Will the “bulls” or the “bears” win the argument over Bitcoin? This debate has returned to centre stage with the sharp rise in the value of Bitcoin over the past year.

The bulls contend that Bitcoin represents an appreciative asset class that is an improvement upon currencies and stores of value in the long term. They argue that the technological innovation of Bitcoin gives it security, accessibility, durability, ease of storage and a supply constraint to underpin its value long term. The bears hold that Bitcoin ultimately has no intrinsic value because it cannot produce earnings and it has no direct utility or government backing.

“The growth of Bitcoin and the ecosystem around it is something I’m paying close attention to,” says Capital Group portfolio manager Mark Casey. “This decentralised, open-source, emergent phenomenon has already come a very long way since it was launched roughly 12 years ago, and there are believable future cases in which Bitcoin and the ecosystem around it become vastly more economically important and influential.”

Money serves three functions

To understand both sides of the argument and frame some context around the emerging narratives, it is important to keep in mind that money serves one or more of these three functions:
 

• a medium of exchange for goods and services
• a measure of value
• a store of value

Historically, monies have varied across these functions, and a few other dimensions have emerged as important. Money is either claim or object based. Object-based monies have value in and of themselves. Claims, on the other hand, represent a right to value elsewhere.

A taxonomy of money¹

Money that relies on centralised technology generally has the issuers set a protocol for how the money is to be distributed and validated, whether it is an object or a claim. Fiat currencies issued by central banks, such as the US dollar, and claims on bank assets (i.e., b-money) use centralised technologies. This can make settlement quite fast because you need only trust the central authority and not necessarily your counterparty, but it can also result in some exclusion — think of credit card transactions and credit access.

On the other hand, money that can be created by anyone is theoretically more accessible, even if it is less efficient to create, distribute and validate. Gold can be found by anyone and is likely to be accepted everywhere as valuable, but it is challenging to mine, purify and store, and it can also be difficult to trust those who wish to exchange it.

Bitcoin basics²

Bitcoin’s unique characteristics

Bitcoin is the original cryptocurrency. It is a novel attempt at a money that is a digital object (i.e. valuable as itself) and is produced, distributed and validated entirely through decentralised technology. This unique approach allows it to capture some of the benefits traditionally associated with both objects and claims, and both centralised and decentralised money.

Bitcoin began circulating in 2009 after publication by an author (or authors) pseudonymised as Satoshi Nakamoto. It uses cryptography to prevent fraud and control its money supply, leveraging a blockchain that has a unique data structure and protocol to enable a global open network of anonymous “miners” to maintain its ledger.

 

1. Source: IMF, Capital Group analysis.

2. Source: Capital Group analysis.

 

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• This material is not intended to provide investment advice or be considered a personal recommendation.
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