Bitcoin rose about $1,000 overnight today (Aug. 5th) and could very well be undergoing the type of transformation that will secure its place in the new global economy – truly being used as a store of value in a significant part of the world.
One of the core tenets of cryptocurrency, and bitcoin in particular, is that it is a borderless, decentralized method of exchange that is free from government control. During its earlier stages, bitcoin’s emergence from obscurity was helped by the aftermath of the global financial crisis: proponents of the digital currency saw it as a way to secure their ownership of assets in a way that was protected from the influence of the same “trust organizations” that were blamed for their part in the crisis (the government, banks, mortgage lenders, etc).
More recently, the same focus of using bitcoin to protect ownership and value has been seen in developing countries, such as Venezuela, Argentina, Turkey and other places. Whether it is hyperinflation, government meddling or increased economic uncertainty, people in these countries have turned to bitcoin (even despite its price volatility) as a better method to maintain purchasing power. However, these use cases, while extremely important as real-life examples, have generally been limited to countries whose GDP do not have any real impact on the global economy as a whole.
Now it starts getting really interesting…
As many people know, there has been a lot of protest, unrest and violence in Hong Kong and the New Territories lately, due in no small part to the potential implementation of extradition of people from Hong Kong to China. For many Hong Kong citizens, this is a crucial infringement on the rights of Basic Law, part of the “one country, two systems” compromise left over from the British Handover in 1997 that is supposed to remain in effect until 2047. Simply put, people living in Hong Kong enjoy many Western freedoms (speech, assembly, etc.) due to previous British rule of the colony that mainland Chinese do not.
If both Hong Kong and Chinese citizens see China’s recent actions as an early power grab that doesn’t sit well with them, then it’s reasonable to believe that they might look for an alternative vehicle to protect their assets, most of which are currently denominated in Hong Kong Dollars and/or Chinese Yuan. For a previous generation, that vehicle might have been gold or the U.S. Dollar, but both of these choices have drawbacks that a newer vehicle, bitcoin, doesn’t. Gold is hard to buy and store, while the Chinese gov’t has already put currency restrictions in place to prevent capital flight. That leaves bitcoin and other cryptocurrencies.
One of the biggest arguments in traditional financial circles against bitcoin is that bitcoin does not serve as a store of value, largely because it is difficult to quantify what its intrinsic value is. But while the numeric approach may still not yield an answer that is provable with a formula, there is nothing that prevents bitcoin from being a store of value, when it could be the best financial alternative to what any person currently has.
China, a country that has banned as much of the digital currency industry that it possibly can, may unwittingly be validating the same thing it has tried to curb through its actions in Hong Kong… and doing it on a large enough scale for the rest of the world to see.