Will Bitcoin replace cash?
There are now 180 currencies worldwide, but the emergence of new currencies has slowed consistently, and even declined.
With the rise in digital transactions – see the £7.7bn bid by Vantiv for card-processing leader Worldpay – and the emergence of digital currencies like Bitcoin, many have rushed to declare these the last days for cash.
Nonetheless, cash remains a huge part of the global economy, especially when you consider black market or ‘grey’ market transactions.
Governments, too, have good reasons for sticking with a cash-based, physical currency, says economics professor Mike Moffat: “As long as governments continue to collect tax, they will have the authority to dictate the currency in which those taxes may be paid.”
The prospect of a cashless society
Fiat currencies are a form of promissory note – they are assigned value because we assign value to them.
Before the era of electronic trading and banking, a gold standard was used to back currencies. Similarly, banks would hold large reserves of cash, its value based on the gold standard, in their reserves.
In the modern system, much of this representation is measured in purely digital terms. Modern value is assigned using zeroes and ones. The prospect of a cashless society is more possible than it has ever been.
“In the United States,” writes David G.W. Birch of Consult Hyperion, “studies indicate that maintaining a cash system – including printing new bills, recycling old ones, moving them about in armored trucks, using them to replenish automatic cash machines – costs the country about 1% of GDP.
“Those studies also show that the marginal cost of a cash transaction is around double that of a debit-card transaction.”
While the relative untraceability of cash, and the anonymity that affords are still of great value to us, they aren’t without their costs.
Nonetheless, analogue currencies look likely to remain a dominant form for the foreseeable future.
The dollar still has some road left: “In 25 years the U.S. dollar will probably still be the world's reserve currency, and Bitcoin may not be around at all,” says Ted Kemp of CNBC, summarising a 2014 CNBC 25 report.
Nicolas Colas, ConvergEx chief market analyst, points out: "The $100 bill is [already] the world's Bitcoin. It's anonymous. It's easy to use. It's actually easier than Bitcoin, because you don't need a computer or even power."
Bitcoin isn’t the only currency vying for a share of the world’s wealth, however, and its viability as a currency may not be its most important aspect.
As Markus Iofcea, Kostas Viskanta and Kevin Kohler of the Y Think Tank write: “Vaults filled with gold have been replaced by law and trust. Bitcoin and other cryptocurrencies represent the latest mutation in this evolution.”
Bitcoin and blockchain – the future?
Bitcoin was the first cryptocurrency to reach the popular imagination – indeed, its initially surging value and subsequent collapse after the failure of the Mt. Gox Bitcoin exchange in 2014 are sometimes blamed on the wave of interest in the currency in its early years.
Now, the price has stabilised somewhat – but many analysts are predicting that the technology which underpins Bitcoin could be far more significant than the currency itself.
Bitcoin are the end result of a process of complex computer decryption, with each decoded string generating new Bitcoin. Because the number of Bitcoin is finite, and the computation involved in generating them expensive and highly technical, this makes them both scarce, and valuable – generating a new industry of Bitcoin ‘miners.’
They are generated in a ‘blockchain’ – an encrypted public ‘ledger’ of transactions allowing users of the currency to establish trust, while remaining anonymous. Although Bitcoin’s fortunes continue to rise and fall, many new blockchain currencies are beginning to emerge.
“The system turns traditional banking privacy on its head,” wrote Morgan Peck in 2012. “All transactions are made in public, but they’re difficult to link up with a human identity. Maintaining the dissociation takes vigilance on the part of the Bitcoin user and careful decisions about which outside applications and exchange methods to use, but it can be done.”
Bitcoin provides ‘pseudoanonymity’ or ‘plausible deniability’ according to Bitcoin’s own Jeff Garzik: “People will learn from Bitcoin and build something better, or Bitcoin’s critical mass will force it to evolve and learn from its own mistakes.”
While Bitcoin's viability as a currency may be far from certain, the blockchain, the distributed online ledger that underpins so many of these newly-emerged digital currencies, could be the next evolutionary paradigm of the world banking system.