Economic update July 2014
In this economic update, ING’s Teunis Brosens explains the three defining properties of money – and why one of bitcoin’s goals could ultimately be its undoing.
What is money?
Bitcoin is a digital currency that was launched in 2009, the value of which, as explained here, has already undergone several speculative crises as well as increasing tenfold in 2013.
When examining if bitcoin could ever replace “real” money, Brosens highlighted three defining properties of money, being a means of exchange, a unit of account, and a store of value.
“Virtual currencies may in the future tick the first box, if they are accepted more widely. But the second and third are more problematic, because the value of bitcoin is very volatile,” said Brosens.
Central banks regulate money supply
With real currencies, central banks regulate money supply and prices through interest rates. During the global financial crisis, for example, there was quantitative easing – also known as QE or money printing – in many parts of the world, in which additional money was created with the aim of helping economies.
Bitcoin, however, comes into circulation when it is “mined” by the public, at a rate that is predetermined. “But it is an explicit goal of bitcoin and other crypto currencies to do away with central authorities,” said Brosens. “This explicit goal could be bitcoin’s undoing as without a regulating authority, price and exchange rate volatility complicates its adoption as real money.”