Experts

Current topics explained by RUG professionals

Bitcoin

The bitcoin rate has gone through the roof. A week ago, the digital cryptocoin was worth ten thousand dollars. So what’s the deal with bitcoin?
Text by Jurgen Tiekstra / Translation by Sarah van Steenderen

Jan Marc Berk

Professor of money and banking

The current hype mainly has to do with investing in bitcoin, says Jan Marc Berk. It’s got nothing to do with whether it is actually a successful form of money. ‘As it stands, bitcoin is not an actual alternative to old-fashioned money’, he thinks. ‘Money has three characteristics: it’s a unit of account, it’s currency, and it’s a store of value. If you test bitcoin for those characteristics…

It is a currency, but only because people trust that others accept it as such. Currency such as the euro has legal back-up: if I owe you a debt, I can always pay that debt by giving you euros. That’s not because you and I agree, but because there’s a law that says I can do that. I’m not sure if people will continue to trust each other regarding bitcoin in times of crisis.

Bitcoin is also not a great store of value. When someone stores their money, they postpone spending it. The value of their money needs to be stable. ‘But bitcoin’s value development is market by high highs and low lows. That’s not good. You wouldn’t like it if your savings kept changing in value.’

Another problem: the amount of bitcoins is technically finite. It’s sort of like the gold standard from before, when European money was linked to gold value. The amount of gold is finite, which led to a lack of money when the various economies started growing. This led to widespread economic downturn. ‘It remains to be seen whether the demand for bitcoin will be proportionate to its supply’, says Berk. ‘If it doesn’t, the supply of bitcoin will have to be changed.’ But that’s not possible. ‘And even if it were possible: who will decide how much to add?’

Rosalie Koolhoven

Associate professor of law and IT

‘The first bitcoin purchase took place in 2010: someone bought two pizzas for ten thousand bitcoins. The current exchange rate adds four zeroes; that money would now be worth one hundred million dollars’, she says. ‘So I can understand it when people don’t want to spend their bitcoins anymore because they think they’ll only go up in value.’

But that’s a financial issue, and Koolhoven is a legal expert. She studied a court decision from 2014 in Overijssel, about bitcoin’s status under private law. The judge decided that bitcoins aren’t actual money, which means that regulations from the Civil Code do not apply to the cryptocoin.

‘The case was about someone who hadn’t paid the agreed upon amount of bitcoins. The person to whom the debt was owed wanted compensation, which was calculated on the basis of lost profits; on general compensation regulations.’ That lost profit had the potential of being enormous, because bitcoin’s exchange rate had gone up greatly. If bitcoin was actual money, the compensation amount would have been bound by judicial regulations, and have been much stricter. In that case, a legal interest amount would have been paid: a fixed percentage of the original sum. But in order to fall under that regulation, paying with bitcoins should be considered payment with money. And the judge in Overijssel didn’t think this was the case.

This means that bitcoin’s legal status remains fuzzy. In part because the European Court of Justice did rule that bitcoins are legal currency. The opinions on bitcoin can vary from country to country, says Koolhoven. ‘The drawback is that when you agree to pay with bitcoins and you pay too late, you may be faced with enormous compensation claims when the exchange rate changes.’

Michael Eerhart

Former international business student and one of the early adopters of the bitcoin

‘Right now, bitcoins aren’t really great currency’, he says. ‘That’s because of certain limitations, although those could be solved quite easily through technology.’ For example, transaction costs are very high: twenty dollars at the current exchange rate. On top of that, each transaction takes approximately half an hour. But Eerhart does know that people in the bitcoin community are working on a solution. Until then, other cryptocurrencies are easier to use.

The bitcoin is better suited as a store of value, as ‘digital gold’. ‘People know there is a finite amount of bitcoins. The limit has been set at 21 million bitcoins, and it will stay there. That’s what gives it value.’

Eerhart is very interested in the block chain technology that made this coin possible, much more so than in bitcoins themselves. The block chain is a transparent data chain that can barely be manipulated from the outside. ‘A simple example of how this works is registering authenticity certificates. Say you want people to know that a work of art is yours. You can register it in a block chain. From that moment onwards, that piece of art is in your name forever. But you can also transfer ownership. And it’s all transparent: the information is registered and recorded forever.’

Block chains can be used to anchor all kinds of information streams. Such as the maintenance history of a car, or votes in a political election. ‘It would solve the problem in the United States, where they keep fighting about election results.’ More examples: how earmarked funds are used in developing countries can be made transparent. Or: having just one account to safely log on to all existing internet services (online shops, banks, government agencies, etc.). Eerhart: ‘Block chain could solve all those problems. That’s not bitcoin itself, but the technology behind it.’

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