In mid December, Time Inc. was the latest in a string of companies to announce that it would start accepting bitcoin in payment, following on the heels of Dell, Overstock and Expedia who came before. You might say the age of cryptocurrency has arrived. Paul Vigna and Michael J. Casey, who write about cryptocurrency for the Wall Street Journal's MoneyBeat blog, certainly think so. They co-wrote a book on the subject called, appropriately, The Age of Cryptocurrency, out on January 27 2015 from St. Martin's Press. I recently spoke to them about the book, currency markets, the global economic order and high-net-worth investors. The central question they are trying to answer: Is bitcoin becoming money? And if so, will it allow us to bypass banks all together, and the giant tax they levy on the global economy? They see bitcoin and other cryptocurrencies ushering in a kind of radical Globalization 2.0. These new forms of money will have important implications for the world's wealthy. Below is an edited excerpt of our conversation.
APRIL RUDIN: What is the purpose of money?
MICHAEL CASEY: This is a really a deep question because once you go beyond the functional aspects of money, you end up discovering that money is one of the key pillars of civilization. Before money emerged as an expression of status and economic power, hierarchies were determined solely by brute force and the capacity for violence.
PAUL VIGNA: This is probably the one question above all others that gets into your head once you start taking bitcoin seriously, and it was one that drove a lot of what we tried to do in the book. On one level, we all know what money is, we all get it and understand it and use. But we do it without any thought to what it really represents, what it really means. When you start examining bitcoin, you start to realize those hierarchies never really went away, the means of control just changed. Money is a means of control.
APRIL RUDIN: What makes the monetary system so ripe for disruption?
CASEY: The monetary system - and the payments system that comes with it - is ripe for disruption because it is structured around the biggest, most powerful and therefore most costly of intermediaries: banks. Until now, we've depended on banks to resolve the fundamental challenge of being unable to trust the strangers with which we do business. Banks have resolved that problem by acting as the middlemen in that exchange. In so doing, they've put themselves in the middle of our economic system - as have other financial service providers that have piggy-backed on that system - which allows them to act as the ultimate tollgate keepers to the $80 trillion global economy, drawing fees from nearly every transaction and credit transfer. All of that works like a giant tax on the global economy. If we can find a way to bypass those banks, to resolve the trust issue without having to use these fee-grabbing intermediaries, we can make the economy more efficient and create countless new opportunities for commerce. This is what bitcoin promises to achieve. This is what is exciting about it.
APRIL RUDIN: Who should read your book and what will they learn?
VIGNA: Well, certainly anybody who's interested in bitcoin. But one thing we discovered is that the deeper we got into the story, the more we realized it isn't just about this technology that was created in a vacuum. It's a response to all the things that had gone wrong and led up to the Panic of 2008. Even if you don't believe in bitcoin, it's entire case rests on the shortcomings of the existing monetary system. Bitcoin is trying to answer the question "Is there a better way?" For anybody who's wondered that themselves, this book takes up the inquiry.
APRIL RUDIN: What do you predict will be the path to wider acceptance?
CASEY: I personally think that wider adoption will come when large institutions - be they governments, banks or private corporations - start to use decentralized cryptocurrency technologies for their own procurement activities and for other purposes, such as managing their databases. It's not enough to say that many merchants are accepting it as an option; until a large enough group of consumers feels motivated to use bitcoin, transaction volumes won't be large enough to stabilize its value. And it's not clear that there are enough incentives for ordinary people to flock to it. So you need the push to come from big, multinational institutions for whom bitcoin or some other cryptocurrency can function as huge boost to efficiency and a way to save money. We need to see these kinds of entities adopt it as a back-office technology for bitcoin to gain the critical mass it needs to take of.
APRIL RUDIN: What kind of opportunity does bitcoin represent for the high net worth?
CASEY: For high-net worth individuals, I see bitcoin as an alternative investment. It's the kind of investment that HNW investors and family offices would hold as say, 5% of a balanced portfolio. You might compare it to holding a portion of a portfolio in gold or in gold coins, because it could be seen as a hedge against problems with fiat currency.
But it's really a strategy that includes investing a risk-tolerant portion of a portfolio with an all-or-nothing possibility of very high returns. It gives these people some exposure to the prospect that cryptocurrencies one day fulfill their promise and bitcoin becomes an integral part of the global payments system. Even if bitcoin ends up playing that role in the background, functioning as the go-between currency and payments technology for transfers in traditional, fiat currencies, demand for the currency will surge, along with its value.
HNW investors would also benefit from the cheaper payments option that bitcoin offers. For people who move large amounts of money around the world - say, to purchase real estate in a foreign country - the 5-10% charges that comes with a mix of bank fees and foreign exchange costs can really add up and cut into the value of such transactions. Moreover, the structure of bitcoin with its anonymity features makes it harder for governments to block or confiscate such funds as they move across borders. All of that is of benefit to high-net-worth individuals, especially when it involves moving money in and out of countries with a propensity to impose capital controls on their citizens such as China, Argentina or Russia.
VIGNA: Honestly, I'm not sure I see the case for bitcoin as an investment right now, except for speculative investors. Even if it takes off as a thing, and I do believe it or some form of digital technology will, I'm not sure the price is going to take off. The price spike in 2013 was based on pure speculation. Now we're seeing bitcoin grow, and expand, and become more useful. We're understanding its utility.
But all of that I think undermines the speculative case. Bitcoin is useful, like a dollar is useful. You wouldn't pay $1,200 for a dollar. You'd pay a dollar. I may not be explaining it well, but I've a gut feeling that as bitcoin becomes more widely accepted, its price is actually going to drop. You don't pay speculative-fervor money for utilities.
APRIL RUDIN: How can you describe the enormity of this potential change? Does it impact everything?
CASEY: Yes, it impacts everything. Cryptocurrency technology has the capacity to upend the entire global economy and create enormous efficiencies. What's more, taken to its logical end it will also disrupt a host of industries and lead to major job losses for people working in legacy industries whose services won't be needed anymore. It might even change the very structure of government and challenge the power of the nation-state.
Just looking at the payments side of thing, let's start with the fact that the global economy is worth $80 trillion. If we shave 3% off that - which is about the average saving that cryptocurrency transactions offers on payments - that's $2.4 trillion, 17 times the value of the overseas development aid expenditures of all governments combined. But that's only beginning to scratch the surface of the potential impact.
APRIL RUDIN: What will it take for people to accept the arrival of digital currency when they are accustomed to seeing representations of money like leather wallets stuffed with dollar bills?
VIGNA: I understand your question, but I think your perspective is keeping you from getting the answer. Look, I'm actually the last person in the world you'd expect would get interested in bitcoin. I still use cash. I hate credit cards. But I'm also 46 years old. My formative years came when cash was still your primary option.
These kids coming up today, they don't use cash. They think credit cards are cumbersome. I was in a bodega recently, and the kid in front of me used his credit card to pay for a cup of coffee, and was annoyed when the cashier wanted him to sign the bill. He grudgingly scribbled something on it, left the reciept on the counter, and huffed off. My point is, the generation coming up does not have the same associations with tangible money that we do. They'll have no problem adapting to digital money.