Has bitcoin come of age? Is it about to go legit? Be printed up with with austere portraits of global heroes (Einstein on the 100 bitcoin bill, Marie Curie on the 1,000) and used to buy a paper or a cup of coffee down the high street? That remains a long way off, surely, but President Nayib Bukele of “plucky El Salvador”, as my uber-colleague Simon Calder would call it, has announced bitcoin is to be legal tender – a first for any sovereign state.
Central banks, including our own Bank of England, have started to take crypto currencies more seriously, in all senses of the term. Elon Musk says he’s invested in it – and you can buy a Tesla with some. So, yes, things are changing, but I can’t help feeling uneasy; the bitcoin thing really does fell a lot like an old-fashioned speculative bubble.
Qualitatively, cryptocurrencies in the 2020s echo rare tulips in the 1630s and shares in the 2020s – popular crazes powered by gossip and rumours. If it crosses over into being a widely accepted form of payment, well, maybe it will evolve into something much more like a popular private sector international currency (a bit analogous to the IMF’s official government-backed Special Drawing Rights), and you can have a bank account denominated in it.
If people, companies and governments come to trust and accept it, then it will become more like conventional currency, inevitably – but with unknowable consequences.
It’s always been an odd sort of “money”, bitcoin and its imitators. It’s mainly been used as a “store of value” – though a volatile one – savings, if you like, rather than as a means of exchange beyond the criminal fraternity and a few oddities.
That doesn’t mean it can’t be used as a means of exchange, though; a method of payment – whether or not governments formally make it legal tender, or – for that matter – attempt to ban or restrain it, which would be either ineffective or counterproductive.
Money is what money does, as the old adage says, and provided anyone wants to believe in it (“credit” derives from the Latin “creda”) then it works as a currency. Economic history is full of examples of human ingenuity taking over when conventional currencies broke down or were alone, as when cigarettes were used to buy and sell in Germany after the Second World War, or Manhattan was purchased from native Americans with glass beads (I didn’t say I approved of such novelties).
Besides, if I lived in El Salvador or any other country where the local currency and banking system has proved unreliable – Argentina, Zimbabwe, Democratic Republic of Congo being recent examples – I’d be more receptive to the idea of a new, voluntary alternative currency.
Nor should we in more “advanced” economies get too snobby about dodgy currencies. The value of the pound Sterling, for example, supposedly stoutly defended by the governor of the Bank of England, the UK state, our punctilious banks – and with a portrait of the Queen on every example – has been shredded and humiliated by inflation (which has been the main way in which the British have avoided formally defaulting on their debts).
A basket of consumer goods that cost £100 in 1970 would now cost you £1,584; or, put another way, your 1970 pound is worth all of six pence today. Even if you’d put it in the building society it would have lost almost all its value.
The banking crisis of 2008 demonstrated that conventional money in respectable regulated banks itself can disappear overnight once faith in these institutions has evaporated and there’s a run, as with the death of Northern Rock. Massive state intervention was needed to rescue the system.
Will bitcoin manage to inflict that kind of damage on folk in the next few decades? It could be worse, and faster. It’s all about choice, really. The Salvadorans can choose between bitcoin or the US dollar (the national currency, the colon, collapsed in 2001).
In the old days, most of us had no option but to use, accept and save in the national currency, which was controlled by others. In the UK, you couldn’t even take more than £40 out of the country without official permission (until as late as 1979).
Now, we have far more choice. You can have a euro or Swiss franc denominated bank account, you can invest more easily in alternative assets (not just property) and, indeed, you can punt on cryptocurrencies. If you think bitcoin too dodgy, you can switch to Doge, or etherium, or whatever.
They “should” compete to be more reliable and trusted currencies, though in reality they may be just different bulges in one gigantic speculative bubble. There are risks – political and financial – to individuals, which need to be managed. They take their chances.
More worrying is the risk to the financial system, though, from a collapse in cryptocurrency – a “run” on bitcoin for example, where everyone tries to convert it back to dollars, yen, yuan and so on. What then? Donald Trump calls bitcoin a “scam” against the dollar, a kind of unfair competition, which is missing the point.
The point is that officialdom can do nothing much about it except take precautions and warn people about the risks (though in our conspiracy theory world that would probably make bitcoin more popular). The latest Chinese crackdown on bitcoin does seem to have dented its value, but in the long run people usually find ways around such restrictions, with the result that the cryptocurrency goes further underground.
All in all, a crypto-crash seems very possible at this early stage in the growing phenomenon of virtual money. There’s probably very little the regulators can do about a virtual currency such as bitcoin that acts beyond the law, which is both its charm and, very possibly, its curse. It will be interesting to see how plucky El Salvador fares.