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Bitcoin still some growing up to do

Opinion
A couple of weeks ago, much was made of Bitcoin exceeding the price of gold for the first time ever. Some fans of the crypto currency reckoned the surge was proof that Bitcoin might be slowly but surely becoming a legitimate asset class. However, that sentiment was laid low in the past week, as the digital currency lost significant ground, succumbing to market-related volatility. (Bitcoin had lost nearly a fifth of its value at the time of this piece being written.)

Around the time Bitcoin was riding record highs, I reached out to the fintech buff that is Simon Dingle to find out what he made of its performance, and to find out if there's any merit to comparing Bitcoin’s price to that of gold. His response to the latter question mirrored many of the views expressed in the half-dozen or so think-pieces I had read, which cautioned against making too much of what turns out to be an arbitrary data point. Dingle reckons that in the context of gold supply being valued at around $7 trillion (R88.44 trillion), and the bitcoin market being valued at only about $20 billion, comparing gold and bitcoin prices simply makes for catchy media headlines and little else.

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Bitcoin’s philosophical ideal is maintaining an open, indestructible, unalterable record of transactions. Photo: Reuters

High-profile mascot

The fact remains, whatever its price relative to gold, and despite Bitcoin’s weaknesses as a digital commodity, it's easily the most high-profile mascot for a growing community of global citizens who, whether knowingly or not, subscribe to the published ideas of its pseudonymous inventor, Satoshi Nakamoto. Nakamoto’s disruptive white paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System will forever be credited for changing the world of global finance by promoting the creation and use of a cryptocurrency that could be issued and distributed worldwide without any central authority whatsoever - no government, or corporate entity.

In theory, such a currency would be resistant to inflationary pressures and immune to the corrupt dealings commonly associated with the world's interlinked financial industry.

So then given these noble ideals, it is curious that global banking industry, as well as governments on the continent and around the world, have been, at best, sceptical about the virtues of embracing the use of crypto currency, and even more reluctant to legitimise Bitcoin specifically.

For governments, there is the obvious fear that a truly democratised monetary system might compromise their sovereignty. As for the banks, well, they can't bear the thought of losing all that lucrative transactional revenue they've raked in for decades.

The thing is, Bitcoin clearly has some growing up to do, and its adolescent tendencies aren't helping to improve public perception of virtual currency.

Bitcoin continues to exhibit an inordinate amount of volatility, no small thanks to a bitter feud between two camps of developers, exchanges, and entrepreneurs who don't agree on the technical question of how big a batch of transactions (a “block”) processed on the bitcoin network ought to be.

On one hand, there’s a group that believes that the current one-megabyte cap is limiting the network’s capacity for growth, and has put forward a version of bitcoin called Bitcoin Unlimited. On the other hand, there’s a group that’s committed to maintaining the status quo.

Read also: LISTEN: Should you buy into bitcoin?

Simon Dingle believes that this seemingly innocuous technical debate has the potential to compromise Bitcoin’s philosophical ideals of maintaining an open, indestructible and unalterable record of transactions.

If these two groups don’t come to an agreement, members of the Bitcoin Unlimited camp might follow through on threats to release their own version of bitcoin that allows unlimited block sizes - one that will not be compatible with the current version. If that were to happen and two versions of bitcoin ended up existing side by side, it would likely erode confidence in the validity of the currency.

Meanwhile, it’s easy to assume that the negative attitudes towards the adoption of virtual currencies by the likes of the Central Bank of Nigeria (CBN) and Central Bank of Kenya (CBK), points to how out-of-touch they are.

Andile Masuku

But with Bitcoin’s volatility issues far from over, new crypto currencies being birthed with increasing frequency, and with dodgy operators like the MMM Ponzi scheme looking to surf the growing wave of enthusiasm around digital cash, adapting monetary policy to cope with such a rapidly changing digital landscape is an unenviable task.

The CBN and the CBK are likely to defend their conservative stances towards virtual currencies by citing the recent failed bid to launch a publicly-traded fund based on Bitcoin in the US. America’s Securities and Exchange Commission’s decision to prevent the Winklevoss Bitcoin Trust from trading on the Bats BZX Exchange underlines the fact that while trading Bitcoin and other virtual currencies might well go mainstream in the future, right now, it remains firmly underground.

Andile Masuku is an entrepreneur and broadcaster based in Johannesburg. He is the executive producer at AfricanTechRoundup.com. Follow Andile on Twitter @MasukuAndile and the African Tech Round-up @africanroundup.

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