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Critics like John Quiggin question bitcoin’s legitimacy, comparing it to worthless assets, but the value of any commodity, including bitcoin, often depends on community recognition and market demand. The analogy of the diamond rush in Zimbabwe illustrates that value is often realized only when a market exists.
Australian Treasurer Wants Country to Be Proactive
When Australian Treasurer Jim Chalmers called for a government rethink on cryptocurrencies, it became apparent that tensions have emerged even in a country where the embrace of digital assets remains minimal. For Chalmers, the events in the U.S. that ultimately culminated in Donald Trump—who became the darling of bitcoin supporters—winning the presidency suggest that something is brewing. Whatever happens, Chalmers believes Australia should be proactive in this area.
However, Chalmers knows that getting the old guard to buy in will be difficult; hence, he attempts to assuage them by reiterating consumer protection principles. In his remarks published in the Sydney Morning Herald, the Australian treasurer believes cryptocurrencies can help modernize the country’s financial system. In other words, the Australian financial system is outdated, and embracing crypto could foster innovation.
Such an admission by a senior official is significant because, until that point, Australia had generally rebuffed cryptocurrencies. For officials who take pride in the Australian financial system’s famed resilience, discussing the addition or embrace of an asset class they associate with criminality is out of the question.
This point was emphasized late last year by Reserve Bank of Australia Governor Michele Bullock when she addressed a forum organized by the Australian Securities and Investments Commission (ASIC). “Cryptocurrencies have no role in the Australian economy or payments system,” Bullock declared. She was joined in disparaging cryptocurrencies by ASIC Chair Joe Longo, whose agency is currently pursuing digital asset exchanges operating in Australia.
There is no doubt that Chalmers was aware of Bullock and Longo’s respective comments regarding cryptocurrencies when he insisted that they do, in fact, have a role to play. It’s fair to say that such a divide is not unique to Australia; many countries find themselves grappling with the question of whether to embrace cryptocurrencies or not.
However, it is worth remembering that most innovations that later turned out to be groundbreaking initially faced strong opposition before being widely embraced. Cryptocurrencies, and bitcoin (BTC) in particular, seem to be in the same position if the events of the past 10 years are any indication. From being called “rat poison” by a celebrated investor to being branded a scam by the CEO of the world’s largest asset management firm, bitcoin continues to persist. Indeed, some of its past critics have become its biggest ambassadors.
‘The Bitcoin is Valueless’ Argument
Of course, the fact that powerful figures like Larry Fink are now preaching the gospel of bitcoin cannot easily sway Australians who have managed to shield their financial system from the U.S. financial crisis of 2008. In fact, some in Australia believe crypto will do to the global financial system what the subprime mortgage crisis did more than 15 years ago. John Quiggin, a professor at the University of Queensland’s School of Economics, said as much in his recent op-ed.
At the core of Quiggin’s long-running angst against cryptocurrencies is their perceived worthlessness. The professor insists that bitcoin’s staying power in the face of criticism does not make it legitimate, using Bernie Madoff’s long-running Ponzi scheme to drive this point home.
However, when Quiggin and others who support his argument repeat the claim that bitcoin is worthless, even though it costs almost $100,000, it raises a question: Where does an asset or commodity derive its value from? Fortunately, a paragraph in the professor’s op-ed provides some clues.
For instance, Quiggin contends that assets like gold, silver, and currency have value because “they are useful or desirable in themselves.” Another reason they have value is that “a government is willing to accept them as payment for tax obligations, like fiat currency.”
It is true that gold and silver are valuable commodities, and people — many who hardly use gold– have recognized this fact for decades, if not centuries. However, many people today may not know why gold is valuable; they simply know it has value, and the next person will readily accept it because they, too, understand it has value. If this is the test an asset must pass to be perceived as valuable, then bitcoin is certainly on the right track.
Perhaps there is another interesting fact about valuable commodities that critics of cryptocurrencies, like Quiggin, often downplay: A commodity is valuable if enough people recognize or can attest to its worth. To illustrate, the knowledge that diamonds are valuable precious stones is what gives them their value. However, if people or an entire community are unaware of this—like the people of Bocha in the southeastern part of Zimbabwe did for a long time then — diamonds or any other “valuable” commodity will be seen as valueless.
Traditional Financial Institutions Seek Crypto Exposure
Expanding on the story of the Bocha and Chiadzwa people in Zimbabwe’s Manicaland province, legend has it that certain knowledgeable individuals, mostly foreigners, would travel to this region and ask unsuspecting villagers to collect as many of these colorful pebbles as possible. In return, the villagers would receive payment or some form of token of appreciation. This practice is said to have continued for years before De Beers, a well-known diamond miner, became aware of it. Records suggest that this mining giant prospected for diamonds for several years before leaving in 2006.
However, a year after De Beers left the area, a diamond rush ensued. Many villagers in the area, now aware that the colorful pebbles were valuable, joined the rush, and some became rich overnight. The point of this analogy is to emphasize that an asset is deemed to have value if people in a community recognize it or agree that it has value. In this case, Bocha and Chiadzwa villagers did not see value in stones hence they were worthless.
In fact, popular legend has it that villagers in Chiadzwa used diamonds as quarry stones for building houses or decorating homes. This means that while the rest of the world assigned astronomical values to these stones, some Chiadzwa villagers with access to them may have been living in poverty. They only realized the stones had value because there were buyers willing to pay good money for them.
The same can be said for cryptocurrencies: they have value because there is a ready market. So, when traditional financial institutions indicate they want to enter the crypto market, as Quiggin fears will soon happen, they should be seen as akin to the latecomers to the diamond rush in Chiadzwa and Bocha. Like those villagers, traditional financial institutions seeking exposure to crypto do not set value but pay what the bitcoin community already agrees to be the price.
That is why gold, as proponents like Peter Schiff often remind us, cannot have a value that exceeds what the gold community assigns to it. The same principle applies to bitcoin, which has outperformed not only gold but also company stocks. The bitcoin community, which began as a very small movement, agrees that the cryptocurrency has value, which they are willing to pay.
Australia Must Not Go Against the Tide
The problem for Quiggin and other critics is that bitcoin is growing, meaning more and more people agree that cryptocurrency has value. As more people seek to join this community, financial institutions must make it possible for clients to participate.
This is why Blackrock, Fidelity, Franklin Templeton, and others have joined the community. They understood that if they did not, some other institution would step in. The same has been true for U.S. politicians: Those opposed to crypto performed poorly in the last U.S. elections, while those who promised to embrace digital assets won—not only because they were financially backed by pro-crypto lobby groups but also because voters favored pro-crypto candidates.
At the end of the day, it is not so much what the gurus of finance think or want; it is what users of the financial system want that matters. If Generation Z believes crypto is the future, responsible regulators and governments must acknowledge this and prepare accordingly. Attempting to convince younger generations to abandon what they see as a new way of storing or moving value may be akin to asking young people who embraced social media in the 2000s to stick to old methods of communication.
Today, we know that social media prevailed because even institutions that were once vehemently opposed it now fully embrace this means of communication. The same will likely happen in the realm of finance. So the question for Quiggin and those of his ilk is: Is Australia prepared for such a scenario should it occur?
Judging from the Australian treasurer’s remarks, even he has some concerns, but pretending that nothing is happening is not a solution. Therefore, instead of trying to beat Chalmers in a debate about the potential harm crypto can do to the financial system, Australian crypto critics should focus on how to mitigate possible problems that will arise, because, as it stands, crypto is inevitable.