Bitcoin, farinet and the dubious blessings of parallel currencies

Can Bitcoin really replace other currencies? The price development of this alternative means of payment shows a steep upwards trend. Nonetheless, investors should be wary about investing in Bitcoin. 

Investors frequently ask whether Bitcoin can evolve into a real alternative to traditional currencies. The question itself is not new, but the global agitation is. The currency’s latest price gains look a bit suspect.  


Bitcoin prices skyrocket: is it a bubble, or a currency revolution? 

Source: Bloomberg, Credit Suisse 

From IOU to Farinet: Bitcoin Is Not the First Alternative Currency

Parallel currencies have always been around. Today, there are many examples, such as the “IOUs” used to pay government employees in Greece or California. In the Swiss canton of Valais, some tourist regions have introduced a local currency called the “farinet”.

Local legend characterizes Joseph Samuel Farinet, a 19th century smuggler and counterfeiter, as a Valaisian Robin Hood. His counterfeit 20-centime pieces inspired greater confidence among the farmers and merchants of the Lower Valais than the paper money issued by the cantonal bank, which had suffered a crisis due to failed speculations. The Valaisian farinets, whether of the past or the present, are destined to stay on the fringe, a remnant of a glorified legend of a more equitable society.

Bitcoin Is Clearly Ahead of Farinet – and Could Still Fail

Bitcoin, on the other hand, is a global parallel currency. In contrast to traditional currencies, bitcoin is not created by a sovereign central bank, but by complete consensus among all the users of its network . It is a digital currency and has no physical form.

The bitcoin network is based on a solid technology called the “blockchain” that might even be considered the digital gold standard. But ultimately, the related problems of legality and legitimacy will probably spell the end of bitcoin. As a playing field for dirty money and hot money, it feels like an anachronism of the 20th century. This makes it the ideal target for political sanctions.

Since bitcoin is not issued by a central bank, it also has few allies. Bitcoin could not have bailed out the financial system in 2008, for example, due to its lack of transparency. This is why bitcoin is unlikely to become established as a global investment currency. Last but not least, bitcoin undermines a key component of state sovereignty: namely, the monopoly on determining the national currency. In brief: bitcoin is no supertrend, just a “fair weather trend”. And that isn't enough for lasting success.