Currency are devised as forms of payments for good and services rendered, though with the increasing debt burden of the United States, investors are rushing into buying gold, Swiss Francs and other alternative real currencies. However, there is yet another queer ‘online’ currency referred to as ‘bitcoin’. Apparently it is a mode of payment for online transactions. With the boom of e-commerce as shown by the successes of eBay, Amazon, Alibaba, Priceline and Groupon (just to name a few websites…), it is evident more and more people are buying and selling goods and services online. While Mastercard, Visa and PayPal have covered the medium of payments for online transactions, it is worth noting how Bitcoin works. In fact this even made news on Wall Street Journal’s blog.
Before I go on to discuss about ‘bitcoin’, let us walk back in time to discover the existence of currencies. Basically currencies were invented to replace barter trades in order to allow people to buy and sell the fruits of their labour freely. Central banks issue and regulate the value of their issued currencies. And that is where the risk lies in, as some central banks are at the mercy of the governments that are elected by the nation. That is an elected government (even a democratically elected one) can influence the hand of central bankers and result in the rise and fall in value of their issued currencies.
With this in mind, technically any group of people can come together to issue their own currencies. Airline companies have already done that by issuing miles when you fly with their airlines, though generally the value of their ‘currency’ devalue over time as award charts gets more expensive over time. Small communities across the world have also issued their own currency for local trade and this can generally protect rural communities who value stability and thus a more sustainable currency.
The rise of ‘bitcoin’ mirrors that to the way information technology has become a vital part of our lives. Starting with the internet, it has changed the way we search for information, access databases and read the news. Recently it has also changed the way we watch videos, connect with friends and share our lives with loved ones. Even e-commerce is a huge part of the economy right now which makes it seem right then that a ‘currency’ is created in bytes. However the liquidity of such a currency is a question mark, so is the accessibility of such a currency to the average investor. If we compare say bitcoins to gold, it is worth noting that the value of the bitcoin is kind of ‘virtual’, while gold at least has some intrinsic value due to its function as industrial material for manufacturing and jewelry making. Another question that needs to be addressed is how easily convertible is the currency and how easily accepted are bitcoins around the world by traders and merchants alike. The final key is with regards to the regulation of the bitcoin, and the trustworthiness of the board of governors that has any say in the issuance of bitcoins worldwide.
The United States Dollar is well-regarded as a stable currency due to the regulation of the Federal Reserve and the economic might of the country. Which is to say that the value of the dollar is what it says on the paper. However, there is no saying if the money supply in the United States will be constrained and as we have seen in the aftermath of the financial crisis, even the largest of economies are susceptible to devaluing their currencies to cope with economic cycles. Which is why bitcoins have some intrinsic value in the restriction of its supply. After all a limited-supply commodity would be valuable in times of extreme demand. Demand meanwhile is based on the value the community or people around the world places on the particular currency. It doesn’t really make sense for a currency to be valuable if there is no demand for it, even though circulation is limited. That is precisely the reason why the US Dollar continues to be valuable, because of the demand for it, and the fact that many commodities trades conducted today are denominated in US Dollars.
However, the global economic situation today and the way governments around the world have manipulated with their currencies to sustain the economy could potentially push people to pursue alternative currencies as a store of value for their hard-earned money. While these have traditionally been gold, there are now some alternative forms of currency that perhaps people might want to think of investing in. Though investors do need to focus on the accessibility, liquidity, and regulation of such currencies to ascertain its ‘real’ value.