Is it a commodity, or is it money? This single, simple question could point out the cause of volatility in Bitcoin and its “rival” altcoins.
There is no point justifying cryptocurrencies’ utility as some commodity. What else then? Are these an investment instrument like shares or certificates of deposit (CD)?
The S&P 500 index has companies that have sizeable operations and assets. Investing in any such stock means one purchases a small stake in the business. The business in turn sells a product/service and earns revenue, thereby creating wealth for investors. CDs are term deposits with banks and earn a fixed return on investment.
Cryptos are neither, but the best part is these never intended to be a part of the investment asset universe. These blockchain-powered digital currencies were to function as money.
Bitcoin is money in this El Salvador village
El Zonte, a coastal village in El Salvador, has made some headlines lately. Here, Bitcoin is serving as a medium of exchange, though the project is still in its early stages.
Being touted as the first-of-its-kind experiment, the project aims to establish Bitcoin’s utility as money, not as some tradable commodity. This is in stark contrast to other ongoing uses where, from retail to institutional investors, cryptos are bought for short-term capital gains.
The project organizers use the term ‘initiative’ on their website. The underlying theme is that Bitcoin can cut the cost of transferring money, especially in cross-border payments.
The website gives a hypothetical example of how it is done by comparing money transfers using a conventional financial services provider like Western Union with transfers using bitcoin. Traditional intermediaries typically charge a commission on remittances, something that can easily be eradicated by using Bitcoin.
It seems to be the validation of Twitter CEO Jack Dorsey’s stance. He has time and again reiterated Bitcoin can become the “native currency” of the internet.
The results of the project are promising. Many businesses that operate on a micro level have started accepting payments in bitcoin. The villagers can purchase groceries from a local store using a smartphone app. This is despite the fact that the value of the holdings in crypto can change at any time depending on the price at which Bitcoin is trading.
Is it all sunshine and rainbows on Bitcoin Beach?
A few ambiguities exist. For example, the price of any good/service is the same in dollars no matter the payment is made using bitcoin. This means the customer will not pay the same in bitcoin every time owing to fluctuations in the price of Bitcoin.
The project claims El Salvador, the country that became the first to adopt Bitcoin as legal tender, will likely save some $250 million every year if all remittances are made using Bitcoin. The data that went into calculating this is absent.
Strike is the locally developed smartphone app that is facilitating the transfer of bitcoin in El Zonte. Like every other aspect of the cryptocurrency space, the app remains out of the ambit of any regulatory oversight, which means risks of storing Bitcoin in the app remain.
Furthermore, the project is being promoted as a “mission.” This so-called “initiative” seeks to achieve “Bitcoin-driven tourism” along the coasts of El Salvador. Typically, this could mean adoption of Bitcoin as money is not all about corroborating the cryptocurrency’s utility as a bona fide alternative to fiat currency but attaining recognition and a little publicity on the back of this.
When the project gives a hypothetical example of how expedient money transfers become using Bitcoin, it arguably resorts more to wishful thinking than any real fundamentals. Blockchain is the single most important lure underpinning cryptos, but the project touts Bitcoin as some sort of token money without explaining how blockchain tech comes into real play.
Tectonic shifts from small beginnings
Every paradigm shift begins as an experiment. Fiat currencies were not adopted simultaneously by all economies. Besides, the concept of fiat currency isn’t that old.
The dollar has undergone many changes ever since it was adopted as legal tender in the US. The last big change was in 1971 when President Richard Nixon suspended the dollar’s convertibility to gold. This event ended the arrangement where one dollar was valued at 1/35 of an ounce of gold, and it made the US dollar a floating currency, the value of which is determined by the foreign exchange market. “Nixon shock” is how it is widely known today.
Money and its forms have always been an evolving subject. One cannot say that the world became richer once we adopted fiat currency as legal tender. Money cannot create wealth, though it acts as a facilitator in some ways.
Money supply is one of the most used monetary policy tools by central banks. A slowing economy can be given a push by adding a little more liquidity to the market. This is done by purchasing government bonds and keeping benchmark rates low.
A hot economy with high inflation can be cooled by sucking liquidity via hiking rates and cutting down on bond purchases. This is important given all economies face periods of boom and distress, but it can’t be an argument to support the notion that fiat currencies can be the only legitimate medium of exchange.
Discernibly, the reason central banks and other regulators are nervous of the Bitcoin ecosystem is the blow this will deal to their powers and supremacy.
The world of today is more regulated than ever. Trade barriers have become a thing of the past. The local fiat currency’s exchange rate vis-à-vis other currencies matters a lot for businesses and governments. With Bitcoin or any other cryptocurrency as a preferred medium of exchange, such arrangements can come to an end.
That said, it is a tough road ahead for Bitcoin and other digital currencies to become a reliable store of value and medium of exchange. The Bitcoin Beach experiment and El Salvador’s move of having Bitcoin on par with the USD can become the driving force behind a paradigm shift, if at all it ever becomes a reality.
For now, the reality is that Bitcoin Beach and Strike have become one of the most downloaded finance apps in El Salvador. If these can succeed in substantiating cryptos’ utility as money, volatility in the crypto world may just become a thing of the past.
