Mark Carney – the Governor of the Bank of England – has said that bitcoin has failed as a currency.
Speaking to students at the London Regent University, Carney told students that bitcoin “has pretty much failed thus far on the traditional aspects of money. It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange”.
Let’s deal with each highlighted issue in order.
Is Bitcoin a traditional currency?
The short answer is no.
Traditional currencies like the US Dollar ($), the British Pound (£) or the Chinese Renminbi (¥) are government-issued currencies. Their supply and distribution is controlled by the central bank of their respective currencies and they usually cannot be used outside that country.
Bitcoin is not government issued. Rather, it is a result of a set of cryptographic rules called its protocol. That protocol also keeps Bitcoin’s supply fixed at 21,000,000 units. This can be changed, though unlikely, but not without the consensus of the majority of its users.
This is a consequence of its decentralized governance model, which is a direct contrast to that of the world’s central banks.
Store of value
There is no dispute about the fact that Bitcoin cannot claim to be a superior store of value compared to traditional currencies like the British Pound. Since January 2017, Bitcoin rose from a value of $999 (£715) to $19,891 (£14,239) in December of that year, before falling to a low of $6,000 (£4,295) in February 2018. By comparison, the Pound was at an average of $1.24 in January 2017 and currently stands at $1.40.
This wide price range lends itself to the objectives of risk-seeking speculators who further compound the high volatility, leading to mainstream economists and their publications dismissing Bitcoin as a bubble. This is not the type of attention a prospective currency wants or in fact needs when endeavoring to achieve its intended use-case; to become a medium of exchange.
Medium of Exchange
The existence of a medium of exchange is integral for commerce. It represents a standard of value through which widely varying assets can be traded. As explained above, Bitcoin currently falls short of being an effective store of value, but, there are other characteristics that are just as important such as fungibility, speed and low fees. Fungibility refers to the property of a commodity whose individual units are interchangeable with other assets. Bitcoin can be divided one hundred million times into a unit called a Satoshi (named after its creator Satoshi Nakamoto) with each unit being worth a one hundred millionth of the price of a whole Bitcoin. Regarding speed, Bitcoin transactions take on average about one hour to complete which is greatly outmatched by conventional digital banking systems.Finally, although having risen to a high of $20 (£14) in December 2017, Bitcoin’s fees currently sit at a fixed value of $0.78 (£0.56). Visa debit and credit card fees range anywhere between 1% and 3% depending on your location and the merchant. That means for any transaction above a value of $7.80 (£5.60), Bitcoin’s transaction fees outmatch the best traditional card payment system.
Indeed, Microsoft, CEX, Expedia, Bloomberg amongst many, many others accept Bitcoin as payment for that very reason.
Was Bitcoin’s intention to become a traditional currency?
Yes and no.
Bitcoin was created to solve the problem of relying on trusting the central banking system. Its decentralised governance model deals with that problem fairly well. Bitcoin has low fees and is fungible which are both unique qualities of its protocol and necessary for media of exchange. Nevertheless, Carney is right in that it suffers from high volatility and slow merchant adoption compared to traditional currencies.
However, I argue that given the relative age of Bitcoin compared to traditional currencies (9 years vs over 5000 years), the progress being made in speeding up Bitcoin’s protocol and the ever-growing trading volumes, dismissing Bitcoin’s utility as a medium of exchange could be premature.
Carney himself finished his response by conceding that Bitcoin’s underlying technology could be used to verify financial transactions in a decentralised way.
Bitcoin’s price is currently trading at $10,344 (£7,406).
Image: [Bitcoin News]