The classic functions of money are threefold: they are a medium of exchange, a unit of account and a store of value.
On this tally, none of the cybercurrencies stack up. They have a marginal use as a medium of exchange because some people will accept them in exchange for goods and services, but they are too volatile to be useful as a unit of account or store of value. Indeed in most transactions they don’t really serve as mediums of exchange because they have to be switched into real money first. They are, however, an asset class like gold, fine wines or classic cars…
So what is behind Bitcoin? Well, it is not clear that there is anything there at all. It may be that the holders of Bitcoin will collectively support it, in that they will accept it in return for goods and services. That would allow it to continue. But if they collectively try to bunk out, there would be a Bolivar situation.
Might there be collective support? The trouble is that we don’t know who owns the Bitcoin.
Anecdotal evidence suggests that the larger holders in the developed world fall into five groups. There are some tech-savvy people who got in very early and saw cryptocurrencies almost as a game. They are probably still holding onto all or most of their stock. Second, there are people around the world who have suddenly come into money – oil workers in Kazakhstan – and want to pop it into a variety of different investments. Third, there are computer students, who literally bought the hype and put cash into a few Bitcoin while there were still affordable. Four, there are general investors, many of whom who got suckered in last autumn and are sitting on big losses. And finally there are the illegal or tax-avoiding holders who want an asset that is under the radar.
The intriguing question is this: who, among these groups, really needs to sell? …
We will know the answer pretty soon. My instinct is that these cryptocurrencies will disappear in a puff of smoke. I just hope too many people are not too damaged when it happens.
Eulogy made by Hamish McRae
