No Need to Reinvent Money


European Central Bank chief Jean-Claude Trichet made strong statements supporting the Euro and the Eurozone’s durability after the bank, once again, raised rates last week. His statements were intended to project confidence towards a currency that has recently been the subject of constant speculation following Greece’s slow slide into default. Speculators foresee a sharp recession as the loss of Greek debt-dominated collateral hits global markets, and even the death of the euro itself; all belief seems to be lost in European institutions’ commitment to maintain economic foundations.

Instead, there is the birth of an entirely new currency. Bitcoin has been called everything from the “future of money" to a "crypto-geek Ponzi scheme," and has been as strong a meme in the tech world as the European crisis has been in the financial one. 

It is an electronic currency, controlled by no central bank and minted by no treasury. Instead, it is “farmed” by the servers hosting its transactions, and its value is determined solely by supply and demand in the marketplace. Without vulnerability to dilutive government interventions like “quantitative easing” or sovereign defaults, Bitcoin was quickly established as the herald of a post-dollar utopia. It is a technological currency, not an economic or political one. Bitcoin is something new.

But this is all just chatter, taken seriously only by bloggers in tech forums. No matter how much Europe suffers, Bitcoin is not the next great global currency. Quite the contrary, Bitcoin would provide even less stability than the euro. Neither currency is backed by a common treasury or political union — the euro’s chief deficit vs. the dollar — and Bitcoin goes one step further by not establishing monetary authority to manage its supply. As a recent Time article noted, the economic case that this results in greater stability is not clear. The end result of this institutional construct is that Bitcoin holders are supported by no insurance, the market is vulnerable to manipulation, and the currency only exists by the confidence of its holders.

If Bitcoin had an intrinsic value, it would be in the computing power required to create it, nothing physical. In fact, it seems that modern “investors” are betting on the extent that the currency itself receives publicity and public curiosity, and not on any underlying economic fundamentals. The amount of press exposure goes up with every negative headline on Europe. Thus, the euro crisis has actually resulted in a direct transfer of value to Bitcoin, which is looking less like a currency and more like a financial derivative.

Bitcoin may be a fad and a scam, but it may also be a perfect sign of our times. Our "real" currencies no longer seem to be all that real, so we move to a virtual version. We prefer an undisguised bet over a well-disguised one; we are still seduced by the magic of technological innovation.

Photo Credit: Wikimedia Commons