If ducks collateralise Duckaroos - what collateralises Bitcoin? Nothing. What central bank or government stands ready to bail Bitcoin out? None. If the US economy props up the US dollar, is there a diversified, productive and growing economy propping up Bitcoin? Nope.
The value of a Bitcoin lies in consensus. Today we agree that a Bitcoin is worth around US $7000 and so today it is. If I stop believing that and and wish to be rid of my Bitcoin then someone will buy it from me for the price they believe it is worth. Bitcoin will be worth nothing only when last person on earth believes it is worth nothing.
Consensus works here because participation is voluntary whereas your participation in the fiat currency of your nation state is compulsory. “Legal tender” does not mean it is only lawful to accept fiat currency as payment (you can accept ducks, shells or Vegemite jars if you like) it means that it is unlawful not to accept the national currency to settle an account.
The value of a paper dollar is enforced by the state whereas the value of crypto is left up to us to decide, or to opt out completely. Voluntary participation, freedom of choice, value through consensus – these things are what libertarian dreams are made of.
With no anchor the good ship Bitcoin drifts, flounders, floats, it soars and subsequently it is less useful as a currency than the good old Duckaroo which is pegged to and stabilised by the price of a duck.
But it was not meant to be so.
Bitcoin was actually designed to be a useful global currency with stability based on supply and demand economics. As more Bitcoin is spent on goods and services the more transactions are processed by computations that create more Bitcoins that satisfy the increasing demand.
This process intentionally becomes more difficult as it progresses requiring increasingly more time, computer power and energy to create new Bitcoin. The total number of coins that can be created is capped at 21 million to ensure that supply should not exceed demand.
So you can't do with Bitcoin what Uncle Donald does with Duckets. You can't mint at will the fresh coins you need to asset- strip your neighbours farms and enslave the townsfolk by constantly diluting and therefore devaluing their hard earned dollars. This is why nation states are not too keen on the whole idea of a decentralised global currency and why libertarians are.
But this is academic. If you are holding Bitcoin you bought last year at 15,000 dollars you might well find your purchasing power has halved in less than a year due which is a hell of a lot worse than your national inflation rate - unless you live in Venuzuela.
Why is it so?
Because Bitcoin's creators did not account for rampant price speculation for profit which has made crypto what it is today – a mardi gras of highly volatile speculative assets.
Very few people purchase goods and services with Bitcoin and other crypto-currencies though millions of speculators trade them on exchanges everyday. Slow transfer speeds and occasionally high transaction fees contribute to Bitcoin's lack of viability as a useful currency – but you could also blame both of these factors on volatility from price speculation which can cause dramatic spikes in network congestion.
Like gold, Bitcoin has (so far) failed as a currency but succeeded mightily as store of value with a total market capitalisation of around 170 billion US dollars. One whole Bitcoin is generally considered to be worth at least 6000 and has been worth as much as 20,000 US dollars. Not bad for a consensual hallucination.
Could Bitcoin replace gold as the global store of value – a safe haven for wealth under threat of war and economic collapse?
Not likely. The only thing that could replace gold is a metal more precious, more beautiful and desirable. Gold represents the romance of greed and the history of lust. It has been valuable across the globe for thousands of years. Ask anyone if their life savings were to be converted to Bitcoin or gold which would they choose – I will bet you that 99.9 percent will choose gold.
You don't need a computer to buy and sell gold. Or even a bank account. There are no whales manipulating the gold price. Bulgarians cannot hack your gold. You don't have to explain gold to anyone as every man woman and child on this planet knows what it is.
Bitcoin is an alternative to gold as a store of value to be sure. The rise and fall of the Bitcoin price in the last year was driven largely by frantic buying in Japan, China and South Korea - countries that were threatened most by North Korean aggression and the possibility of war.
In September 2017 the Bitcoin price was coming down from an all time high of nearly 5000 to less than 3000 dollars when North Korea launched a missile over Northern Japan and Bitcoin shot up 30 percent in the next 24 hours. The bull run that followed took the price of a Bitcoin to nearly $20,000 in December.
As for gold, is it a co-incidence that its price has been falling steadily since April this year when an inter-Korean summit between South Korean President Moon and North Korean supremo Kim Jong-un saw peace officially break out on the Korean peninsula ?
Both these assets will live long and prosper as a hedge against tomorrow. Both will benefit from rumours of war and impending doom.
So if Bitcoin and gold are such great stores of value could they, like ducks, succeed as collateral for a currency instead of being a currency itself?
Stay tuned as a these questions will be (sort of) answered over the coming weeks when we unearth digital gold and mint crypto currencies of our own.