Intellix - Bitcoin: Will it be the global Fei or end up like tulip crisis? | #Cryptocurrency | #Bitcoin | #Crypto | #Money |#Finance | #News

More people might have read about Bitcoins in the past few weeks than the movement of Dow Jones Industrial Average, or what the outgoing Federal Reserve Chair Janet Yellen was to say. 

That shouldn’t surprise anyone though. The cryptocurrency debuted on the CBOE Global Markets’ exchange last week, surged 25%. It rose from a November low of about $7,000 to a high of more than $17,000 a few days ago, before falling to $16,261, as data from Coindesk.com shows. As we write it is at $17,539, and few know how where it will be when the article hits the stand. 

As these things happened in the US and elsewhere, authorities have been warning against trading in cryptocurrencies which is as worthless as the paper it is written on.

How does one reconcile the fact one regulator in charge of fiat currency warning against what is perceived to be a currency, and the treasury seeking to benefit from avarice?

Does Bitcoin, or other cryptocurrencies, count as money?

Anthropologist William Henry Furness III in his book, The Island of Stone Money, talks about the monetary system in Caroline Islands in Micronesia, a German colony in the Pacific Ocean at the turn of the 20th century.

An island of a few thousand inhabitants that did not have any recourse to metal or paper, had a medium of exchange called Fei, which consists of solid stone.

wheels ranging in diameter from a foot to twelve feet with a hole in the centre. Since these were huge there was no need to possess it, but an acknowledgement of ownership was good enough. Much like the funds in your bank account which can be transferred, fei was being used.

Nobel laureate Milton Friedman didn’t believe there was much difference between fei and gold. In fact, he extends the argument to even the US dollar. How is one piece of rectangle paper with Abraham Lincoln on one side different from another rectangle sheet where Lincoln appears in a glossy paper?

“The short answer – and the right answer – is that private persons accept these pieces of paper because they are confident that others will,’’ writes Friedman. “The pieces of green paper have value because everybody thinks they have value because in everybody’s experience they have had value – as is equally true for the stone money.’’ Going by Friedman’s logic for money, Bitcoin makes the cut!

But there is a catch. For something to become money, it has to be accessible to everyone and in denominations that can help transactions. At $17,000 apiece, it is good for buying a car, or a seaside home, but not onions and tomatoes.

History shows even fiat currencies have turned worthless. Germans shunned the Mark post World War-I due to hyper-inflation, Zimbabweans the dollar under Robert Mugabe and now Venezuelans the Bolivar. Bitcoins are in good demand in the land once ruled by Hugo Chavez.

What about those who are buying Bitcoins to make a quick buck?

Financial history is strewn with lessons of how manias build up, and crash taking millions with it. Probably the first recorded is the Dutch Tulip mania in the 17th century. When new varieties of tulip bulbs were introduced, prices soared multiple times in a matter of months triggering people to pledge land to buy the tulips which didn’t have much value. When prices collapsed, it left a trail of misery.

Fluctuations in Bitcoin’s price itself would make it a risky bet that many would avoid, but draw a few brave hearts. But it is also set to draw attention of governments and central banks who now ‘control’ money.

“Governments now look at it like it’s a novelty, but the bigger it gets the less of a novelty it becomes,’’ says JPMorgan CEO Jamie Dimon. “Nations make currencies, but they like to have central banks controlling them. They like to know who has it, where it’s going, and why it’s going there. My point is, the bigger the Bitcoin gets, the more likely governments are going to close it down... China just did.’’ Cryptocurrencies can become the global Fei, or end up like the tulip crisis.

Raymond Goldsmith had this to say on the financial crisis: “It is like a pretty woman – hard to define, but recognisable when encountered.”