (Citibank’s C2it), big players (Western Union’s PayingFast), as well as new entrants such as ProPay and BidPay (the latter also acquired by Western Union), one dominant player will eventually arise.
Is that Bitcoin? Or, like MySpace was usurped by Facebook and Yahoo! by Google, will there be another, better model out there?
Some say there already is.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
