Bitcoin, a game changing new medium of exchange, has been taking some jabs from China and the former Fed Chairman Alan Greenspan. The revolutionary currency that has been commanding the financial world’s attention for some time now, has recently met with some high-profile criticism. The virtual money was chugging along doing quite well after a vote of confidence from US authorities, until it recently encountered some negative-Nancy attitudes.
Bitcoin had commanded a price of around $600 prior to the stamp of approval from the US which almost instantly doubled its trading price. The crypto-currency was at one point inching its way up towards the price of an ounce of gold, before recent developments caused its market price to drop below $1,000.
In an unexpected move, the central bank of China decided to prohibit its banking and financial institutions from being able to use bitcoin. It issued the ban citing its belief that the virtual money is not a real currency. The central bank highlighted many of the known concerns regarding the currency such as its potential to facilitate money laundering. Governments and critics alike have taken issue with the fact that the new crypto-currency leaves the door open for some nefarious activity and that the currency itself poses some long-term risks to financial stability.
While there may be some legitimate concerns regarding just how the growing use of virtual currencies like bitcoin might revolutionize the global economy, blaming the currency for the illegal activity individuals do with it seems hardly fair. China, in its defense, did not ban individuals from trading the currency themselves so long as they knowingly and willingly assumed the risks themselves.
Bitcoin trading fell below $1,000 Thursday upon news of the Chinese ban. The development seemed to stall the momentum enjoyed by the virtual currency since its US stamp of approval. While the wobble might have shaken the faith of some bitcoin holders around for a quick buck, it was apparent that the majority of holders were undaunted and the crypto-currency was trading over the $1,000 again in the same day. Bitcoin however, not only had to withstand negative policies in China, but also had to bob and weave as former Fed Chairman Alan Greenspan decided to take a few swings at the new currency.
In an interview published Wednesday, Greenspan referred to the price of bitcoin as a bubble. He went on to suggest that there was no apparent intrinsic value and try as he might, he simply could not come to imagine that it had any.
As if those statements were not clear enough, Greenspan went on to explain, “I do not understand where the backing of bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit and trust of the individual who is issuing the money, whether it’s a government or an individual.”
Bitcoin even drew some uppercuts which compared it to the tulip mania phenomenon. One Dutch professor suggested to his students that the bitcoin craze is even more outlandish than tulip mania because you get absolutely nothing if this currency fails, not even a tulip.
The recent criticism did show some effect in trading, but the bitcoin battleship sailed through the storm and has since just about recovered.
Some of the responses to the criticism brought humor to the situation with statements like, “isn’t the whole point that bitcoin doesn’t need to be liked by government?”
Greenspan’s comments were also interesting considering the reality of fiat currencies throughout today’s global economy. At present, almost no currency around the world is backed by anything but the “faith and credit” of its own government, meaning in reality it is backed by the same individuals using it. Also, the US dollar, which at present still enjoys a somewhat elevated standing as the reserve currency, is being printed ad infinitum. It may be that the reluctance of bitcoin users to take the Chinese action and Greenspan statements seriously is a reflection of their level of faith and trust in the institutions that provide the “statutorily approved” money around the world.
There may be a legitimate concern regarding virtual currency. For example, if governments around the world were to formally adopt virtual currency like bitcoin, it could result in even less freedom and anonymity than cash. Virtual currency is attractive today because it appears totally free and unregulated. However, if this were to change and a governing political power were to be married to a virtual currency, that could spell a level of tyranny which was historically unachievable. It would seem that this is a much more legitimate concern than that of money laundering and criminal activity which will take place with or without virtual currencies.
As for now, bitcoin has taken the jabs from China and Greenspan without flinching. Although trading dipped periodically, the crypto-currency has recovered and is sailing smoothly back towards setting new trading highs. The world will watch attentively to see whether bitcoin is another tulip craze or if it’s signaling a new global economic phase.
By Daniel Worku