After imposing restrictions on bitcoins recently, the price of Bitcoin plummeted to the level of $34,000 (£24,030) for the first time. This has to be seen in the backdrop of the situation, where, Tesla reflected an unwillingness to accept the currency for their transaction.
So how one should interpret the situation. Is China going to loose, for not accepting the currency, or could it just be the other way around?
What’s so fuss about bitcoin?
Bitcoin was created so as to free the currency from the central financial authorities like governments and central banks, etc. In this way, it will loosen the grip of the central governments over the currency, in one shot. Moreover, it is also devoid of any intermediaries, as it works on “peer-to-peer” basis.
There is also an argument that, bitcoin will relax the currency of its depreciating nature. For example, printing of excess notes might create the fiasco of inflation, which could be avoided by the use of bitcoin currency. At the same time, no single agency creates bitcoin, which further mark its relevance. Further, each bitcoin is itself been divided into its constituent parts known as “Satoshis”, which has its own advantages.
Bitcoin and developing nations
Some studies have made strong arguments, that developing nations should go for the adoption of bitcoin currency. By including this currency in their circulation, such nations will turn out to be less susceptible to inflation. Not being tied to domestic reasons, bitcoin will not be eroded in its value as a ‘normal, currency. Moreover, bitcoin will be resistant to domestic market volatility. Due to this reason, bitcoin enjoys more fan-base in the developed economies.
In the past, authors have made argument that how the governments, institutions, etc. have manipulated the monetary policy and markets so as to benefits the few, at the expense of whole society. This has resulted in American and French revolutions, a poignant reminder of Europe’s “Dark Ages“.
But this argument overlooks one important thing. Bitcoin, being a global currency, will undoubtedly be dominated by the major economies of the world. Therefore, the value of bitcoin will fluctuate as per those economies, thereby, putting the situation of developing countries in peril. Moreover, bitcoin is a high-risk, speculative and volatile asset. Like many high-risk investments, it goes through boom-and-bust cycles. During the boom period, it might create the frenzy of exaltation which pumps up the price to an enormous level. For example, the price of bitcoin rose to over $1000 from just $13 in the year 2013 and it again gained the meteoric rise to $20000 from just $1000 in the year 2017.
In addition, the cybersecurity network of the developing nations is not at par with that of the developed nations. Therefore, keeping the former in an even more vulnerable position. I have already mentioned the threat of virtual currency in my earlier article.
Bitcoin and Adam smith
So, would Adam smith have favoured the bitcoin currency, had he been alive?
One might think that, as a champion of free trade, he must have given his assent for the circulation of bitcoin. In addition, bitcoin will further serve the purpose of ‘invisible hand’, the concept very well thrived by Adam Smith.
This thinking is flawed, due to two important points.
Primarily, Adam Smith has not discarded and ignored the financial institutions altogether. Moreover, he has explained the importance and imperativeness of banks in the circulation of money for society.
Secondly, Adam Smith and economists like Carl Menger, have given importance to currency in terms of society. The currency, according to them, must be socially accepted and needs to be valued by all. Bitcoin lacks this crucial aspect.
It might seems that, at this point, Keynes and Adam smith would have found themselves on the same page.
So, finally, is China going the right path?
Indeed, it is. The currency which is highly vulnerable, not socially acceptable, susceptible to manipulation, etc., will only add woes to the economic problems for any nation, as of now. Bitcoin is still in its infancy and still has to traverse a long path, unprecedented in nature, to make a history of its own.