For many people, last week was the moment when Bitcoin registered as something they should know about, as it saw a sky-high boost in value.
Bitcoin is a currency. Society uses standardized currency to exchange things of value. When you sell something, you can either trade for some other good or service the buyer is selling, or you can receive currency – in other words, money – that you can then use to buy something from a different seller. There is nothing magical about a currency – it could literally be anything – provided everyone in a society agrees to accept it as such.
Currency must have some consistency in its per unit value. If currency does not have a clear value, it is hard to buy things with it; the seller will always want more while the buyer says “only this much.” Additionally, a currency has to maintain its value over time, since the holder may not want to spend it right away. Currency only has value if we all believe it has value.
This truth has made people uncomfortable for generations. History has shown governments have often forced its citizens to use a currency that is not desirable as a store of value, or undermined its value by unilaterally changing the value per unit of its currency (a devaluation), or creating large budget deficits that it finances by unilaterally creating more currency (inflation). This is why you often hear central bankers talk about inflation as a bad thing – they are afraid that an erosion in the value per unit of a currency will make it less desirable. It’s also why nations who have currencies that are not as stable will often put in place “exchange controls” which make its citizens unable to use other currencies that might be more stable or desirable.
Bitcoin’s underlying operational structure – the blockchain transaction ledger system that supports it – is not subject to government scrutiny or regulation. Bitcoin is thus incredibly useful for people who want to hide their transactions and money from governments. But, it’s also attractive to people who fear government actions that could cause a devaluation of the currency they are currently using.
Right now, people are taken with the rapid rise of the price of Bitcoin as a financial phenomenon. I think that they should be focusing on two things that are much more significant. The first is that much of the demand for Bitcoin is coming from nations that have exchange controls where citizens are using the anonymity of the Bitcoin market structure to avoid these controls.
The second, which concerns me much more as a U.S. business person, is that the people are signaling that they think that it is worth much more than the U.S. dollars they are using to purchase the Bitcoin. As Congress is about to explode the U.S. budget deficit through some very ill-advised tax cuts, they should take note of this market signal.
Since World War II, the U.S. dollar has been the primary international currency. This has benefited us tremendously. More than any other factor, this primacy has allowed our country to have low borrowing rates, low inflation and low energy costs. If the U.S. dollar loses its attractiveness because society finds a preferable currency for exchange (whether it is Bitcoin or any other currency) – the implications for the U.S. economy are grave: higher interest rates, higher inflation, higher energy costs and lack of price stability.
History is littered with governments that eroded the value of their currency through financial imprudence. Our nation is not immune from this fact. If international investors, and our own citizens, lose confidence in the U.S. dollar we will pay dearly. Bitcoin’s rise could be a sign of trouble to come.
That’s why it should matter to you.