Is Bitcoin our future currency?

In Hong Kong, any discussion regarding currencies tends to focus on offshore trading of the RMB, the expanding list of 24 Chinese bilateral swap agreements and how much longer the US$ can maintain a diminishing global reserve status.  

Monetary scholar Edwin Vieira has observed that every 30 to 40 years the reigning monetary system fails and has to be rebooted. He also noted, that the average life expectancy for a fiat currency is 27 years, so if history is any indication, we are overdue for a shift.

There are some surprising developments helping to define what may be coming next.

Legal tender is created by a government decree, stipulating that taxes must be paid in a fiat currency, generally issued by a privately owned Central Bank. Technology has been disrupting industries, displacing incumbents with ‘faster and cheaper’ alternatives and some of the world’s leading entrepreneurs have now set their sights on redefining money.

The most prominent example of this is Bitcoin (BTC), a peer-to-peer digital currency that operates without the intermediation of any Central Bank or government. The currency was launched in 2009 by a modern day Keyser Söze named Satoshi Nakamoto.

BTC were primarily the domain of patrons of a dark web exchange called Silk Road until a seminal moment changed all that earlier this year.

In March, an important message was broadcast by the issuers of centrally controlled fiat currency and it was received in Cyprus by bank depositors as  ‘this is our money, not yours and we are confiscating ½ of it immediately and without further notice’. In response, BTC, a decentralized currency, appreciated by 2000% from around US$10 to over US$200 and just last week, BTC continued its parabolic rise, briefly flirting with US$1100 in China before settling in at US$725. 

The most recent 550% rise in BTC was attributed to Baidu, the worlds largest e-commerce site, who began accepting payments in BTC and perhaps more so, to Federal Reserve Chairman Ben Bernanke, who broadcast an important message at a congressional hearing in Washington last week stating ‘virtual currencies may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system’.

Many have argued that the tulip like parabolic rise from US$10 to US$1100 and periodic waterfall descents of BTC are evidence of hoarding, not trading and with only 12 million issued and circulation capped at 21 million, this lack of liquidity renders BTC a poor choice for use as a currency. This observation appears sound but it is missing the point?

The real genius may not be in BTC at all but rather in the encrypted ledger book called the block-chain, which is a transaction database shared by all nodes participating in the peer-to-peer protocol. Transactions take place between secure addresses and are then broadcast to the network, where they are confirmed by consensus, addressing the ‘double payment’ challenge inherent with digital currencies.

The software behind BTC is open source (free) and is increasingly being leveraged by innovative digital alchemists who seek to build on the excitement of BTC but also rectify obvious shortcomings by adding mediums of exchange that offer increased liquidity and are fungible with stores of value such as gold.

So is BTC Future Money? For savvy investors in Hong Kong, China and around the world, the jury is still out but one thing is certain, decentralized digital currencies are here to stay and they are Future Money.