Remember that wonderful time before gold-backed cash and now US dollar-pegged cash was invented? ( In economic terms, the value of a country’s money used to depend on it’s gold supply. Then the gold standard was done away with. The current currency valuation is pegged to the value of the US dollar. )* Before that time, the earliest humans (or neanderthals and so on) bartered goods in exchange for other goods. They simply had a barter economy.
What is barter ?
Under our Civil Code, by the contract of barter or exchange one of the parties binds him/herself to give one thing in consideration of the other’s promise to give another thing. It’s different from the usual buy- sell (a contract of sale) where money, or its equivalent is used.
Barter a last resort
When a country becomes bankrupt or at least, is hanging on by a thread (read Greece), there’s a tendency for its citizens to resort to a barter economy. What good is your cash if it can’t buy food? Greeks took money out of their banks and bought Chanel bags instead, which they say, held values better than their own currency.
In pre-2000 Brazil, hyper-inflation was so bad it’s money was basically worthless. One doctor wanted to be paid in appliances instead of cash. Argentina was likewise bankrupt in 1999, leading to a barter system.
What is bitcoin
The latest high-tech commodity for barter is bitcoin. Bitcoin is said to be a digital currency** invented by a group of individuals in 2009. It’s simply made up of computer code. How it works is your spending / buying of bitcoin is recorded on a ledger / the blockchain, which is in the form of an open source software distributed to all users. This ledger may be verified by anyone, lessening the risk of double-spending bitcoin.
This verification is made by solving complex mathematical equations to add transactions to the blockchain. You solve equations and are then rewarded with bitcoin. This is called “mining” bitcoin.
The merits of bitcoin
Bitcoin value is said to be stable like any currency as it is pegged to its number. A set number of bitcoins were invented so their number stays constant. However, not all of these bitcoins have been “mined” by people. Bitcoin may be obtained by buying them or by “mining” them. Once all bitcoins have been mined, you have to purchase them in the secondary market (bitcoin exchange companies). But since not everyone is a math genius, most people just purchase bitcoin on exchanges.
There are no transaction costs to using bitcoin, no credit card transaction charge, no taxes (?), no necessity of opening cross-country bank accounts.
As a caveat, I have never used bitcoin. I hold most of my assets offline for security purposes. I have tech paranoia from watching too much Terminator! Haha. I don’t have a credit card and I rarely shop online.
The few times that I tried online shopping, however, I came across stumbling blocks where bitcoin may prove useful such as online stores that only recognize US credit cards. For others, bitcoin may be useful if banks are beyond the places where they live, facilitating financial inclusion.
Pitfalls of bitcoin
But mostly, any visit on the darkweb will show that bitcoin is mostly useful to dubious individuals who want to anonymously buy and sell drugs, guns, people, babies, pills, and mostly anything illegal on the internet and have these delivered to their doorstep (well that may be difficult when it comes to buying people). My curiosity led me to click on a link to the “Google” of the darkweb. The search results were just traumatic! A word of caution when visiting the darkweb, you might pick up a virus along the way. I don’t recommend it.
Valuation for future value
Bitcoin trading vs forex trading
Bitcoin is not issued by any central bank. It is not backed by anything. Most importantly, it is not recognized by our Bangko Sentral ng Pilipinas (Philippine central bank) as legal tender but the exchange and transmittal thereof is regulated by it.
Unlike foreign exchange trading, where the commodity is legal tender or foreign currency, bitcoin valuation for future value is difficult to do as its value is not tied to conventional indicators such as money supply, inflation rate, interest rate, country imports/exports, country gross domestic product, among others. Unlike stocks, bitcoin has no underlying business nor assets. However, similar to stocks and foreign exchange trading, the current price/ demand of bitcoin is largely driven by market expectations (people speculating on the price). A bitcoin is currently valued at USD 14,000.00/ PhP 700,000.00. The market value of all bitcoin is currently at USD 68 billion.
As a bearer commodity, bitcoin is easily susceptibility to theft
Bitcoin is essentially a “bearer” commodity. As such it is easily transferable to anybody who acquires possession, by legal means or otherwise. Conventional capital securities like stocks, bonds, derivatives, time deposit certificates on the other hand, are not so easily subject to theft as there are safeguards in place to prevent thieves from converting them to cash.
Note that for bitcoin, it’s current price may be solely determined by market expectations only. It stands and falls on how the general public feels a demand for it. Any tiny ripple in its reputation for (in)stability, then your investment may be in danger. Remember that bitcoin price crash when Mt. Gox, then the only existing exchange for bitcoins, was “robbed” or hacked. The latest hack occurred last month when a mining marketplace was hacked of millions worth of bitcoin.
The problem with anonymity
If you happened to receive stolen bitcoin, and it is recovered from you, from whom do you have recourse? What country’s law is applicable? Is there an underlying contract with the exchange companies? These are some things to consider before buying bitcoin.
Have you ever used bitcoin?
*apologies for the jargon. I try to simplify terms where I can so as not to bore readers.
** Currency is a misnomer as bitcoin is not legal tender