Recent research suggests almost half of millennials have an appetite for cryptocurrencies in their pensions, versus less than 10% of the remaining generations.
As more fund managers dabble in cryptocurrency, many commentators are recoiling at the idea that Bitcoin and other digital currencies should be taken seriously.
While I am not a wholehearted Bitcoin advocate, I find many of the arguments against it exhibit a flawed understanding of what ‘money’ is.
You and I can barter goods. My chickens lay eggs and your cows produce milk. We can agree an exchange price — how much milk equates to a dozen eggs.
State digital currencies are ‘the next great experiment in finance’, according to The Economist
But I may want to trade goods for skill: your milk for the shoes I make. My skill requires resources, such as leather from the cows you use for milk. As trade becomes more complex, barter becomes less useful. How much milk is a strip of leather worth, plus my cobbling skills?
A ‘currency’ is an agreed unit of exchange. Historically, the things we used as units of exchange were also a reliable store of value. They were scarce, fragmentable, transportable, durable and difficult to copy. Among them, gold and silver were ideal.
Even when more easily transportable paper money came in, it was merely a promise by the issuing bank to pay its owner an equivalent sum in gold.
Finite stocks
However, the supply of gold is finite. You can’t keep printing promises to exchange for gold if there isn’t enough to back them up.
There are approximately 186,000 tons of gold above ground, according to the World Gold Council, around 17% of which is held by the International Monetary Fund and central banks — around £1.5trn. The world’s stock of coins, banknotes and bank deposits is approximately £21trn. Add money market funds and so on to the world’s total store of value and that amounts to around £34trn.
Bitcoin is simply another digital unit of exchange. If we all agree to use it, it becomes a currency
The US government unilaterally disengaged the dollar from the gold price in August 1971, creating what we now call ‘fiat’ money — a means of exchange validated as money by government decree. This is how the world works today. Money has value only as long as the issuing government (and any parties engaged in exchange) says it has.
Most of the money that circulates is virtual. In the UK, less than 5% is cash, coins and Bank of England reserves used for banks to pay each other. The rest is simply data, created by banks to lend.
The value of ‘acceptable’ investments is worthy of comparison. Global stockmarkets are worth around £50trn, while global debt is £145trn. The derivatives market is ‘worth’ a whopping £456trn. These are simply valuations, digitally credited to owners’ banks if and when they are realised.
Bitcoin is simply another digital unit of exchange. If we all agree to use it, it becomes a currency.
As a currency, each Bitcoin is fragmentable into 100 million parts, obviously transportable and scarce given the limit on production. Indeed, there are 18 million Bitcoins in existence, and a computing protocol virtually ensures that no more than 21 million can be produced before the year 2140.
Issuance has a current value of £500bn. If Bitcoin occupied only 10% of the world’s store of value, that would make each potentially worth over £188,000.
Launching rivals
We all use virtual currency now. Whether Bitcoin and other ‘private’ cryptocurrencies gain widespread acceptance remains to be seen. However, since neither banks nor governments can control circulation, they have an interest in launching rivals to maintain control over their own nation’s money supply.
The creation of central bank digital currencies (CBDC) — allowing people to bypass conventional banks and deposit funds directly with the central bank — may prove to be the most revolutionary change in commerce since the invention of paper money.
I find many of the arguments against Bitcoin exhibit a flawed understanding of what ‘money’ is
Whatever the future for Bitcoin, state digital currencies are “the next great experiment in finance”, according to The Economist.
China has already launched the e-Yuan as legal tender in a pilot programme. The Federal Reserve is to issue a discussion document later this year on a US CBDC.
Advisers may better serve their clients by understanding and embracing these trends, rather than dismissing them outright.
Graham Bentley is managing director of gbi2. You can follow him on Twitter @GrahamBentley