“Cryptocurrency is primarily a private currency, unlike conventional fiat money, it is not controlled by the state,” says Svein Ølnes, senior researcher at Vestlandsforsking, a research institute in western Norway.
Fiat money is a traditional currency created by private banks but controlled by the government. “Fiat” means “to be” in Latin.
Ølnes explains that the US dollar had a fixed value in gold until 1971. As other currencies were linked to the dollar, they were also linked to what was known as the gold standard. Under this system, central banks are obliged to return gold notes and buy gold in exchange for notes.
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Without such a gold standard or silver standard, money no longer has any intrinsic value. It is the belief in money that determines its value. It is fiat money and all the money in the world today is fiat money.
“Cryptocurrency is also private money, but it is produced differently and the government does not regulate its quantity and value,” says Ølnes.
Bitcoin, the most popular cryptocurrency, also has no intrinsic value, he says. Its value is based on trust.
“Trust is based on cryptography working as it should, that it cannot be manipulated, and that the number of bitcoins will never exceed 21 million,” Ølnes said.
“So far, 19.1 million bitcoins have been mined. So, most of them have left. But not everything. This is because the future amount is halved every four years,” the researcher explains.
The value varies greatly
Ølnes says that bitcoin started with 50 newly created bitcoins every ten minutes. Every four years, the award amount is halved. Currently, the reward is 6.25 newly generated bitcoins every ten minutes. In 2024, this number will be 3,125 and will continue to halve in this manner until it rolls back to zero around 2140.
“This process almost approaches the gold standard, which is determined based on the availability of a certain amount of gold in the world. The world is producing 1-2 percent more gold every year, so the amount remains very stable,” says Ølnes.
Having a fixed amount made investing in bitcoins more interesting than trading them until now.
“This is due to several factors. Bitcoin is a small currency. It varies a lot in terms of value, so it’s not used for three normal functions like money,” says Ølnes.
These three functions as a medium of exchange, store of value, and a benchmark for comparing prices of goods and services.
“Bitcoin has worked best to store value. Although the value has fluctuated, it has risen sharply since its introduction. Hence, it functions as an investment vehicle but does not work well for trading as its value fluctuates. And you can’t set prices in bitcoin because it’s not stable – or at least it never was,” says Ølnes.
He says that the value of bitcoin reacts to all kinds of news. It tends to fall quickly in recessions, but quickly rises again.
“The stock market has taken a hit over the past year and cryptocurrency is changing accordingly. “Crypto-currency is 100 percent driven by supply and demand, unlike regular currency, states run buyback schemes to stabilize the currency.”
- Cryptocurrency is a form of decentralized digital currency based on blockchains.
- A record of the owner of a cryptocurrency is stored on a digital blockchain and is accessible and open for all to see.
- Cryptocurrency does not exist in physical form like coins and bills.
- There are about 2,000 different cryptocurrencies available.
- The most famous of these is Bitcoin. Other cryptocurrencies include Etherum, Ripple, Litecoin and Monero.
- Although different cryptocurrencies use the same underlying technology, they are not identical.
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Other cryptocurrencies are less trusted
Bitcoin is not the only cryptocurrency. This is about 40 percent of the total cryptocurrency and so-called altcoins account of the remainder.
“I have less faith in altcoins, at least most of them. There are thousands of them. We have no use for most of them, but maybe a handful have features that can complement bitcoin,” says Ølnes.
“I really focus almost exclusively on bitcoin, which I trust. But when the market goes down, Bitcoin’s share increases because it is more stable than altcoins. We can see this now because the cryptocurrency has been down for the past year.”
Bitcoin requires electricity, but Ølnes explains that mining is not the most energy-intensive. The bulk of energy usage comes from maintaining the security of the entire system.
Ølnes believes that bitcoin will win in the long run because it is easier to use regular money.
Bitcoin is already ruling across national borders. It takes less time and is very easy. It has no financial intermediaries.
The value is in the bitcoin itself
Ølnes explains that unlike money, bitcoin is a bearer. The value is in the bitcoin itself, like physical cash. But bitcoin can be transported digitally, which you cannot do with physical cash. When you send regular digital money from one country to another, it has to go through several countries, sometimes four or six banks.
“All of this takes some risk and requires a slice of the pie. This is not the case with bitcoin. Nobody risks anything and you make direct transfers without intermediaries.
Commenting that conventional currency has been around for hundreds of years, Ølnes says that we might think that shopping online with a credit card is quick, but it’s not. “The process takes a few days and different agencies take their share of what you pay. It’s Expensive.”
Some people question how bitcoin can be trusted in such limited quantities when we can continue to print regular money.
“The amount is not dangerous,” says Ølnes. “I am more concerned about the exchange rate.”
It is linked to its owner by a private encryption key
Each bitcoin is worth 100 million satoshis, or sats for short. According to Ølnes, if everyone wants some, there are enough units in the world for everyone. One US dollar is equal to approximately 5,000 satoshis, and the Norwegian krone is equal to 500 satoshis.
Ølnes explains that bitcoin will experience some inflation as more bitcoins are constantly being made, but when all 21 million coins are mined, the opposite will happen – and bitcoin will become more and more valuable.
“Furthermore, a large number of bitcoins are lost because their owners lose their keys to them.”
Bitcoin is personally linked to its owner through a private encryption key, similar to the security mechanisms used when you log into your online bank accounts.
What is Blockchain?
- Blockchain is a decentralized and distributed digital “ledger” that allows all digital transactions to be registered, tracked and visible.
- Blockchain stores data in interconnected blocks using cryptography.
- The most popular uses of blockchains are cryptocurrencies such as bitcoin and cryptographic property certificates (NFTs).
He personally invested
Ølnes himself invested in bitcoin.
“I’m noting it so it won’t be used against me. I can’t say how much I invested.”
“The first commandment is to never disclose the amount to anyone except the tax authorities. That would be stupid because then you make yourself a target. You are responsible for your own safety, so there is a lot to watch out for. Bitcoin has no bank hedge funds. If you go out and brag about your investment, you may be visited by people who want you to hand over your keys,” he says.
Succession is a problem.
“Some people take the keys to the grave with them. You have to plan carefully so that your children can manage your investments,” says Ølnes.
“You have to give them the key while you’re alive, which requires a vote of confidence. If there is no trust, you can be deceived by your children.”
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A takeover of global money transfers?
Ølnes says he believes bitcoin can take over much of global money transfers because it’s simpler than the current system.
“There is still a lot of work to be done. We have strong and very heavy financial systems. But if people start to accept bitcoin as a transfer system, the ball can start rolling quickly.”
Ølnes says bitcoin is easy to use. All you have to do is register with one of the few exchange services that have committed to anti-money laundering.
Today, bitcoin is worth about 400 billion euros at today’s price conversion, or a third of the value of the Norwegian Petroleum Fund. In the grand scheme of things, that’s not a lot, but Ølnes says the takeover of cryptocurrency as a global means of payment requires forethought.
“Bitcoin can have different roles as a transfer currency transfer medium. More people need to adopt it to increase its use in commerce. But surveys show that 400,000 Norwegians say they own cryptocurrency.
Islam is similar to money transfer system
The system is similar to Islamic hawala, which is used to transfer money across borders and is used in large parts of Asia and Africa. Hawala serves as an alternative to the banking system and is based on personal trust and Islamic traditions.
For example, you deliver something to a person in another country with a code word, and the recipient receives a different currency in their country using the code word.
“Bitcoin is similar to hawala in many ways. It is based on a chain of trust. While hawala is based on personal trust, bitcoin is watertight,” says Ølnes.
“Bitcoin has been working for 14 years without being hacked, although there have been many attempts. Strong security and strong decentralization are the reasons why it cannot be hacked. It runs thousands of machine systems around the world. If thousands of machines fail, the system is still just as reliable. During 14 years, there was almost no interruption.”
He believes the upside is greater than the downside
El Salvador lost a huge amount of money last year by buying a lot of bitcoin when the country converted it to fiat currency. Some people think it’s stupid, but not Ølnes. Although the value of bitcoin has fallen significantly over the past year, El Salvador has not sold its bitcoin and therefore has not experienced any losses.
“What do they have to lose?” Ølnes says. “I think the positive side is bigger than the negative side. The International Monetary Fund (IMF) is certainly mocking El Salvador. The IMF doesn’t like countries using cryptocurrency because it’s out of their control. This also applies to states, and part of the criticism should be understood as such. Bitcoin is a threat to those who control today’s monetary systems.
Ølnes notes that even the Norwegian Petroleum Fund has invested in bitcoin, albeit indirectly.
“Oil Fund has invested in companies investing in bitcoin. I think it would be smarter if they invest directly in bitcoin. Investing 10 million euros would be a small amount for the Fund, but the positive result would be huge.”
“I strongly believe in goodness and that’s why I invested. “Bitcoin is a radical idea, and it’s a solution that could be as important as the internet,” says Olnes.
Read the Norwegian version of this article at forskning.no