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Digital Business insights: Bitcoin buyer beware
A MEANS of exchange is simply a promise between two or more parties.
The modern form of exchange began roughly 400 years ago in Europe when banks started issuing notes in return for deposits. This meant that the banknote could be redeemed for gold or coins by anybody presenting it for payment. Over time all banks started issuing fixed denomination promissory notes and that is where we are today. Banknotes.
Typically, a banknote states, "I promise to pay the bearer on demand the sum of whatever the value of the note." Most countries assign the responsibility for issuing banknotes to a central bank.
So the promise of the return for the note is backed by the central bank in each country. And the central bank and the promise in most cases is backed by law.
In countries where there is some distrust in the ability of the central bank to support the note, people tend to rely on US dollars, Swiss francs, Pounds Sterling and so on. These currencies are perceived to have more stable, reliable and intrinsic value than many others.
And if things get really uncertain, people transfer their notes into gold, diamonds or other precious metals.
It's pretty simple really.
Little or no trust = gold and jewels, and at the most catastrophic level, food.
More trust = big, reasonably stable economies and the currencies issued by their central banks.
The key word in all this is exchange.
I have something that I can exchange without problem for goods and services, and it has a value that I understand.
There is always a risk. But the risk is mitigated when the whole economic system relies on the billions of promises that central banks effectively put on their notes or their electronic equivalents.
It is no longer about the absolute reality of the promise on the note, it is about the backing that central banks give to the notes. This makes them a means of exchange. Banknotes then have an exchange "rate" when they are moved from country to country.
So what is Bitcoin?
Bitcoin is a means of exchange if two people or more agree that it is a means of exchange. With this agreement, Bitcoin becomes currency. But only for those people.
How Bitcoins are created, mined, their rarity, their security etc are all red herrings.
Even red herrings are a means of exchange if two or more people agree they are.
That is what barter is. That is what Bitcoin is. It is a Bartercoin.
That is the easy bit.
The hard bit is the universality of exchange and whether or not Bitcoin fits into the system or any system. And whether it needs to.
Exchange agreements are now universal. It has taken a long time for the world to evolve its current exchange system. And cowrie shells are no longer part of it. Not universally.
The risk with Bitcoin is simple. Bitcoin has no universal value. Bitcoin has no value.
The value exists only in a transaction where both parties agree a value and where both parties are in a position to enforce that value. There is no intrinsic value.
The risk to anybody is in acceptance of Bitcoin as a payment for goods and services. And the risk is all yours.
Bitcoin can be potentially useful where both parties already trust each other, are part of a existing collaboration of organisations but in different countries, or where one or both parties are involved in illegal activities, want to avoid scrutiny or taxation and can use muscle or threat to ensure fulfilment at some later stage.
The other factor that clouds the Bitcoin story is the current level of hype.
Here we go again. Yet another sophisticated digital pyramid scheme with a few bells and whistles thrown in. First in, you win. That is always the hook for the unwary.
The hype has arisen largely from the view by certain people that Bitcoin is a useful vehicle for speculation, which confuses the issue even further.
For speculators, it doesn't matter what Bitcoin is. If an investment can be made, value added and an exit completed, who cares? Exit is the key word here.
There is only a problem if the speculator can't get out.
But for the rest of us, normally when there is an exchange of currency for goods or services, there is agreement at the time of exchange, on the value.
Which is even true for Bitcoin of course.
But the value of Bitcoin currently fluctuates hugely and will continue to fluctuate up and down, and possibly even diminish and disappear altogether.
In that case, the promise (which is implicit in the currency, that it has an agreed value) will fall back on the parties using the currency to sort out.
So if Bitcoin is now worth nothing. Or very little. Do we still have an enforceable agreement? Note the word enforceable.
That question will be answered differently, by different players. For some (those with existing trust or muscle), the answer is yes. Nothing has changed.
But for others, it will be hard to enforce agreement in any court in any land.
Though, those with deep pockets will no doubt give it a try. And possibly even succeed, especially in the land of litigation. But for most of us, dream on.
So, as usual buyer beware.
The digital revolution has seen a number of hype driven booms and busts so far. Bitcoin is another. There will be more to come.
- John Sheridan, December 2013.
John Sheridan is CEO of Digital Business insights, an organisation based in Brisbane, Australia, which focuses on helping organisations and communities adapt to, and flourish in, the new digital world. He is the author of Connecting the Dots and getting more out of the digital revolution. Digital Business insights has been researching and analysing the digital revolution for more than 12 years and has surveyed more than 50,000 businesses, conducting in-depth case study analysis on more than 350 organisations and digital entrepreneurs.
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