Cryptocurrency is described by critics as the product of a mass willingness to believe, somewhat akin to faith. In many ways it is just a currency that has very limited purchasing options so should be fairly illiquid and disregarded but valuations have been soaring. Bitcoin has more than quadrupled since last year.
So what has driven the huge price increase in bitcoin? Well all currencies are a question of ‘faith’. There is faith that the Bank of England will honour the £50 note, certainly the piece of pink paper itself is not worth £50 but there is faith and belief in the banking system and that gives currency its value. Elon Musk has tweeted that ‘money is just data that allows us to avoid the inconvenience of barter’. Musk has called bitcoin a ‘less dumb’ version of cash.
Bitcoin has gone up in value relative to other currencies, meaning that the value of other traditional currencies is falling away. It appears that faith in bitcoin is on the rise and faith in traditional currencies is falling. There is a limited supply of bitcoin, it can’t just be printed or increased, the supply is limited by algorithms that need to be answered and this distinguishes it from all other currencies.
More people are believing in the bitcoin system, despite its limitations in practical terms. Can this also be seen as people moving away from the faith in other monetary systems? Can the traditional systems be seen as ‘dumb’? Is it dumb to believe in cash and hard currency supported by central banks? That is what Elon Musk is suggesting.
Traditional finance officials have seen little value in digital currency and see the surge in value as part of a speculative bubble. Howard Lutnick, Chief Executive Office of Cantor Fitzgerald said ‘the dramatic rise in values of Bitcoin is driven by retail investors and because retail investors keep buying’. The retail investors are not following the traditional measures of valuation and are regarded by professional investors as inexperienced, but maybe what we are seeing is a mass willingness to believe in a new currency and a new paradigm?
The younger generations have not been served by incumbent monetary systems, that are handing them debt so large it cannot be repaid. Current monetary policy has been one way for decades. Always rate cuts to stimulate the economy, and never rate rises to re-balance once the economy has been stimulated. This has led to permanent asset inflation and great wealth imbalance between the generations.
The younger generation might well think it would be ‘dumb’ for them to believe in a system such as this and prefer to start afresh in a ‘bitcoin’ world. If enough have faith or prefer this system can they really make it happen?
Rebel Economics 