The question over the potential growth in the future usage of Bitcoins as means of an alternative currency has been a widely debated topic among many in financial industry community. Are fiat currencies replaceable by a form of digital currency, or is this just a backup currency should monetary policies fail?
The history of Bitcoins date back to 2009, where according to an article written by Ron Rimkus, CFA, “Bitcoins: New Gold or Fool’s Gold (April 8, 2013)”, was originally set up to be a decentralised, encrypted form of digital currency, much like a virtual currency. The goal of setting up a Bitcoin system was to explore an alternative medium of exchange in the wake of relentless printing of money by major Central Banks around the world following the Global Financial Crisis (GFC) in 2008 – 2009, where the thought of flushing the capital markets with ample liquidity was one of the solutions to reassure investors that there is plenty of liquidity to support the monetary systems, and to boost consumer confidence, creating jobs, etc. According to the article, the value of US 63.00 on April 20, 1986 is now worth approximately USD 28.40, or an approximately 2.8 percent devaluation over the course of approximately 28 years, taking into account the time value of money (TVM). Although the percentage devaluation does not seemed to be quite a lot, but one has to take into consideration on many livelihoods have been affected as a result of declines in their relative purchasing power parity (PPP), and having to manage the increased household expenditure as a result of the massive devaluation of a currency.
Recently, in the financial world, there has been a revival of the topic of currency devaluation in the wake of US Fed’s Quantitative Easing (QE) program, and Bank of Japan (BOJ) recent monetary policy reforms targeted at massive Japanese Yen devaluation. In a Barrons magazine article published during the weekend of April 13, 2013, journalist, Randall Forsyth highlighted that at its monetary peak, a Bitcoin fetched USD 266.00, but by weekend when the article was published, the price of a Bitcoin fell to USD 54.25. This brings the question over one of the main functions of a fiat currency system, which is supposed to be a stable source of value.
With questions surrounding the effectiveness of using Bitcoins as an alternative medium of exchange, there is much debate on how will a digital currency be set up as a viable form of currency. Could Bitcoins be introduced in most of the monetary systems in Asia? If so, how shall Bitcoins be applicable when used in the context of regional trade and commerce? In Asia, there are a few examples of fixed exchange rate systems, namely China and Hong Kong. The former being an exchange rate fixed at approximately USD: RMB 6.20, while the latter has an exchange rate pegged at USD: HKD 7.76. If Bitcoins were to apply in a fixed exchange rate system, it might not be effective, as there will not be any questions arising from massive printing of currency in order to devalue the value in a fixed exchange rate regime, but there are still lingering questions over the stability as a store of value, given that there is no monetary authority governing the flows of Bitcoins. There are also questions as to how Bitcoins could impact inflationary trends, as one might know from Economics 101 that inflation is a monetary phenomenon. It might be unlikely to extrapolate the volatilities in the price of Bitcoins were due to solely to massive injections of Bitcoins. It could also be attributed bto fear and greed commonly seen in any financial markets.
The impact of the recent monetary policy moves taken by the BOJ has revived several debates as to the sustainability of massive yen devaluation, and whether this could revive the Japanese economy. Governments around the region are increasingly on guard against the impact of the BOJ’s policy has on the exchange rates of their domestic currencies. In this context, the issue of how Bitcoins could be used as an offsetting monetary tool is an interesting topic to explore. Perhaps, the use of Bitcoins could be used as an alternative currency where traders and consumers will only conduct their transactions using Bitcoins. But, as it stands right now, Bitcoins have not reached the stage where it is a widely acceptable form of exchange, as not many people are aware of its existence, or its functions.
Along the context of the discussion of Bitcoins, especially with the rising Asian consumer power, the currency could be used as a means of conducting online transactions, such as e-commerce, or means of payment, much like a debit/credit transaction when shopping online. A prominent internet e-commerce business such as Alibaba.com could introduce an online function that accepts Bitcoins as a legitimate form of exchange. However, it continues to remain a question of wide acceptance. But, if one were to look into another perspective, there are already many online gaming stores in Asia that accepts digital currency, and perhaps that model could be applied to Bitcoins. But, until the use of Bitcoins become widespread, consumers, businesses, and the government could begin looking into accepting Bitcoins as a medium of exchange.