DB Wood Team
22nd January, 2021
Blog, Hot Topics
The future of money…
Money has been around about as long as humanity. It is defined as anything that can be used to pay for goods and services. In the case where the Roman farmer would swap his best cattle for a new pair of shoes, both the cattle and the shoes were seen as forms of money. Then came physical money, like the creation of the British pound 1,200 years ago, which allowed a wider and speedier exchange of goods and services across an economy. Its slightly easier to carry around than a cow, and can be used for many more things.
The age of the computer took us from a physical money system to an electronic one. For the first time in history it was possible to transfer value across cities or even countries using the internet instead of horses, cars or planes. For the vast majority of uses, our current money system is pretty good. We can pay for goods and services using cash, a card, or our phones. Things we’ve paid for show up in our bank statements within a few days, and we can transfer money to each other pretty quickly via ‘faster payments’. Its only when you want to do more complicated things like change from one currency to another that things get clunky and expensive. Enter digital money…
In 2008, an unknown person or group of people named “Satoshi Nakamoto” created Bitcoin, the first recognised form of fully digital money. There is no central authority managing its use, nothing you can withdraw and hold in your money jar, and no settlement agencies required for validating transfers of bitcoin from one party to another. It literally exists only in cyberspace.
Now, as we wrote in a related blog in 2018 (https://www.dbwood.co.uk/blog/ic-insights/love-first-sight-can-sometimes-nasty-bite/), the investment case for Bitcoin remains tricky. It’s not a tangible item like gold, or hard currency, and therefore it’s ‘online only’ presence unnerves. Add to this its immense trading volatility and the risk for most to invest is too high to tolerate. Stocks go up and down much less than Bitcoin, which has seen daily swings of up to 60%! And although stocks generally go up more than they go down, 71% of retail investors still lose money trading them (Source: Etoro, 2020). Think about that for a second, they mostly go up, but most people end up with less than they had at the start! The emotional journey of seeing things move up and down generally leads people to make bad decisions at the wrong time. Bitcoin moves up and down even more, so the emotional journey is a challenge.
But back to the future… one of the things that the past has taught us is that the best technology rises to the top, even if many variations go bust along the way. Anything that either speeds up the time to do something, or reduces to cost of doing it, generally gets adopted. Cryptocurrencies (there are many, and all with different use cases), of which bitcoin is the market leader, encompass incredible technology that automate so many of the things that still require time and cost. Sending money will take seconds not hours, and the clunky stuff such as currency conversions where Thomas Cook (other travel agencies are available) take 3% each side, would be basically free and instant.
Where do things go from here then? Well, it seems unlikely policymakers adopt Bitcoin as a medium of exchange for everyday things, quite simply because they cannot control it. However, as we continue to transition towards a cashless society, the technology underpinning Bitcoin (blockchain) is likely to be utilised within something like a ‘digital pound’, to power our society very much like today, just more efficiently.
What about Bitcoin? Well just because it isn’t a frequently used form of money, doesn’t mean it doesn’t have value. We don’t pay for our weekly food shop with gold, but as a store of value over time it has a rich history. There are similarities with gold as well, as by design it has a fixed supply; there will only ever be 21 million Bitcoins. Investment funds are slowing adopting it as well, albeit at very low levels given the volatility and possibly due to the fear of missing out rather than a well thought-through investment case.
However, that said, we could be sat in 2041 using a cashless, fully digital, money system with Bitcoin known as ‘digital gold’. It is a crazy concept right now, though so was the idea of a money coin to that Roman cattle farmer…