Bitcoin may be in a bubble but it's about to disrupt the concept of money. Here's why
Global bitcoin expert Andreas M Antonopoulos spoke in length with Moneycontrol News on the philosophy and need of a currency which is decentralized, deregulated and not under the control of any government.
Money makes the world go round, as the saying goes, and yet few of us ponder over its existence or history.
From the barter system to gold coins to gold-backed currency to paper currencies, the medium of exchange has evolved with humankind's progress.
A fast-increasing class of people believes that the future belongs to digital currencies -- these are currencies that are virtual, decentralised and operate without oversight from central banks, who have been the regulator of currencies for a few currencies now.
Bitcoin, based on the blockchain technology, is currently the most famous digital currency.
When it first came into existence, many termed it as ‘not real’ money, arguing that it cannot be held in one's hand or physically kept in a wallet.
From the sidelines of a public talk arranged by Zebpay, global bitcoin expert Andreas M Antonopoulos spoke at length with Moneycontrol on the philosophy and the need for a currency which is decentralized, deregulated and not under the control of any government.
Andreas is a technologist and serial entrepreneur who has become one of the most well-known and well-respected figures in bitcoin.
In the interview, he talked about why bitcoin has an upper hand over fiat money, what it derives its value from and at what point can it see mainstream adoption.
Why should bitcoin be preferred over traditional currency and what is the idea behind it?
Andreas: For the same reason people appreciate the internet over the telephone network or over the postal service, it is really quite simple.
The internet created this opportunity which was the free flow of information across borders, across the world, connecting everyone with equal access. The internet isn't about the protocol, the protocols change, but the core idea is the free flow of information across the world.
Bitcoin is free flow of money across the world. That it is as simple as that. Why would you need the free flow of money? Because we don't have free flow. In fact, the money industry is one of the most restrictive, compartmentalized, anti-competitive, country basic locked up industry that exists.
It is one of the last remaining industry that hasn't faced competition from information technology, until now and so the free flow of money is the core concept, that's achieved through a protocol, that protocol has no trusted central party because if you have a central party there won't be any free flow of money.
The central party will be forced to apply restrictions. Just like over the internet there is no third party, if there was, there would have been a list of censorship and licensing requirements.
So, that's what bitcoin does at its very fundamental.
People see this and get excited and think that this can form an investment, which is not a very good investment. It is very volatile. So, for the average person, it is riskier than internet stocks were in the middle of 1990s. They went through many bubbles.
But, there is a difference between what the internet stocks that went through bubbles and the internet itself and what it gave humanity. So, you could have a bubble crash but the internet did not go away, it formed different companies around it and continued to create progress.
Bitcoin is very similar, as a protocol, it does not care about the price at all and if all the companies go away the bitcoin still stays, companies are just ways to get on it, use it and make a profit out of it. And the price is just a reflection of the currency value and it is very volatile at the moment.
There is some room for certain people to invest a small proportion to diversify a portfolio. So, one of the advantages that bitcoin has is because it is different from all other commodities out there, it is counter co-related.
So, from the money perspective, when fiat goes down bitcoin goes up. It moves similar to gold and so it forms a similar asset class as digital gold.
When will it be used more as a medium of exchange rather than just a speculative asset?
Andreas: Some people already accept it as a medium of exchange. However, because of its high volatility and price differential, it is only useful as a medium of exchange in areas of finance, where the existing mediums of exchange are very problematic.
For example, cross-border transactions are slow, expensive, full of security risks, counter-party risks, delays, and problems and is very costly as well. So, in that area bitcoin is far superior.
As gradually the technology expanses and the market liquidity gets bigger, the volatility will reduce. As volatility is reduced, new applications that were not possible because of it become possible and its use expands.
What gives value to bitcoin?
Andreas: Part of the reason why people have a hard time understanding what gives value to bitcoin is because they don't understand what gives value to money. So, when you hold a rupee note in your hand what gives it value, it is not a promise from the central bank. What gives value to rupee is not the Reserve bank of India (RBI) or its promise and full faith in credit of the Indian government.
What gives it value is that your fellow Indian's believe it has value, and use it on a daily basis.
That's why even when the central bank breaks the promise, full faith and credit unless you have one of the old Rs 500 note, in which case where is the full faith in credit? No faith, no credit, so even that promise is broken, interestingly enough that damages the value of the rupee but it still does not take it to zero.
If the value of a rupee was completely based on the government’s promise then the moment they said that it had zero value, it should have gone to zero value but in fact, it was only discounted by around 15-20 percent, people would still take the old money. That 85 percent value in the currency shows that value does not come from the government, it comes from other Indians.
Where does the value of bitcoin come from? It comes from other people on the internet, who are with you, believe that because this technology cannot be arbitrarily changed, because the number of coins issued cannot be arbitrarily increased, because it is useful for trans-national transactions, someone will want it tomorrow and will be willing to give you products and services and that's what gives it value, it's that belief.
This is a fundamental issue because the currencies have always had the face of a queen, a king or a national leader and we think that the face is what gives it value but that's not true. An economist understands that but an average person doesn't.
Bitcoin represents private money; it says that we can do without the flag, the king, the queen or the prime minister as the face. We can use mathematics, we can use internet propagation, and we can develop the same properties of money [which are], portability, fungibility, unforgeability, and security that makes money useful in something that is digital.Follow @shukla_05sid