Bitcoin is scaring the large banks. On September 12th Jamie Dimon, the CEO of JP Morgan Chase stated that Bitcoin is ‘dumb.’ We assume Jamie to be a smart man, after all he is the CEO of the largest bank in the US. What is his reason for being against the cryptocurrency? Doesn’t he see how much support the currency garners from all corners of the world? He could believe that Bitcoin fundamentally flawed, or that it is just a fad, but maybe the real reason he speaks out against Bitcoin is because he is scared it is threatening his business.
Why would the CEO of Chase be scared? The same reason the Chinese are fearful, or anyone else who relies on fiat currencies. The risk to Chase is an economy where fiat currencies are not used to buy and sell goods. Last year big banks raked in $6 billion in ATM fees alone. In 2015 US banks made $32.5 billion in overdraft fees according to Moebs Services, a financial analyst firm. In a world with no fiat currency, Chase is no longer a profitable business. If cryptocurrencies replace fiat currencies, Chase loses. The thought of losing a profitable part of their business model has scared the bank, so they are going to make whatever claims they can to scare customers away from their competition.
Currencies are a funny thing in that they partially exist because we trust in their value. Long gone are the days of the gold standard when the value of each dollar was backed by gold. But wait, why would gold have any value? The answer – scarcity. If an item is limited then that item is innately more valuable when creating more out of thin air is hard to do. But now the dollar is no longer pinned to gold, it’s value simply promised by the government of the United States. But why the dollar and not the Peso? The United States does not rub each dollar with a magic ‘value oitment’ to give every dollar its value. It has value because people believe in it. There are fundamental reasons that people support the value of a United States dollar like our legal system, accountability etc. The real scary part of Bitcoin for the Dimon’s of the world is that people obviously believe in the coins as currency.
Dimon also poked at the value of Bitcoin as being underpinned only by illegal activity. However illegal activity is far from the only economic value of cryptocurrencies. Crypto will always hold a value for individuals who do not believe in, or are skeptical of, their country’s fiat currency. The desire to own tradeable currency independent of government backed currency was the original reason Bitcoin was created. Being free of a government’s financial decisions would give individuals around the world greater financial freedom, just ask the Greeks how valuable that would have been in 2015. People who own precious metals are a great example of the individual desire to financially separate from their government. This desire holds true even in the richest economy of the world.
When it comes to functional value, Bitcoin is significantly more efficient than fiat currency. First, supply of Bitcoin is limited to 21 million coins after it all is mined, so it meets the scarcity requirement to be a currency. Transactions are faster than bank transfers and transactions can be verified almost instantly, therefore it is more tradeable than fiat currency. Today you can achieve similar time results with fiat currency with wire transfers, however you have to pay your bank an additional fee to process the transaction and it still takes up to a day. Each cryptocurrency transaction also carries a fee, but those fees are much smaller and less exuberant than bank fees. Storage of Bitcoin can also be safer if you are smart about it. Instead of storing your money in online accounts vulnerable for being hacked, your Bitcoin can be stored safely offline in hardware wallets.
Sure, Bitcoin and other cryptocurrencies have some issues to sort out. How would taxes be paid if all transactions are anonymous, what will be done about block size, how to handle the irreversibility of transactions, does so much electricity need to be used to process transactions etc. But just like the internet when it was young, the community will sort out shortcomings of cryptocurrencies and they will become an important part of our everyday lives. In the process, we can only hope when large corporations get backed into a corner and put up a fight that the individual wins. In the age of the internet, communities of individuals have never had more power.