Crypto doors to the future
So if Bitcoin’s credentials as both a currency and an investment are open to serious doubt, why should anyone pay it any heed?
First, because it is spurring the development of an underlying technology: distributed ledger systems like blockchain. Distributed ledgers are essentially means to ensure that no one authority controls transaction information; instead it’s a database that’s shared and updated across the whole network. For a long time, Bitcoin and blockchain were inseparable in many people’s minds. But whereas Bitcoin relies on blockchain to verify transactions, blockchain can be applied to any number of units of account.
Massive recent investment in computing power by Bitcoin mining operations and in the development of other crypto-currencies is analogous to the huge spending on telecoms infrastructure during the tech boom of the late 1990s. Many companies involved back then ultimately went bust when tech crashed in 2001, but the infrastructure remained, providing the foundations to the Internet revolution of the past two decades.
Bitcoin could prove a similar building block for the next generation of financial technology, not least distributed ledgers. In fact, some investors see Bitcoin as an equity investment in blockchain – holding Bitcoin is as if you were holding a share in a blockchain company.
Bitcoin could prove a building block for the next generation of financial technology
At the same time, crypto-currencies are unlikely to disappear altogether. In a world of massive monetary policy experimentation, a serious accident caused by central banks is not unrealistic. Even the reserve currencies are potentially at risk of hyperinflation, a monetary crisis that could fatally undermine the existing system.
That might seem far-fetched, but monetary regimes don’t last forever. The current, post-Bretton Woods settlement has only been around for 40 years. Before the existing system could be abandoned, there would first have to be a replacement, such as crypto-currencies. Which is why their development could be marking the first stirrings of a regime change.
Mass adoption of crypto-currencies would rob central banks of their monopoly in creating money and thus running monetary policy. A Bitcoin-based economy would be a much more volatile one. Little wonder then that central banks are mulling how to create their own digital currencies.
All of which is to say that whatever happens with Bitcoin in the near future, some version of crypto-currency is likely to stick around.
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