It’s truly hard for me to believe that any economist would really say something about currency like “representing economic data”. No, that is certainly not where the value of bitcoin or the value of any sorts of cryptocurrencies comes from. (Or pardon me if I have been ignorant on Econ papers) It is also really hard for me to believe that any economist would believe the failure of modern currency and banking system. Just imagine the failure of USD GBP EURO etc. No offence, it just won’t happen. However, bitcoin is a hint and also the technology to change the current system and the change is already happening. Let me just elaborate a little about my thinking on bitcoin.

All assets come with underlying values or a raw source of real economic value. For example. Stocks give you the value from dividends and ownership. Options are attached to some underlying assets like stocks or some indices. You cannot have futures without having some underlying assets with economic meaning such as cotton. This applies to currencies and cryptocurrencies as well. Currencies as a very very very special type of asset can have a value because they represent some economic value within some economy. For example, USD is a strong currency, because it is used to represent economic value in the US, which is backed up by the giant volume of American economy. Similarly, Euros is another important currency since it is used in the Europe, which is the other most economically developed place in this world. From what I can understand based on common sense and the simplest economic theories, Bitcoin should also follow this logic, if it is a “currency” representing economic value. That is: its value is based on the top of the economy it represents (not the “economic data”). As a currency, it has to be used as a ruler/measure of economic values in real world. To support the high nominal price of bitcoin, that proportion of economy which uses bitcoin has to be a good match of its price. However, we do not see that foundation to back up its value. This is also why governments all over the world does not define bitcoin as “currency” besides political reasons. Economically, it is just not a currency at least at this moment.

Bitcoin may have a future. The fact that is troubling people (like myself) who are willing to believe the future of bitcoin is that it has a such high price at this moment without having a big share of economy to represent. In other words, very few people use bitcoin as a ruler/measure of economic value. I believe most bitcoin holders have not bought or sold anything with this “future measure of value”. Please let me know if you use bitcoin to take bus/subways, get lunch and buy groceries or if you are getting paid by your employer with bitcoin. The bitcoin may have a real player seat against other real-world currencies in the future. But if the speculation dominates the future of bitcoin, bitcoin is not going anywhere. Since the first very simple fundamental requirement for any asset to be a measure of economic value is to have a stable price. Look at the fiat currencies, it called deflation if the price of whatever paper bill goes up significantly. It is called inflation if you have to use 100 dollars to purchase whatever you can purchase with 10 dollars today. The design of the bitcoin is experimental. It does not have the power at this moment to represent the magnitude of the world economy’s volume.

On the other hand, if you think about the current status of the modern banking system. Isn’t it providing a complete digitalized easy way to transfer money, to make purchases or to do whatever a normal person would like to do on a daily basis? On a daily basis, people use credit card, apple pay, sumsung pay, paypal, vemno, wechat wallet, alipay and the list goes on and one. If you tell me bitcoin settles faster. Ok. Yet, the settlement speed is a technical issue not an economic issue. If you tell me that bitcoin is a more secure way to make transactions. Ok, the modern currency and banking system has been existing for centuries. Yet, bitcoin just reached a decade. From seashell to metals, from metals to only gold and silver, from gold and silver to coins and paper bills attached to the gold’s intrinsic value. The security of this modern currency and banking system is tested throughout the history of human beings’ existence. Or you may mention the technological security, yes right blockchain. Don’t you think the giant banks can set up a privately functional blockchain system fully under proper regulation to improve their current technological security? Blockchain is just a distributed ledger system or you can view it as a distributed data storage like any other data warehouse systems whether its SQL, Hadoop or whatever. Also, all things written in computer programing language are highly likely to have bugs/loophole as long as its long enough.

As a matter of fact, bitcoin currently is just a very good way to hide values for transactions that cannot be shown to the public and the transactions that do not stand by our universal values. Imagine a world, politicians hide their illegal profit from bitcoin. Drugs and other criminal activities cannot be traced because the transaction goes anonymously. Imagine that type of world where human trafficking happens more often and sex slaves are very easy to sell. I’m not sure what is really worse than these consequences about letting banks to record all your legal transactions and money transfer. Yet, this is the current impact of bitcoin. All traceable transactions became untraceable which does not benefit the people living peaceful life.

Now back to the point of what is the real value of bitcoin at this moment: the best explanation of the existence of bitcoin is that it somehow acts as a media to temporarily store values, and it also gives the risk-loving and ambiguity-loving type of people the chance to bet against each other. In other words, bitcoin is more like commodity in this sense. The difference is that most commodities have their own real-world use. For instances, People make t-shirts with cotton and feed animals with corn products. However, the real-world use of bitcoin is for transactions but this real-world use of it is nearly negligible. Most of the people do “exchange” their USD/GBP/EURO/RMB/YEN to bitcoin so that they can use the bitcoin to make purchases. People often compare bitcoin with gold in some sense. But there is a significant difference between bitcoin and gold. Gold was once the most prevalent currency around the world (silver as the same). The paper bills appears initially as a representation of gold(or silver). Even now the most powerful paper bill the USD is somehow related to the value of gold. The US also has the largest gold reserve in the world.

Until the volume of transactions goes up significantly (and it won’t if the volatility remains the same), the bitcoin will have little to none fundamental value to explain its high price. So bitcoin is just a bit like commodities, providing just the chance to trade/gamble. Will you buy bitcoin if it is a real currency? My guess is not. Switching between EURO and USD does not really help you get anything if you are not a forex trader. If you really choose not to hold bitcoin for just a very small tiny nominal price change VS USD/fiat currencies, you are not really valuing its future being a currency.

This is wrote on my phone. I apologize for the typos and bad grammar.

-HMK