The true value of Bitcoin is not what you think. As I see it, cryptocurrency does not replace fiat money, banks, financial systems, or anything else: the airplane did not replace the train or boat, and the train did not replace horses. Cryptocurrency is simply a whole new world of possibilities, addressing and finding solutions for the needs of those people that have always been the first to benefit from new technology: the ones who can pay for it, the movers and shakers, which of course includes de early adopters.
Bitcoin and cryptocurrency in general, just like the airplane and other technological advances may be said to respond to a dream, not a need. And speculators certainly take advantage of the dream and aspirations of individuals to make profits and other advantages, creating price bubbles and market distortions that have nothing to do with a tangible value for whatever they are speculating on. Of course, speculators are often transitory millionaires, much like the gambler that hits the jackpot and keeps on playing the game. So, what is the value of this new form of money? For one, it is designed to be independent of all political governance mechanisms, incorporating what the Cryptocurrency Standards Association calls “Satoshi Standards” into the open source software that operates it:
a) Freedom, in that it is free of jurisdictions and of conditions for its use, and anyone with an Internet connection can use it;
b) Equality, in that all users are equal, all miners are equal, and coders need miner approval for changes to be made to the system; Equality also means that the user of the software is not subject to centralized controls or validation, since the Blockchain is a descentralized, globally distributed open ledger that all can see.
c) Transparency, is a product of the open distributed ledger, since every transaction and a “paper trail” of transactions for every unit of currency are there for all to see.
d) Privacy, in the form of pseudonymity, in which all users have unique identifiers, with encrypted public and private keys that serve to ensure security.
No other money offers all four benefits, and only cryptocurrency is independent of our financial controls and regulations, which is why it became of interest to criminals, including petty thieves who think that privacy is anonymity. This is also what regulators and police have focused on: the possibility that they might not be able to identify a criminal who is using the money, which is often the case with unmarked cash. Gold and other high value assets can also be anonymous, but remelting gold or erasing micro engravings in diamonds is really a lot of work. Not surprisingly, in this age of fake news, the fable of anonymous and untraceable Bitcoin or other cryptocurrency often makes good headlines, and serves to disguise the true value of this new form of money: the powerful elites can use it to free themselves from the perceived dangers of our present day financial systems.
Cryptocurrency is an honor system backed by mathematics, not force, and the price is set between buyer and seller, with the possibility of including conditions or “smart contracts” to protect against fraud. You do not have to pay the financial system to protect, store, or even transport your value: cryptocurrency does that by itself, and the same security measure you must take to protect your banking accounts are used to protect your private and public keys, and the equipment you use to connect to the internet. It is an honor system in that it is not based on law nor backed by anything of value save the honor of the mathematical program that it is built upon. It is an honor system in that any use of force to take your wealth within the cryptocurrency system is, by definition, useless unless you personally give out your information.
Of course, this can be portrayed as useful to criminals, but it also protects the wealthy from being targeted by those same criminals.
In fact, the privacy of the “ultra-rich” has been under attack for the last few decades, because criminals also used private banks, unnumbered accounts, fake identities and other tools to evade controls and launder money, and even to finance criminal and terrorist activities. But no means was offered to help the ultra-rich maintain their privacy, and they became subject to the same controls that applied to the rest of the population.
Privacy and freedom are the two great benefits and value of cryptocurrency. And regulatory compliance can be built into all transactions without compromising these two elements, which are balanced by the other two Satoshi Standards: transparency and equality.
And in 2017 the conditions have come about in the country that most uses Bitcoin to allow the wealthy to literally invest in these two critical values, divesting themselves of holdings in fiat currency with all its limitations and problems, and depositing them in cryptocurrency that they recognize as a valid form of transferring and storing value.
Some bloggers and news media says that this is a ploy to evade foreign exchange controls, or to evade taxes, and it may look that way in the short term, but in the long term all fiat currency and the financial systems that use them are suffering from constant devaluation, market manipulation, hacking and other security issues, to mention just a few problems. Cryptocurrency runs on the Internet for speed, but as Andreas Antonopoulous loves to explain, can be run with paper wallets and text messages. A perfect solution for the individual or organization with a truly secure vault!
Which brings us to an unexpected value that cryptocurrency has: that of security. The four Satoshi Standards offer security to the user and the miner. How much is that security worth in money? I really don’t know, but I do know that the market for security and privacy services is huge. And smart contracts make it easy to define how and when the store of wealth can interact with the fiat currency system, and added level of security.
So how much is a Bitcoin really worth? Well, how much is a diamond worth? Who defines the price of diamonds? Instead of being defined by a market or government, the price is set by a private business that controls not only the supply but also the demand by means of its marketing campaigns. The Enron Scandal in the USA demonstrated how oil and energy prices were also manipulated, as did the recent LIBOR scandal with respect to foreign exchange markets. Well, nothing stops a small group of key investors from doing the same to protect the value they are storing in cryptocurrency, and I believe they’ve started doing so at this time. Of course, the lack of community standards creates risks for individuals who don’t know what they are getting into, not to mention the possibility of outright fraud, but governments have already seen that cryptocurrency is actually much more secure and stable than fiat currency. As was recently reported,
“Regulators of all countries have come to the conclusion that it is necessary to do a national virtual currency. This is the future. Each country will decide the issue of a specific time and maturity independently,” said Skorobogatova, speaking at St. Petersburg International Economic Forum (SPIEF 2017). (www.rt.com/business/390608-russia-bitcoin-cryptocurrency-central-bank/)
But I seriously doubt the governments will use a true cryptocurrency and will attempt to create a hybrid fiat coin that allows them to control all aspects of financial transactions int heir jurisdictions. This might actually work, because if salaries and bills and taxes are paid in the hybrid coin, it will be used. But I also think that the ultra-rich of the world, including international crime organizations, will avoid fiat currency as a means of storing value over the long term.
This will result in a new monetary ecosystem being created, one that can interact with but also exist independently of the payment, financial, and government finance systems. This will be the subject of a book I should be publishing before October, 2017.
Manuel F. Perez, MPA, CAMS
A renaissance man, student of how humanity’s multiple changes are leading to social, economic, political and technological transformations that he is actively tracking. With public, private and non-profit sector experience on an international level, Manuel Perez is active advising and coaching entrepreneurs in the Cryptocurrency and technology fields. He is also Co-Chair of the Cryptocurrency Standards Association (CRYPSA) and president of Space Renaissance USA (SR-USA).