Satoshi Nakamoto's cryptocurrency has not yet demonstrated its function as a means of payment or a store of value. But its dizzying rise is beginning to cast doubt on central banks.

In December 2020, bitcoin reached new all-time highs, with the price exceeding 18,000 euros on the Kraken marketplace. Rather impressive when you think that at the beginning of the year, this virtual currency was only worth a little over 6,000 euros.
It must be said that this incredible ascent is taking place in a particular context, marked by the Covid-19 crisis, the staggering government spending that accompanies it and the general economic uncertainty that places us.
Therefore, one can wonder if bitcoin is becoming a safe haven? In any case, this financial UFO perplexes people. What is it really for today? And what should we expect tomorrow?

Ten years of crazy growth

Created in 2009 by the mysterious Satoshi Nakamoto, bitcoin was intended to be "a purely peer-to-peer electronic currency " allowing "to send online payments directly from one party to another without going through an institution financial” , as it is written in the famous founding paper of its creator.

Ten years later, the bitcoin network is performing admirably and has already attracted millions of users. But its critics do not give it the status of a real currency. They rather put it in the sub-category of “cryptoassets”.
For Laurent Quignon, head of banking economics at BPN Paribas, bitcoin does not respect any of the three fundamental qualities of a currency.

Kraken - The Rise of Bitcoin

Thus, we are forced to note that bitcoin is not, today, a means of payment. Buying an everyday good or service directly with a bitcoin is an impossible mission. Because of its altogether marginal use and its high volatility, it cannot play the role of a unit of account either, that is to say a standard of measurement allowing the value of goods to be compared.
As for the function of reserve of value, which makes it possible to preserve purchasing power over time, it would still be too early to judge.

"The automatic control of the quantity of bitcoins issued and, ultimately, its capping have not, until now, demonstrated their ability to stabilize their value, as evidenced by the high volatility of the bitcoin price" , writes Laurent Quignon in The Economics of Cryptocurrencies , a white paper published in February 2020.

For his part, Pierre Noizat, founder of the Paymium market place, half-acknowledges that bitcoin does not yet have sufficient critical mass to interest traders.
But, according to him, its function as a store of value is already there.

“There is a growing distrust of traditional currencies, as people realize that they can be created at will. From this function of reserve of value will flow the use of the means of payment” , estimates Pierre Noizat.

Bitcoin has limited transactional capacity

However, even in the pro-bitcoin camp, we no longer believe in it so much. In his book "The Etalon-Bitcoin" , the economist Saifedean Ammous, a great admirer of bitcoin, does not think that this cryptocurrency will become a means of payment for everyday purchases.
The Visa network is handling more than 65,000 transactions per second , its current maximum, for a total of more than 200 billion recorded transactions and an annual volume of $11.5 trillion in 2019.
For its part, the intrinsic capacity of the bitcoin network is limited to a handful of transactions per second, between 3 and 7 approximately, or a few hundred million per year. And the closer you get to this limit, the more the transaction fees increase and the confirmation times get longer.

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Increasing the block size of the blockchain—currently set at 1MB—would increase transactional capacity, but would also dramatically increase the amount of blockchain each node must store. According to the economist, this would result in a reduction in the number of nodes and therefore a weakening of the network.

The only solution is to multiply transactions outside the blockchain, also known as “off chain” . This is what the Lightning network offers, for example, a decentralized system that relies on the bitcoin blockchain to manage instant payment channels at minimal cost. In the end, the blockchain only records the balance of payments, but we would not see the details of the transactions.

This “off chain” route is still quite experimental and it is not certain that it can be done completely independently, without the help of one or more economic players.

It could “give rise to a new type of financial institutions, similar to current banks, based on cryptography and operating online,” Saifedean Ammous believes in his book.

Except that we are then quite far from the first idea of bitcoin, which wanted to eliminate all intermediaries.
Moreover, it is not certain that such a gas factory will really be more efficient than the current centralized payment systems. The heaviness of a decentralized system is not necessarily very relevant for buying a baguette.

Bitcoin, a future global standard?

Also, this economist bets above all on the store of value as the main future use of bitcoin. Saifedean Ammous is one of the libertarian economists and refers a lot to the Austrian school which advocates the establishment of a strong currency as a global standard, independent of all politics.
Gold played this role in the 19th century, before governments decided to break away from it to create their own fiduciary currencies and, incidentally, to run the printing press.
A fatal mistake according to libertarians, because such a currency can only deteriorate over time, leading to the impoverishment of the population, or even general decadence.

Banque de France - Gold reserve of France. In total, central banks hold 34,000 tonnes of gold, or around 20% of the total mined to date.

Libertarians are against any monetary policy and want the elimination of central banks, which goes completely against current economic dogma, where the main role of money is precisely to steer the economy through interest rates. 'interest.

“Without centralized management, the central bank cannot manage the quantity of money. There is no more monetary policy and no more fight against inflation. This can potentially become monetary anarchy” , explains Laurent Quignon.

“That's exactly what dictators say, without me it's chaos. The current banking system is a masquerade,” retorts Pierre Noizat.

For libertarians, bitcoin might be the ideal benchmark, better than gold. Totally dematerialized, it poses no transport or storage problem. And since its quantity is strictly limited, the value of bitcoin would be stronger than gold.

Central bank cryptocurrency, a flawed project

Could bitcoin one day pull the rug out from under central banks? In any case, they are aware of the danger, as evidenced by their epidermal reaction to Facebook's libra. But the libra is an easy opponent, because supported by a society on which we can put pressure.
It's much harder with bitcoin, which is totally decentralized and unstoppable. Governments are responding through regulations, as in China, with the banning of exchange points. They also plan to compete with it by creating their own cryptocurrency. The Middle Kingdom has already started an experimental distribution of a crypto-yuan, while the ECB is considering creating a virtual euro .
But such a project seems difficult to pilot.

"If this central bank cryptocurrency is accessible to individuals ('retail' central bank digital currency), individuals could, under certain circumstances, convert their bank deposits into ECB cryptocurrency, which would be detrimental to financial stability. Indeed, bank deposits constitute the "money supply" that the central bank seeks to influence in order to control inflation. When a commercial bank grants credit, it simultaneously creates a deposit which constitutes a resource for it. It is therefore necessary to establish quantitative limits on the holding of central bank digital money (as there are, de facto, for coins and banknotes) in order to preserve the effectiveness of monetary policy and the financing of the economy. explains Laurent Quignon .

A wholesale distribution, only to financial institutions, would preserve this role of financing the economy, but we do not really see what would be the interest of such a cryptocurrency. In short, this whole defensive strategy seems pretty flawed.

Bitcoin is in no danger of disappearing

It is therefore not impossible that the central banks will one day end up buying back a large part of the bitcoins themselves, which would then play the role of assets of last resort, similar to their tons of gold bars.
Bitcoin could also serve as a universal exchange currency between central banks. Its transactional capacity would be more than enough to perform this task, while providing a much better level of security.

In any case, we will have to deal with it, because bitcoin is pretty damn solid. In the space of ten years, no cyberattack or fraud has been detected on the network.
Even the arrival of quantum computing, which would make it possible to break the signatures of transactions, could not destroy it. It is enough that the community decides to replace the current algorithms by others, insensitive to the power of quantum calculation.

“Nothing will be thrown away, all transactions will be considered valid up to block X with the current cryptography, and valid from block X+1 only if they use post-quantum cryptography, X being fixed in the future… This is how hard forks work” , explains Renaud Lifchitz, scientific director at Holiseum.

Mysterious or obvious, rich in potential or outdated, attractive or frightening, useful or futile, one way or another, bitcoin is here to stay and will haunt us for a while to come...