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Bitcoin is not a currency

The ‘currency’ part was just a great marketing campaign, like the ‘a diamond is forever’ campaign was for De Beers.

In recent weeks various voices have confirmed the fact that bitcoin is not a currency. First there was the Israeli central bank who came out to state that they do not recognise virtual currencies such as bitcoin as actual currency. Then there was Stripe, a leading global payment processing company and one of the first to enable bitcoin transactions who announced that they will not accept bitcoin payments any longer.

The core purpose of a currency is to be a token of exchange used to purchase goods and services, but the significant volatility of bitcoin, whether positive or negative, makes it too risky for merchants to use as their currency of trade. Then there’s the transaction times, but I am not even getting into that. At the moment the volatility is the main issue in my view.

The fact that you can search for the market capitalisation of any cryptocurrency should be a clear giveaway. The market cap of cryptocurrencies depicts the total value of all tokens, coins etc in circulation in US dollar denomination. If you search for the term “US dollar market cap”, you will find many things, but none of them will provide you with the total value of all dollars in circulation.

If they were in fact currencies, the only measure of success would be its adoption by buyers and sellers of products and services. The overwhelming information about every cryptocurrency seems to be how much they would be worth in future, rather than its adoption. Cryptocurrencies are therefore vehicles of pure speculation at the moment, nothing more and nothing less.

If someone is serious about creating an alternative blockchain-based currency, it should be pegged to a more stable currency, like the US dollar, until its adoption is significant enough to stand on its own. Then, once it is widely used, it can be taken off the “dollar peg” to see what happens.

1. Similarities between cryptocurrencies and financial instruments

During an Initial Coin Offering (ICO), the issuer can choose what the cryptocurrency will represent. Some represent tokens (like vouchers), others represent the right to income (like a type of preference share) and others represent a form of ownership, like ordinary shares.

While the stories of a decentralised currency sound beautiful and idyllic, it is still a few years away.

In the meantime, people who intend to buy cryptocurrencies must treat cryptocurrency investments like share investments. So, at least ask: “What is the underlying value of the asset that is represented by this financial instrument.” Before you decide to invest. You can take a view on the future value of the underlying asset or service, I don’t mind, but at least understand that the cryptocurrency in itself is worth nothing. It is only a representation of an underlying asset or service.

Let me give an example of how I see some of the cryptocurrencies in circulation.

2. Comparing cryptocurrencies with financial instruments

So many people are telling me that bitcoins have a value because there is only a certain amount in circulation. Others explain to me that bitcoins have value due to their absolute trust in the blockchain as a decentralised trust authority.

So, while taking this into account, let me ask you a few questions:

1. Do you know of anyone who had their shares stolen on a public stock exchange?

2. Do you know of any public stock exchange that “lost” someone’s shares because their systems are not trustworthy?

If you answered no to these questions, then the value of the blockchain as a trusted method to exchange financial instruments is nothing new, since the world was already able to do it faultlessly without the blockchain.

So, let’s say bitcoins were shares (securities) listed on the New York Stock Exchange and it is impossible to authorise more than 21 million shares in the bitcoin company.

Then, these would be the facts about the company:

  1. The company holds no assets;
  2. The company earns no revenue and has no intention to earn revenue in future;
  3. The shares can be transferred from its owners to any buyer who has a trading account;
  4. The company will increase its issued shares slowly until it reaches 21 million.

That’s it, nothing more and nothing less.

Many companies buy the shares of other companies through the transfer of shares. Shares are therefore also instruments to transfer value. With the only difference between shares and cryptocurrencies being the method through which it is done.

Yes, I understand the value of the blockchain as a transparent decentralised trust authority, but we must see it for what it is. It is a method to transfer financial instruments that represent the value of an underlying asset or service, not a currency.

*Neither this post not any part of it is intended, or must be considered to be financial or legal advice. It is written for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses.

D’Niel Strauss is director at Stocks & Strauss.

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COMMENTS   17

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Stripe’s decision has nothing to do with their opinion on Bitcoin being a currency please do your basic due diligence before you try and deceive people.

‘The fact that you can search for the market capitalisation of any cryptocurrency should be a clear giveaway. The market cap of cryptocurrencies depicts the total value of all tokens, coins etc in circulation in US dollar denomination’

A new system need to be valued at the current best standard. Doesn’t mean it will stay that way.

`If someone is serious about creating an alternative blockchain-based currency, it should be pegged to a more stable currency, like the US dollar, until its adoption is significant enough to stand on its own.`
And this is where you just dont understand the reason in the first place for the need of a decentralized system that none controls.

`1. Do you know of anyone who had their shares stolen on a public stock exchange?
`
In 2016 SARS stole lots of money straight from my parents bank account. It took them 8 months to recover it. This was 100% SARS mistake, they recognize this but they just didnt not seem to care that they held money that was not their for 8 months for no reason. Shares can similarly be frozen by third party and that is why we want to get away from them.

2. Do you know of any public stock exchange that “lost” someone’s shares because their systems are not trustworthy?
The enormous fees we pay these people to “keep our shares save” is laughable.
And again a government can force all your assets frozen, including your precious shares. Basically you are 1 Zuma or Mugabe away from getting your assets frozen for “political reasons”

Considering the above the rest of your article is pointless.

Vexxo, a good response and I wonder if D’Niel Strauss will refer to these comments as he failed to also mention that President Nixon stopped pegging the US dollar to the value of gold

Vexxo and Tim, thank you very much for taking the time to respond to this opinion piece. I have a few commitments and will reply in detail later today.

Please note that the intention of this opinion piece is not to “bash” bitcoin, but rather to open such robust discussion to get closer to a thorough understanding of how the blockchain will influence our lives in future. Your feedback is highly appreciated.

Thanks
D’Niel

No. I know business men in Hong Kong, Singapore and mainland China who move millions of dollars a day in digital currency for import and export. Then there is the 100K plus people in Venezuela who live off mining and selling crypto currencies. Even the government is involved using confiscated equipment. Hell they even trying to launch their own govi crypto coin. The stories are horrific. What about the all the central Americans who move money back home? Don’t even get me started on my last uber driver who sends money back to East Africa? Millions of rands a day are traded on localbitcoins and through exchanges for Zimbabweans. What about all the small asian businesses in this country, how does it get back to the Far East, through ABSA?? This would all explain the billions of dollars of on chain transactions per day on congested BTC chain ALONE. What about Beijing based Bitmain who now produce more chips than ALL of Nvidia, and now partnered with SAMSUNG, news flash, they take payment in BCH and dollar ONLY. What about the massive surge in peer to peer trading on platforms in the Far East, they been evading exchange controls for years and buying property in the west. Just ask a Perth or Vancouver real estate agent. oh then there is the dark web, haven’t even scratched the surface with value traded using Anon coins. I can go on and on and on.

Telegram launching their own currency this year, already approached investors, can you imagine linking 155 million people, securely and anonymously. Why would I use MoneyGRAM??
Just some quick googling and I see one of your colleagues is a director of JUMO, a money transfer business. LOL. A dying industry thanks to blockchain tech. Would explain this hit piece.

Yes it IS a currency, what you pay for it though is subject for debate.

I use bitcoin to buy things all the time, and I sell things for bitcoin too. Exactly as you describe the core purpose of a currency, as a token of exchange. It is a currency regardless of its price. Volatility in price does not suddenly make it not a currency. If you want to look at that to determine if something is a currency, tell me then what does Venezuela have? What is their medium of exchange? They have hyper inflation, so is the bolivar no longer a currency under your specifications? Let’s see how well the USD does in the next few years VS bitcoin… I am betting on bitcoin, which has a limited supply unlike the USD. Pegging a Cryptocurrency to the USD is a bad idea, the US financial crisis is coming, and it will affect many markets. Let’s see how bitcoin is doing then.

Sounds like you are too invested in bitcoin to see it for what it really is.

@D’Niel Strauss.

Your opinions are just just opinions. The reality is that bitcoins is being used to transact.

Thanks Muks, you are 100% correct. This is an opinion piece with the intention to gain a more thorough understanding of how the blockchain will influence our lives in future. Thank you very much for the time taken to respond and being part of the discussion.

Thanks
D’Niel

The fees to get a transaction added to the Bitcoin blockchain make it unviable for most everyday transactions.

Can I use a share to buy bread or can I use a cryptocurrency to buy bread?

Yes we are aware that Moneyweb is anti-cryptocurrency. I dont think most of us care.

We also don’t expect emerging economies, india, SA etc to accept cryptocurrencies with their compromised Reserve Banks as gatekeeper to keep the status quo.

But we will still buy it although its volatile and keep or use it whichever way we want.

SARS just need to come up with the taxes around it and it is okay, we will transact within the rules. Tax shouldn’t be the enemy and we shouldn’t be scared of it.

If you want to process your bread transaction in the next 10 minutes, you’d have to pay approximately R50 in fees to Bitcoin miners, at the time of writing this. Fees hit USD 28 in December.

Bitcoin is too slow (by design, because of proof-of-work), and too expensive to be a viable currency.

True…there are alternatives being Ripple, Bitcoin cash and others. Bitcoin is like the Versaces’, Guccis’, Ferrari’s and the fancy big gas-guzzlers of cyrptocurrencies.

I am not really a bitcoin fan but one thing I keep asking is what gives bitcoin value? Any fiat currency has value not because you have to pay taxes in it, rather someone owes it. Fiat currency can only be created via an act of borrowing. Since there will always be more debt than fiat in existence, it it like a game of musical chairs when there is a scramble for scare currency to service debt. To prevent a deflationary collapse, the currency has to suffer ongoing debasement.

Gold on the other hand is something of positive value- a piece of metal that someone worked hard to win from its ore. Gold and silver have very low declining marginal utilities which means they are monetary metals chosen by mankind.

Successful currencies are those which are owed – as you can escape the web of debt, I can, but society cannot.

Now Warren Buffet says never ask a barber if you need a haircut. The issue is one of vested interests. This is why I would never ask the Israeli central bank if Bitcoin was a currency. Central bankers are fraudsters as their stock in trade is irredeemable debt. Now most companies hate competition as it drives margins down. The civilised approach is to become lean and mean and market orientated etc. Central bankers would have you jailed. Taxi drivers just shoot you. Gosh who would have thunk that the Israeli central bank is not a Bitcoin fan? Even Bernanke and Greenspan cannot agree if gold is a currency.

Lemme tell you this, britches. There is no market capitalisation of the dollar. Any Ecos 101 student will tell you that you need to Google Money supply. There are different types of money supply M0, M1, M2 M3 etc. This will give you the total value of US$ in existence depending on how one defines a US$.

Volatility does not preclude being a currency. One could have asked my Mate Brett about JCI/ Western Areas shares and theft, but alas we cannot.

After all, what is a currency? a medium of exchange, a unit of account and a store of wealth (no time span given).

Hmm few things…
BTC has not been thought of as a currency for a while now… the popular view has been store of value…
Stripe dropping BTC… Thats already news on Jan 23.

Good day everyone 🙂 Appreciate all the input!

(Some may pick up from my earlier comment on other crypto-related articles that I lean against Bitcoin/Altcoin, but at same time one needs to embrace advancing tech, is it improves everyone’s lives…so I welcome debate on a constructive way). And altcoins causes excitement.

Yes, Moneyweb will be “anti-Bitcoin” as it’s a web-community with a FINANCIAL bias, and not a tech website 😉

Another commentator (“gopieter”) yesterday suggested to me that the crypto exchanges needs to be decentralised, to ensure better security (as around 10-14% of all crypto were hacked the past year. That’s unsustainable).

My view: cryptos are not truly decentralised: it’s CONTROLLED by the largest/wealthiest society of miners that verify blockchain data, and thus are performed by a powerful portion of community/companies that have the capital to afford high-end computing power to perform this task. (So “control” goes from Central Govts who are regulated / have checks & balances…to faceless group of powerful people no one knows their identity..except through code.)

Another commentator uses a depreciating currency of Venezuela as example. Accepted, for the Venezuelan citizen BTC is an alternative….but bear in mind, we here in SA pay a PREMIUM for our BTC (compared to exchanges BTC-price in foreign countries), and am sure the “risk premium” will even be worse in Venezuela. So, holders of BTC in less favourable 3rd world countries like SA….you already LOST VALUE (or better put, ‘pay a price’) before you use your BTC. It waters down the argument of store of value against own depreciating Fiat-currency.

Issue of Tax: Govts WILL work out a way to generate income through placing control on the exchanges, even if the whole globe ends up goes crypto. If Govts are side-lined successfully, when every citizen are using crypto and assuming NO tax are collected ever…the world Govts will become irrelevant…i.e. a world-systen without central Govts, with NO ONE taking responsibility for central services (there’s no police, no courts, no national roads or rail. No water-planning. No food deliveries from farm to co-op to stores, etc)…society will be back to the Flintstones, as tax remains a function of modern society, in which technology operates in. In a Flintstone realm, blockchain is not needed to do elementary tasks. See the ludicrous argument that “crypto” will replace central Govts? It simply can’t. Not a great fan of Govt myself, but let me tell you…I’d rather choose not to life like the Flinstones 😉 It will not resemble a modern world we know today. More like Somalia or worse. (I see the world WITH crypto perhaps, but WITH TAX from central Govt. Crypto won’t get away from that!!)

Have a QUESTION to our pro-crypto commentators: want to know WHERE does the FIAT-money go, when one use an “exchange” to convert your Fiat-currency into BTC or any Altcoin??
I assume the ‘investor’ receives his BTC allocation (based on the crypto price that second), and your Fiat-money is banked into the (normal/Fiat) bank account held in the name of the particular exchange you use. Right?

All right, then WHAT does the exchanges do with all the Fiat-currency (be it ZAR, USD, GBP or whatever country applies). Do they (i) withdraw all their Fiat-cash, and BURN it all on a pile, since now one assume the exchange could use it’s own Fiat-bank balance to convert more into own crypto ;-)….or (ii) do they happily live off the money accumulating in their ordinary Fiat-bank balance? (…as if everyone takes profit and withdraw, there WON’T be enough Fiat-currency left in the exchange’s Fiat-bank-account to pay all BTC holders (…hence the price naturally falls).

The community owning crypto-exchanges, I assume IF they have complete faith/trust in their BTC or Altcoin, why then still do they need the pile of cash in their exchange-bank-accounts? (..aren’t we supposed to convert from Fiat to crypto, and KEEP it in crypto for life…to trade & use it like the way intended?)

WHY is it necessary for investors to take crypto profit, by using the exchange to convert BTC, etc back into Fiat-currency again?? Perhaps little trust to keep one’s gain in crypto instead??

Apologies…lot of concerns…I don’t expect detailed answers from everyone. Oh…and WHICH crypto is likely set to become globally accepted?…surely it can’t be just BTC….that would be arrogant in the face of thousands of other promising Altcoins(?)

Pardon the pun, my views are like taking a look at the other side of the “coin” 😉

No person can say what is currency and what is not. During the hyperinflation in Zimbabwe, tampons were used as a means of exchange – currency. Toilet paper was used as currency when I was in the army. We used to call it white gold because when you need it, you really need it and you did not have money. Now, the intrinsic value of all fiat currencies is less than toilet paper because it is “single ply and not baby soft”.

Ultimately the value of a gold coin is determined by the value of a human life, as a person has to go down a deep, dark dangerous hole in the ground to dig it out. Some come back up, some don’t.

As my friend Richardthe Great so eloquently states – gold is money while fiat currencies are debt tokens or IOU’s or a promise to pay. It is not payment, it is deferred payment. The institution who originally issued the promise to pay, namely the government, changed the laws of payment (1971 the Nixon Shock) to enable them to redeem an IOU with another promise to pay.

If we take 2 steps back, it becomes clear that we are currently living in a era of paper money or “fiat currency”. This is the last phase in the cycle of money.

The cycle begins with a commodity currency and a barter system with or without debt. Wheat is exchanged for eggs and debt is redeemed – no trust needed.

The next phase in the cycle of money is metallic money( copper, silver and gold). The bag of grain is too heavy to carry around so we carry something that is light, but represents a lot of value. In that way a person can carry the value of 10 bags of wheat in his pocket. – no trust needed.

The next phase is “representative money” and this is where things gets interesting. The owner of the gold coins is afraid he might get robbed so he goes to the only guy in town who owns a safe – the goldsmith. The goldsmith issues a receipt for the gold on deposit. This receipt represents the gold and can be given to the shop-owner as payment. Here, for the first time trust is needed. The owner of the gold has to trust the goldsmith that he won’t issue more receipts than the amount of gold deposited with him.

The next phase is “Fiat money” or money by decree. After the goldsmith (banks) issued a hundred times more receipts (to themselves which they then borrowed to the king) than the amount of gold in the vault, they cannot produce the gold when the shop owner hands in the receipt in exchange for gold. Then the “king” makes a law stating that from now on forward gold in not money any longer and that the receipts will now act as money. People need to trust the bankers and the government during this phase. They have to trust that the government won’t issue more receipts or promises to pay than the amount of gold(actual money) in the vault. Only the most ignorant and naive citizens trust the government and the banks during this phase. The mere fact that the country is on a fiat currency system implies that they broke all their promises already!

Then when people wake up to the fact that the government is issuing promises to pay at such a rate that nobody accepts that promise as payment any more, the system collapses and starts afresh at phase one.

The moral of the story? Get ready to carry a bag of wheat, and some tampons for change, the next time you visit Spar.

Well said Sensei! (It’s almost like you give the topic a proper “Seipai’ Karate-kata workout 😉

Appreciate the refreshing of our memories as to how the money-system originated and evolved.

It brings me back to cryptos….every time there’s a new fork from existing coins, or new ICO’s…it’s like virtual “printing of money”, as yet another set of software development joins the crowded sphere.)

“Oss” (greetings)

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