In a recent interview to Bloomberg Television, Bill Gates, the world’s richest college dropout and third richest man, raised doubts about Bitcoin, the world’s most popular cryptocurrency. He said: “My general thought would be that if you have less money than Elon, you should probably watch out.”
The comment was in response to Elon Musk, the boss at electric car-maker Tesla, and a big votary of people buying and owning Bitcoin (though, of late, he has said that Bitcoin is overvalued).
Bitcoin is a cryptocurrency that has been around since 2009. It was supposedly invented by someone known as Satoshi Nakamoto but whose real identity or identities (given that it could even be a group of people), is/are not known.
Between September 3, 2020, and around noon on February 26, the price of bitcoin in US dollars, has gone up by a whopping 356%, and as I write this, it is quoting at around $46,350 per unit. And, not surprisingly, those investors who rode this wave are a confident lot.
They believe that bitcoin has the capacity to emerge as a parallel money system to the current paper money system run by governments and central banks around the world.
It is worth recalling here that Nakamoto invented Bitcoin in the aftermath of the financial crisis that broke out in mid-September 2008.
In the carnage that followed, the world economy was ready to get into the second Great Depression, with economic growth collapsing and even contracting in many countries.
The Western central banks printed and flooded the financial system with huge amounts of money. The idea was to drive down interest rates and encourage people to borrow and spend, and businesses to borrow and expand, with the hope that all this would drive economic growth.
This ability of central banks to create paper money out of thin air is referred to as the debasing of currency. In an earlier era, before World War I, much of the world was on a gold standard. Paper money was backed by gold (or silver, in some cases). In other words, the paper money was basically worth a certain weight of gold. Citizens could actually go to a bank and exchange their paper money for gold.
This system limited the ability of governments to print excessive paper money, given that if citizens came to know of it, they could walk into a bank and exchange it for gold. Hence, there was a danger of banks running out of gold if enough people wanting to convert their paper money into gold turned up at the banks.
This system got gradually dismantled between 1918 and 1971 as many countries around the world faced economic problems between and after the two World Wars. Also, as more countries of the world moved towards democracy, they realised that they needed a more flexible money system than the gold standard. This paved the way for the pure paper money system of today, where the money isn’t backed by anything other than just trust in the government.
Nakamoto clearly didn’t like the ability of the government and the central banks to create paper money out of thin air by printing it (or creating it digitally, for that matter). As he wrote on a message board in February 2009: “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”
Nakamoto looked at a central bank’s ability to debase paper money as abuse of the trust people had in it. And Bitcoin was supposed to be a solution for this breach of trust — a cryptocurrency, which did not use banks or any third party as a medium and the code for which has been written in such a way that only 21 million units can be created.
Currently, the number of Bitcoin in existence stands at 18.64 million units. Further, the paper money system which is run by governments and central banks is ultimately in the control of individuals running these institutions. The Bitcoin system is decentralised and has no owner.
These are the reasons offered by those who believe in bitcoin as to why the price of this cryptocurrency keeps going up and why it is the future of money. But is that actually the case? Not really. Here are three reasons:
1) The rise of Bitcoin and other cryptocurrencies challenges the monopoly of the government and central banks to create money out of thin air. Hence, it is difficult to believe that governments around the world will let cryptocurrencies flourish. As
Finance Minister Nirmala Sitharaman told the Rajya Sabha recently, “A high-level Inter-Ministerial Committee (IMC)…to study the issues related to virtual currencies…recommended in its report that all private cryptocurrencies, except any virtual currencies issued by the State, be prohibited in India.” The US Treasury Secretary, Janet Yellen, has also come down hard on cryptocurrencies in the recent past.