Bitcoin – Gold or Tulip?

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by Richard Kemmish
Founder at Richard Kemmish Consulting Limited

At the Euromoney GCC Financial Forum in Bahrain in the New Year delegates will be joining a debate on digital currencies – niche or gamechanger? Here is my 2 satoshi on the topic. 

One of the things I hate about tulips is the way that they think they provide a precedent for things that they know nothing about. ‘Ah, if only we’d learnt the lessons of the great Dutch tulip price bubble of 1636 we wouldn’t be in this mess’ – has been the rueful story after every great market crash for the last three hundred years. It’s been said, sadly, but wisely about everything from the internet stocks to 19th Century railway bonds. Never mind that tulips are completely useless things, unlike the internet and railways (unless you are a customer of SouthWest Trains, but that’s a different topic).

The problem of tulips is one of false positives. Any time anything goes up a bit too fast for comfort the pub bore recounts the stories of single bulbs costing more than townhouses in Amsterdam as if that is the end of the debate.  He’s said that about shares in Amazon (market cap currently $550bn), the Shanghai Stock Exchange (market cap $3.5 trillion) and British sporting prowess (27 golds at the last Olympics. Bit of a stretch that one, but any excuse to say it).

And isn’t our tulip loving pub bore just having a field day with Bitcoin?

The question, the central, drop-everything-this-is-the-only-thing-that-matters question about bitcoin is this: does it actually create value? Amazon does, companies listed on the Shanghai Stock exchange do, tulips don’t.

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The very first thing that I learnt in my first economics lesson, a thing that has stuck with me ever since, is what money was for. As a twelve year old I thought I already knew but the idea that it was a store of value or a medium of exchange were totally new and fascinating concepts to me (thank you Mr Harvey).  The more we progress with the financial crisis, the more I realise the importance of that lesson for the simple reason that money isn’t doing what it is supposed to any more, in particular storing value.

About 50% of the articles that appear in my time line are about how overvalued assets are, whether they be financial or real assets. Quite a lot of the rest of the articles are about how stubbornly low inflation is globally and how, as a consequence, we have to continue extraordinary monetary policy. Huh? Asset price inflation is out of control, consumer inflation – the only metric that seems to matter to most central bankers – is hugging the x axis. The parallels to the US economy in 2006 are too obvious to bother repeating.

There are many problems holding back the European Deposit Insurance scheme, I wrote about some of them here. Whether these are insurmountable is a political, not an economic question which, given recent political developments in Germany, makes me quite pessimistic. To make matters worse the European Central Bank has been downbeat in recent statements about deposit insurance more generally. That is all the more remarkable given their role as guardians of systemic stability and as the party responsible for deciding on the on-going viability of banks.

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I am doing some work currently in a country where the banking system is nearly 80% funded by deposits. That country is also the most technically savvy country I have ever been to – it leads the world in many aspects of financial technology. It wouldn’t be much of an exaggeration to say that everyone banks via mobile phone apps, has multiple places to park money – banks and e-wallets side by side on their phone screen – and increasingly have only ever known banks as a source of instability. Their technical savvy is adding to that instability – swipe right to start a run on the bank.

Gold is the traditional safe haven in times of inflation or geo-political unrest. It is pretty good in that role. But have you ever tried ordering a pizza with it? (neither have I, but you get the idea). If only there was a currency that could be a medium of exchange, a store of value and didn’t depend on the banking system to service it. Until the world’s banking system genuinely stabilises – which extrapolating from current trends is roughly speaking: never – an increasingly sceptical and technically savvy population is going to rely on bitcoin to preserve its wealth.

That’s real value added. Tulips just smell nice.



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