Researcher believes bitcoin could become as important as the internet
– Cryptocurrency is primarily a private currency, which unlike ordinary fiat money is not controlled by the state, says Svein Ølnes, senior researcher at Vestlandsforsking, the Research Institute of Western Norway.
Fiat money is traditional currency created by privately owned banks but subject to government control. ‘Fiat’ means ‘let it happen’ in Latin.
Ølnes explains that the US dollar had a fixed value in gold until 1971. Because other currencies were linked to the dollar, they were also linked to what is called the gold standard. Under this system, central banks are obliged to be able to redeem notes in gold and buy gold against payment in notes.
The trust in value
Without such a gold standard, or silver standard, money no longer has any intrinsic value. It is the confidence in the money that determines its value. This is fiat money, and all the world’s money today is fiat money.
“Cryptocurrency is also private money, but it is produced in a different way and the state does not regulate the quantity and value of it,” says Ølnes.
He says that bitcoin, the most famous cryptocurrency, also has no intrinsic value. Its value is rooted in trust.
– Trust depends on cryptography working as it should, that it cannot be manipulated – and that the number of bitcoins never exceeds 21 million, says Ølnes.
“So far 19.1 million bitcoins have been mined. So most of it is out. But not all. That’s because the amount coming in is halved every four years,” explains the researcher.
The value fluctuates a lot
Ølnes says that bitcoin started with 50 newly created bitcoins every ten minutes. Every four years the reward amount is halved. Currently, the reward is 6.25 newly created bitcoins every ten minutes. In 2024, the number will be 3,125 and will continue to halve in this way until it is possibly rounded down to zero in approximately 2140.
“This process is almost approaching a gold standard, which is set on the basis that the world has a certain amount of gold. One to two percent more gold is mined in the world every year, so the amount remains very stable, says Ølnes.
Having a fixed amount has made investing in bitcoins more interesting than trading them so far.
– This is due to several factors. Bitcoin is a small currency. It fluctuates a lot in value, so it is not as well suited to the three normal functions as money, says Ølnes.
These three functions are as a medium of exchange, to store value and as a yardstick to compare prices of goods and services.
“Bitcoin has worked best as a store of value. Although its value has fluctuated, it has risen sharply since it was introduced. So it has worked as an investment vehicle, but it hasn’t worked well for trading, as its value fluctuates. And you can don’t set prices in bitcoin, because it’s not stable – or at least it hasn’t been, says Ølnes.
He says that the value of bitcoin reacts to all kinds of news. It tends to fall quickly in recessions, but rise quickly again.
“In the last year, the stock market has taken a beating, and cryptocurrency fluctuates accordingly. Cryptocurrency is 100 percent governed by supply and demand, in contrast to regular currency, where states run purchase schemes to stabilize the currency.”
read
What exactly are interest rates and where do they come from?
Little faith in other cryptocurrencies
Bitcoin is not the only cryptocurrency. It makes up around 40 percent of total crypto value, and so-called altcoins account for the rest.
“I have less faith in altcoins, at least most of them. There are thousands of them. We have no use for most of them, but perhaps a handful have properties that can complement bitcoin, says Ølnes.
“I really pay attention almost exclusively to bitcoin, which I trust. But when the market falls, Bitcoin’s share increases because it is more stable than altcoins. We can see that now, since cryptocurrency has been down for the last year.”
Bitcoin requires electrical power, but Ølnes explains that mining is not what uses the most energy. The main part of the energy use comes from maintaining the security of the entire system.
Ølnes believes that bitcoin will win in the long term, because it is easier to use than ordinary money.
Bitcoin already reigns supreme across borders. It takes less time and is much easier. It has no financial intermediaries.
The value lies in the bitcoin itself
Ølnes explains that unlike money, bitcoin is a bearer instrument. The value is in the bitcoin itself, just like physical cash. But bitcoin can be transported digitally, something you can’t do with physical cash. When you send regular digital money from one country to another, it has to go through several countries, and sometimes four to six banks.
“All of these take some risk and claim a piece of the pie. This is not the case with bitcoin. Nobody risks anything and you make direct transfers without intermediaries.”
To the comment that ordinary currency has worked for hundreds of years, Ølnes says that we may think it is fast to shop with a credit card online, but it is not. “The process takes several days, and different entities take their share of what you pay. That’s expensive.”
Some ask how to trust bitcoin with such a limited amount, when we can just keep printing regular money.
– The quantity is not dangerous, says Ølnes. “I’m more concerned about the exchange rate fluctuations.”
Linked to owner with personal encryption key
Each bitcoin is equal to 100 million satoshis, or rate for short. There are enough devices for everyone in the world if everyone wanted one, according to Ølnes. One US dollar is equivalent to approximately 5,000 satoshis and one Norwegian krone is worth around 500 satoshis.
Ølnes explains that bitcoin will experience some inflation because more bitcoins are constantly being made, but that when all 21 million coins have been mined, the opposite will probably happen – and bitcoin will become increasingly valuable.
“In addition, a good number of bitcoins are lost because their owners lose the keys to them.”
Bitcoin is personally linked to its owner through a private encryption key, similar to the security mechanisms used when you log into your online banking accounts.
Personally invested
Ølnes has himself invested in bitcoin.
“I make a point of mentioning this so it won’t be used against me. I cannot say how much I have invested.”
“The first commandment is never to disclose the amount to anyone other than the tax authorities. That would be stupid, because then you make yourself a target. You are responsible for your own safety, so there is a lot to keep track of. Bitcoin has no bank hedge fund. If you go out and brag about your investment, you may get visits from people who want you to hand over your keys, he says.
Inheritance is a challenge.
– Someone takes the keys to the grave with them. You must plan carefully so that your descendants can manage your investment, says Ølnes.
“You have to give them the key while you’re alive, which requires a declaration of trust. You can be defrauded by your children if the trust is not there.”
read
People who cannot pay their debts are twice as likely to commit suicide
Global money transfer takeover?
Ølnes says he believes bitcoin can take over much of the global money transfer because it is so much simpler than the current system.
“There is still a lot to do. We have strong and colossally heavy economic systems. But if people start adopting bitcoin as a transfer system, the ball could quickly start rolling, he says.
Ølnes says bitcoin is easy to use. All you need to do is register with one of a handful of exchange services that have committed to complying with anti-money laundering rules.
The value of bitcoin today amounts to approximately 400 billion euros calculated in today’s price conversion, or a third of the value of Norway’s Oil Fund. In the big picture, the amount is not very much, but Ølnes says that cryptocurrency taking over as a global means of payment requires thinking ahead.
“Bitcoin can have different roles as a transfer currency, also called a transfer medium. To increase its use in commerce, more people need to adopt it. But surveys show that 400,000 Norwegians say they own cryptocurrency.
Similar to Islamic money transfer system
The system is similar to Islamic hawala which is used to transfer money across borders and is used in large parts of Asia and Africa. Hawala works as an alternative to the banking system and is based on personal trust and Islamic traditions.
For example, you deliver something to one person in another country with a code word, and the recipient gets a different currency in their country by using the code word.
“Bitcoin is similar to hawala in many ways. It is based on a chain of trust. While hawala is based on personal trust, bitcoin is waterproof,” says Ølnes.
“Bitcoin has worked for almost 14 years without being hacked, although there have been many attempts. Strong security and strong decentralization are the reasons why it has not been hacked. Thousands of machines around the world run the system. If a thousand machines go broken, the system is still as reliable. It has hardly experienced any downtime in 14 years.”
I think the upside is greater than the downside
El Salvador has lost huge amounts of money by buying a lot of bitcoin when the country made it a fiat currency last year. Some think it was idiotic, but not Ølnes. Although bitcoin has fallen significantly in value over the past year, El Salvador has not sold its bitcoin and therefore has not realized any loss.
“What do they have to lose?” says Ølnes. “I think the upside is greater than the downside. The International Monetary Fund (IMF) is undoubtedly making fun of El Salvador. The IMF does not like countries that use cryptocurrency, because it is out of their control. This also applies to states, and part of the criticism should also be understood as such. Bitcoin is a threat to those who control today’s monetary systems.
Ølnes notes that even the Oil Fund has invested in bitcoin, although indirectly.
“Oljefondet has invested in companies that have invested in bitcoin. I think it would be smarter if they invested in bitcoin directly. Investing 10 million euros would be a small amount for the fund, but the upside would be huge.”
“I have great faith in the upside, which is why I have invested. Bitcoin is a radical idea, and it is a solution that can prove to be as important as the internet, says Ølnes.
———
Read the Norwegian version of this article at forskning.no
