One of the chief characteristics of Bitcoin is that its coin supply is limited — not more than 21 million coins can be minted out of which, as of January 2022, 18.9 million bitcoins have already been mined.
Bitcoin inventor Satoshi Nakamoto, the anonymous name used by the creators of the Bitcoin cryptocurrency, designed the cryptocurrency essentially as digital gold and capped the maximum supply to mimic the finite quantity of physical gold.
But then the parallel between the two is superficial. Gold glitters and can be seen and touched. It is tangible. Bitcoin, on the contrary, exists only in the virtual world. While the blockchain technology that tracks it might make it tamper and foolproof, it has fascinated people across the globe by its sheer mystic and myth alone.
Sheen wearing off
And such mystic and myth seem to be wearing off. No wonder. While the price of gold fluctuates, it has not been mauled or ravaged as cryptocurrencies in the wake of the pandemic and war-induced worldwide recession have been.
On June 22, 2021, Bitcoin tested $30,000 after breaching the 50,000 mark and peaking at $68,000. Now it has tested $20,000 and its downhill course isn’t over yet. One shudders to think what would have happened had Elon Musk not been halted in his tracks and his company Tesla allowed to sell its cars both for greenback and Bitcoin.
Let us say Tesla had sold its electric car priced $100,000 and accepted two Bitcoins as consideration when it was trading at $50,000. Accounting and taxation nightmare of untold proportions would have ensued had it not fetched back-to-back $100,000 to the company.
In April 2021, Tesla boasted that its investments of $1.5 billion now commanded a staggering value of $2.48 billion and thus had made a billion dollars for its shareholders. Sober punters don’t open the bubbly unless the profit is booked. Tesla committed the cardinal sin of celebrating prematurely, little realising that gyrations on bourses do not necessarily translate into profits or losses. Be that as it may.
Lure of dollar
Cryptocurrencies have held sway among fiat currency sceptics who question the undeserved international-currency status of the greenback or the US dollar which, like Bitcoin, has no underlying asset. To be sure, the US dollar was backed by gold during 1944 to 1973 when the gold exchange standard held sway — bring $35 and walk away with one ounce of gold. This offer was only to nation states and not to individuals.
Paul Erdman, in his riveting novel The Billion Dollar Sure Thing, explains vividly how it was one durable myth that pulled wool over the rest of the world’s eyes. The US never did have that much gold and it was just bluff and bluster, secured in the knowledge that no one would flutter the dovecotes of the US dollar.
But when the Gulf War heightened the hostilities and petrodollars or Eurodollars challenged the greenback’s hegemony, the cookie crumbled and the dollar-gold peg was suddenly and unceremoniously withdrawn by the Nixon administration when an ounce of gold got sold for $125.
Meanwhile, the world was hooked to the US dollar. So much so that wrenching away the dollar-gold peg hardly made any difference to its fortunes. But the fact remains that the world currency order is irrational.
Enter Euro as the challenger on January 1, 1999 and it was thought the US dollar’s irrational monopoly would be broken but that was not to be. It is believed that the US dollar in circulation outside the US is more than what sloshes around inside. The mythical Satoshi Nakamoto’s Bitcoin was a riposte to the greenback. But that too clearly has come unstuck. TINA (there is no alternative) factor is helping the US dollar along.
Underlying asset lacking
Cryptocurrencies may have peer to peer (crook to crook?) acceptability but it can never make the grade as legal tender. That El Salvador made it legal tender was an aberration. A currency that has no body to be kicked and no soul to be damned can never be a serious contender as a mode of settlement. It has no underlying asset and no regulator or guarantor. While the greenback too has no underlying asset, it at least acts as a regulator and guarantor.
Bitcoin then is condemned to remain speculators’ delight and an asset class for investors too. The Indian government has wisely conferred on it the asset and not currency status and slapped a 30% tax on gains made from it.
Bitcoin may rise from detritus and shine again when speculative sentiments improve, but rational investors singed by it won’t touch it with a barge pole again. Blockchain technology and mystic alone cannot be the twin USP that can revolutionise the world currency order.
In any case, there are certain functions that can never be in the private realm. Currency and nation’s defence are two examples. Private currencies can be chaotic as private armies can be deadly. Both are disruptive.
(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)