Report predicts bitcoin will fail

By Nicel Jane Avellana

Nov 28, 2013 01:54 AM EST

Excitement has been growing over the Bitcoin, as evidenced by its price that zoomed past USD 1,000 yesterday, but not everyone is convinced that the digital currency's rally is here to stay. In his analysis, Reuters Breakingviews economics editor Edward Hadas made a prediction that the Bitcoin will eventually fail. Hadas said the digital currency is doomed to fail because it is private money, one that is not government-issued.

Although modern digital technology is responsible for creating bitcoins, the monetary philosophy behind its creation is one of the oldest theories of money, Hadas said. Citing the work of anthropologist David Graeber, Hadas stated that the long-held belief that currencies were used to make barter more efficient was erroneous.

Hadas wrote, "Straightforward barter played a tiny role in all premodern economies. Instead, what we think of as purely economic activity was inseparable from an intricate structure of social relationships and spiritual beliefs. Purely commercial activity was rare - and it almost always relied on some form of government-issued money. Barter was not the precursor to money; it has always been the inferior alternative."

Hadas then goes on to explain that truly private money, such as the Bitcoin, will be an inferior alternative to money that would have the backing of the government. Despite its ideological appeal, monetary relations are just too closely linked with other economic, political and social relations that a private entity that has less influence than the government will not be able to manage a functioning monetary system.  Moreover, the Bitcoin was said to have showcased the issues faced by private money. Hadas said the bitcoin's legal status was uncertain. There was also the possibility of the bitcoin losing its value if its users lost faith in it as a currency. However, Bitcoin was said to have an appeal currently because people think the government is not doing its job.

Hadas concludes, "Bitcoin appeals because governments are not fully living up to the responsibility that comes with state-sponsored money. Bitcoin, or something like it, will thrive until the authorities do better."

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