Pros and Coins for Bitcoin

Jerker Holm, Professor of Economics, Lund University

How do you think the bitcoins system will develop in the future and what significance could it have?

“There is a lot of enthusiasm about bitcoins in some quarters today. This is probably due in part to the revelation that the NSA can monitor online transactions and that central banks around the world have deliberately allowed the amount of money in circulation to increase, which in theory raises inflationary pressure. With a ‘cryptocurrency’ like bitcoins, there is no third party such as a bank involved and monitoring transactions becomes more difficult. In addition, the number of bitcoins and their growth rate is pre-determined and limited, which means that the amount of bitcoins cannot be manipulated. In theory this should give them a more stable value. However, I am of the decided opinion that even if bitcoins have increased in value so far and could continue to do so in the future, there are a large number of obstacles to making them a viable alternative to existing currencies in the long term. My guess is that bitcoins will continue to increase in value for a while yet, then this will be followed by a reaction that causes the exchange rate to fall very rapidly. Unlike other currencies, this currency is unlikely to be given a ‘second chance’.”

Why do you think this will happen?

“Firstly, most countries already have functioning online payment systems with existing currencies. It will therefore be difficult to persuade people other than ‘bitcoin enthusiasts’ to accept payment in bitcoins if they are used to transactions by bank transfer, for example. Another reason is that confidence in a currency is crucial to its long-term survival. Our usual currencies have many rules and regulations, covering aspects such as the aims of the central banks, how their management is appointed, and acceptance of payment in a certain currency (e.g. for payment of taxes), which creates confidence. The bitcoins system is entirely based on people’s current willingness to use bitcoins in transactions and possibly to speculate on their value. This makes them much more sensitive to disruption. If, for example, the authorities in certain countries were to demand the right to scrutinise bitcoins transactions when money laundering is suspected, this would probably lead to a fall in demand for bitcoins and consequently a fall in the exchange rate with other currencies. It will not be easy to rebuild confidence after a fall of this kind.”

Text: Pia Romare

Photo: Apelöga

Published: 2014