The ‘hook’ in my title is just to indicate that I am going to join the BBC in making Bitcoin and cryptocurrency the subject of a brief comment this week. Bitcoin’s value hitting a new record high value makes it topical.
I don’t intend to explain what cryptocurrencies are – that can be done at so many different levels and I think requires more professional graphics and video skills than I can offer if it is to be presented in an understandable way. The BBC’s posts in the finance section of their website are one quite useful introduction. Beyond that, you can go as deep as you like with some Googling.
What I want to remind readers is that although Bitcoin and many other offerings like it are called currencies, they are in reality better described (at the moment) as commodities. Their pricing is not determined by the same factors that influence the value of the US dollar or the Pound Sterling – global trade flows, central bank interest rates, government debt issuance and so on.
Governments can increase the supply of their sovereign currency at will, and to a large extent decide on its relative value (the Chinese are infamous for doing that). Because of the way crypto currencies are created using a computer process known broadly as ‘blockchain’, increasing their supply is a slow and IT resource (and electricity) intensive. That is quite different.
This makes cryptocurrencies a recognised store of value in limited supply that is usually securely stored, but can be stolen, which is hard to use for day to day financial transactions (but can be so used with the right accounts), the value of which is not within the control of central banks and which varies in value solely on the basis of supply and demand.
Just like gold bullion, in other words.
In general, cryptocurrencies are more like commodities than cash. As such they may be suitable investments for some people.
The issue that I worry about is that some hundreds of years ago, central banks realised that if they accumulated large amounts of gold, they ‘took back (some) control’ – where I have heard that phrase before? No doubt they will be asked by their controlling governments to do the same with cryptocurrencies.
In the meantime, you can expect some elements of the American Wild West, or even the European piracy boom of earlier centuries to prevail. So if this sort of investment appeals to you, do your research and make sure you know what you are getting and how you can liquidate it back to boring old bank deposit money.
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