he holders of the “currency of the future or the future of currency”, as Bitcoin is rightly referred to, have had a good return of late. And, it is no longer news that digital currency had become legal tender in the little Central American nation of El Salvador with a population of 6.4 million inhabitants as at 2020.
The adoption of a digital currency by a country with barely a third of the population having internet access may be dismissed as a PR gimmick by others. Protests were held in the streets of El Salvador. Let us not, however, dismiss this opportunity. Esperanto, the future language, was never adopted as a national language.
For those who are unfamiliar with Bitcoin, it is a technology that claims to solve a slew of issues with traditional national currencies. Its purpose is to protect wealth against inflation, government intervention, and financial intermediaries.
Regrettably, it does not function. Some products become popular as a result of their utility. Bitcoin is popular despite the fact that it is largely useless. Its success stems from the fact that the value of a Bitcoin has skyrocketed since its inception in 2009, making some people extremely wealthy and driving others to believe they, too, can ride the Bitcoin rocket.
It is not a virtual currency in the traditional sense; it is virtual gold, a speculative investment vehicle made possible by some cutting-edge technological advancements. It is the ludicrous apotheosis of our monetized economy, a non-productive asset. Bonds came first, followed by synthetic bonds, and finally, Bitcoin.
Bitcoin’s and its hundreds of imitators’ appeal is a result of understandable apprehension and uncertainty. It is difficult to say which aspects of human existence might be improved by the internet in this era of technological disruption, and people who did not see the growth of Amazon, for example, should be wary of dismissing Bitcoin’s potential.
However, it is important to understand what Bitcoin is at this time.
Bitcoin’s supply is limited by design to avoid inflation. This is not to say that Bitcoin’s value is not fluctuating. It occasionally rises, which is a wonderful perk that standard currencies do not offer. On the other side, the value can sometimes fall as quickly as it might rise during a period of hyperinflation. El Salvador, which has made it mandatory for businesses to take Bitcoin, has promised to make it feasible to convert the cryptocurrency into real money quickly. That is not exactly a sign of a functioning/practical currency.
Bitcoin’s inflexible construction renders it catastrophically unsuitable as a substitute for national currencies. It follows a long tradition of stopping politicians from making terrible economic policy decisions by prohibiting them from making any. An older example of this terrible concept is exemplified by the gold standard.
Bitcoin’s security is significantly exaggerated; it is possible to lose it. Indeed, according to some estimates, 20% of all Bitcoin in existence is no longer accessible due to forgotten or lost passwords. In 2018, over 100,000 users lost their Bitcoin and other virtual currencies entrusted to Quadriga, a Canadian corporation, after the founder died unexpectedly, leaving no trace of the company’s virtual vault password.
Bitcoin might be confiscated or stolen as well. During World War II, the German government depended on a code known as Enigma, which their mathematicians said could not be broken. It was famously broken by the British, who essentially cracked the code by figuring out the password. That was also how the US government appears to have collected a portion of a Bitcoin ransom payment worth several million dollars from cyber attackers (hackers) who blackmailed the owners of the Colonial Pipeline (the country’s largest pipeline system for refined oil products) earlier this year.
Perhaps more importantly, using Bitcoin as money is complicated and expensive. To the extent that anyone manages to use it, they do so primarily through a developing infrastructure that resembles the existing financial system. El Salvador enlisted the help of a financial corporation to establish digital wallets for its citizens, which are essentially the same thing as bank accounts.
Virtual currencies are advertised for off-road use in the same way as pickup trucks are. However, the vast majority of users prefer to remain on the streets and roads.
It is possible, but improbable, that this new pedestal will improve the old financial system — for example, by making money transfer across borders less expensive. However, this has yet to occur. For the time being, Bitcoin users are essentially a group of costumed libertarians playing a make-believe game on the nanny state’s playgrounds.
Of course, the majority of Bitcoin users do not regard the cryptocurrency as a form of payment. They are in it to make money, which is the only benefit Bitcoin has provided.
There are other grounds to be concerned about this. Bitcoin mining is a nightmare for the environment, needing far more electricity more than any other thing in the world or nation on the planet.
Speculative frenzy diverts resources and focus away from more profitable initiatives.
And the larger the bubble, the more harm it causes when it bursts.
However, I was not very concerned about Bitcoin until recently. The present mania has been likened to other well-known bubbles, such as the 17th-century Dutch Tulip craze (one of the most well-known market bubbles and crashes in history, also known as ‘Tulipmania.’ It is a cautionary tale about the dangers that come with extreme avarice and speculation. One thing they both have in common is that they both involve a limited group of wealthy investors. Tulips were not purchased by the majority of Dutch people, and Bitcoin is not owned by the majority of Americans.
However, if governments begin to take Bitcoin seriously, this will cause much more concern. The delusion that the financial system’s problems can be remedied by changing it rather than improving it is a comfortable one. This type of reverie lends itself to amusing internet discussion. Leaders at all levels of government should be able to recognize when something is wrong.