When it comes to people’s social trust in money – nothing is unimaginable, especially since our civilization has moved away from money with any real value. Bitcoin, the most famous virtual currency, has certainly led to the creation of several small or larger fortunes, and one of the most interesting stories of getting rich quickly with its help is that of Kristoffer Koch from Norway. In 2009, he bought 5,000 bitcoins for 150 Norwegian kroner (about 80 zlotys), and in 2013 it was enough to buy an apartment in the most luxurious district of Oslo. Koch came across bitcoins in 2009 while writing his master’s thesis on encryption, and then he decided to buy about 5,000 bitcoins for scientific purposes. Since then, he has completely forgotten about this purchase and it was only at the beginning of 2013, when the media began to report more and more often about the digital currency, that he remembered his investment.
Where to start
Bitcoins, which used to be worth only 150 crowns, suddenly turned out to cost over 5 million crowns – or just over two and a half million zlotys. Koch sold a fifth of his investment and bought an apartment in Oslo’s luxury district of Toyen. All this for virtual money, which is a legal fiction invented by the unlimited imagination of man. As it turns out today, one of such intersubjective beliefs is the belief in bitcoin. According to Yuval Noah Harari, a historian at the Hebrew University of Jerusalem, people have no trouble accepting that primitive people cemented the social order by believing in ghosts and demons and gathering at every full moon to dance around the fire. What we do not notice is that our contemporary institutions function on exactly the same principle. Take the corporate world, for example. Today’s bankers, businessmen, and lawyers are, in his view, basically powerful magicians. The main difference between them and tribal shamans is that modern jurists tell far stranger stories.” (Y. Harari, From Animals to Gods. A Brief History of Mankind). A good example of creating half-magical, half-fictional entities that have nothing to do with reality are bitcoins. Few people understand that bitcoins, like coal in a mine, are also mined, i.e. generated in the process of solving mathematical problems with devices with appropriate computing power. In the case of the bitcoin system, there is also no single, specific entity issuing the so-called bitcoins (as the Polish zloty is issued by the National Bank of Poland). They are created by a system that consists of a different number of computers over time, belonging to different people and working on the basis of the same software.
Similarly, few people know why the National Bank of Poland in a given year orders the minting of a given number of coins of individual denominations and the printing of a specific number of banknotes. Stephen Hawking said that it is possible to imagine a technology that would outsmart the financial markets. Isn’t bitcoin already such a technology? On the other hand, Arthur C. Clarke – a science fiction writer and promoter of cosmonautics pointed out that any sufficiently advanced technology is indistinguishable from magic. So what is the magic bitcoin that fires the imagination of so many people around the world? On the websites of many central banks around the world, you can find a whole bunch of warnings about the investment risks associated with virtual currencies. On the basis of a lot of this information, it is possible to build a pretty neat legal negative definition, which is what, in the light of the law and perhaps only yet – bitcoin is certainly not.
What are bitcoins or other virtual currencies not?
Virtual currencies are not a universally accepted (e.g. in service and commercial outlets) or legal means of payment. They are not issued and guaranteed by state central banks. This means that business entities or individuals are not obliged to accept payments in these currencies, even if they have previously accepted them. Virtual currencies are also not electronic money. Central banks even define them as speculative bubbles or financial pyramids. A speculative (price) bubble is a self-reinforcing mechanism in which price increases are not justified by economic and financial factors, but by psychological ones, e.g. constantly growing expectations. On the other hand, in the structure of a financial pyramid, the profit of a specific participant is directly dependent on the payments of later participants, who are, in a way, lower in this structure. The mechanism of financial pyramids is based on their founders acquiring as many participants as possible, who – encouraged by the promised profits – pay them money. In practice, financial services are rarely provided. The organizers usually persuade the participants of a financial pyramid to recruit more people. For this reason, financial pyramids are doomed to collapse in advance, because the system requires an avalanche of new participants, and this possibility is limited.
Can investing in a sequence of numbers and letters functioning in a system created by an unknown person have the character of fueling a speculative bubble or a financial pyramid? Of course, not only can but it also has the character of a bubble, and perhaps also bears some features of a financial pyramid. That is why central banks quite rightly warn about the risks associated with investing in virtual currencies. However, it should be remembered that such a bubble or pyramid structure can also be used by investing in other investment goods, such as the Swiss franc, gold, works of art, or the real estate market. Moreover, it is always difficult to assess when such a bubble may burst. According to the definition proposed by the European Banking Authority, virtual currencies are digital representations of value, not issued by a central bank or public authority, not necessarily linked to the currency of a specific country, but recognized by natural and legal persons as a means of payment. They can be transferred, stored or subject to electronic trade. Central banks postulate the use of terms such as virtual currency, pseudo-currency, quasi-currency or cryptocurrency. The term virtual currency best emphasizes the imagined nature of bitcoins as an institution created, created in the human mind. The rest of the names proposed by the European Central Bank, on the other hand, are intended to distinguish virtual currencies from real currencies.
What is the belief in bitcoin?
Bitcoin, like any other money, is an effective way to store and transfer wealth, as it allows you to turn bulky material goods, such as land or livestock, into a virtual digital record that has value in the collective imagination. Robin Dunbar, a British anthropologist and professor of evolutionary psychology at the University of Oxford, believes that culture is the ideas in people’s heads. Similarly, bitcoins should be seen as a product of the unfettered imagination of man. According to Yuval Noah Harari, all virtual currencies are intersubjective imaginary orders, which are the result of human thought or imagination. This is best seen in the case of virtual currencies, where our trust, as in the case of traditional money, had no chance to be formed on the basis of extremely complex and durable political, social and economic relationships. Where we put our trust in the face of many public warnings about a speculative bubble and a pyramid scheme. Where, probably not understanding at all what bitcoin mining is all about, we think that we will get rich on them. Why do people believe in virtual currencies? We hope for a high, immediate profit, because the Internet and the commodity exchange believe in it. I believe, because we read how much a pizza bought for 10,000 bitcoins would be worth today, or that ordinary people have become millionaires thanks to bitcoins, and it works on our collective imagination. Thus, the recognition of virtual currency, first by individuals (a subjective phenomenon) and then by a sufficient number of members of society as money or not, depends on the completely subjective conviction of individual members of the community. Are there any activities aimed at strengthening such a phenomenon as virtual money? Yes, because bitcoin, like any other legal fiction, needs its sincere believers. An example of gaining followers can be a public manifesto published under the pseudonym Satoshi Nakamoto in 2008. The document talks about the need to create electronic money, based on the principle of mutual trust and a peer-to-peer network that allows payments to be made without the participation of third parties (decentralized system). Meanwhile, for now, we are dealing with an investment system based on the principle of mutual trust, but in a bitcoin bubble. When the news spread that the wordpress.com was accepting bitcoins, it was undoubtedly another important step towards the rise of bitcoins. Futures contracts on Chicago stock exchanges have also already started for bitcoin. This means that financial markets have also begun to strengthen faith in virtual currency.
Will cryptocurrencies ever break the glass ceiling?
The question of whether virtual coins can become a universally acceptable means of money can be answered in the affirmative, but with some reservations. The moment people put their trust in the bitcoin money system, the digital coins it generates will become money. However, for this to happen, in the intersubjective consciousness of society, they must cease to be treated as an investment good. Otherwise, their significance as a means of payment will be as negligible as that of the gold ruble or gold dollar or collector coins issued by the National Bank of Poland. Do virtual coins have a chance to become legal tender in Poland? The National Bank of Poland does not refer directly to these considerations. Currently, in accordance with the Act, only NBP has the exclusive right to issue banknotes of the Republic of Poland. And these are banknotes and coins denominated in zlotys and groszes, and they are the only legal tender in Poland. If virtual currency becomes a universally acceptable means of money, then central banks will have to address this fact somehow. They will be even more forced to do so when trust in virtual money will be undermined, sooner or later, and citizens will start to lose, as a result of using bitcoin, real money – i.e. euros or zlotys.