One of the more entertaining outcomes of the Greek crisis was a revival of interest in virtual currencies, especially the bitcoin. When capital controls were imposed, the Greeks swapped euros for bitcoin, and then swapped bitcoins for US dollar.
The "normal" volume was around 10,000-12,000 bitcoin transactions per day. It rose to over 120,000 transactions per day in June-July. The price rose from $220 per bitcoin on June 1, to $285 on July 24. That is, 29 per cent gain against the dollar in seven weeks. In euros, bitcoin rose from euro 213 on June 1, to euro 260 (July 24), a rise of 22 per cent.
Every bitcoin transaction must go through authentication. There is a limit on money supply. The supply increases at a decelerating rate, which is determined by mathematical algorithms that control "mining" (the process of generating new coins).
Each "coin" is a unique number. One headache is to ensure somebody doesn't make two simultaneous transactions by quoting the same number twice. This problem is central to all digital currency transactions. It is further complicated because bitcoins are anonymous. So a coin cannot just be tied to the owner for validation.
The inventor, "Satoshi Nakamoto", found a clever solution. Every bitcoin transaction is time-stamped and recorded in a virtual ledger, the "blockchain". The blockchain confirms if a given coin is available for transaction at a given time. The blockchain is maintained by a peer-to-peer system of multiple computers. It can be downloaded by any one. It is difficult to fraud because it is cross-checked.
The volume generated by Greek demand led to slow blockchain processing. Transactions that normally take 15-20 minutes to clear took over five hours. Nevertheless people trying to pull money out of Greek banks did not complain!
Not coincidentally, there is a lot of interest in bitcoin in China as well. A number of Chinese syndicates mine bitcoin and China contributes a huge chunk of transactions. In March -April 2015, about 80 per cent of bitcoin transactions were yuan-denominated (CNY).
The stock market meltdown in Shanghai has also driven higher bitcoin volumes. The People's Bank of China has issued stern warnings against bitcoin speculation. Several Chinese banks have blocked bitcoin transactions from accounts held in them.
News related to bitcoin is reportedly censored. The Global Bitcoin Summit in May 2014 was held in Beijing but not reported in Chinese media. None of this has stopped CNY-related speculative actions in bitcoin. In fact, there is large premia on Chinese bitcoin exchanges due to higher demand and CNY currency controls that makes it hard to arbitrage. In general, bitcoin valuations on Chinese exchanges are at 25-35 per cent higher rates than elsewhere.
The "blockchain" method in particular, can be used to validate other transactions and to create new decentralised, "open" markets, including prediction markets. This has led to significant investments in the adaptation of blockchain-type technology.
Nasdaq for example, is using it to keep track of shares. It also has obvious application in maintaining ledgers of land registry records, and in "smart loan", and microfinance markets. India, incidentally, is already one of the biggest global markets for bitcoin loans, which suggests something happening in e-commerce is not being picked up by official statistics.
Along the way, investment banks like Citibank and Barclays have decided to launch their own digital currencies. If somebody figures out how to solve fractional-reserve banking issues with bitcoin, there is no obvious reason why digital currencies would not work on a much larger scale.
So, an old question might have regained relevance. What is fiat money worth? It is a piece of paper (or a digital ledger entry)? It promises to give the holder another piece of paper (or another digital entry). If the utility lies purely in convenience as a medium of exchange, why not use bitcoin or something similar, where the supply is governed by mathematical laws and not by political considerations?
Twitter: @devangshudatta
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
