Bitcoin, Zimbabwe, and full faith and credit

Zimbabwe hyperinflationI was thinking about Zimbabwe because of the news about Mel Reynolds, and I have been doing work on bitcoin for various clients. And here’s what I don’t get about bitcoin: what backs it? I understand that nothing backs US currency other than the full faith and credit of the US government, but if the US government falls, we will all have bigger problems than the value of the currency.

Zimbabwe’s currency became worthless because of a gross political mismanagement that we can’t really imagine here. And, there were few resources to pull the government out of its troubles. The people didn’t turn to gold, though: they turned to the US dollar and the South African rand for currency, putting their faith in someone else’s credit.

Bitcoin seems to be based in utopian thoughts about technology improving upon government – seems, because we don’t know for sure who invented it. Goofing hackers? North Korea? Who knows! It solves some problems in the payment system, but it doesn’t seem to be an improvement upon currency. Yes, I have heard the argument that it is inherently inflation proof, but inflation isn’t nearly as big a deal most of the time as people like to think it is. Deflation, on the other hand, can be almost as destabilizing as hyperinflation. (Hyperinflation is most definitely destabilizing.)

But why should a bitcoin have value? We don’t know who issues it or who supports it. If it’s a payment token, like a stamp or a train ticket, it would have the value of the currency that it replaces. If it is its own currency, it needs something more than just an anonymous person waving an anonymous hand to give it value.

What am I missing?

 

A white woman with green glasses and gray hairAnn C. Logue

I teach and write about finance. I’m the author of four books in Wiley’s …For Dummies series, a fintech content expert, and an avid traveler. Among other things.

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