Is Bitcoin a fraud or a breakthrough technology? Is it a valid, though untested, digital currency of exchange? Is it a promising alternative to so-called fiat currencies (the ones backed by governments)? Can it fundamentally alter the way economies work? Has it become a “store of value,” as some investors view gold? And the big question: if its astonishing rise in 2017, to nearly US$17,000 per Bitcoin from under US$1,000 a year ago, is a bubble, when will it pop?
I have no idea. Not just to the last question, which is the easiest to back out of, since at the best of times it’s a mug’s game to predict when incredible run-ups in the price of anything will end, and doubly so when any sense of underlying value is elusive and cryptic. On the other questions, too, I admit befuddlement.
Now, I respect Jamie Dimon, CEO of J.P. Morgan, for his certainty in declaring Bitcoin a “fraud.” I admire the optimism and creativity of Bitcoin’s proponents, like the Winklevoss twins, early backers of the stuff, whose stash is now worth more than US$1 billion — it’s so rare to see such faith pay off these days. And I envy the ingenuity of the developers, like the mysterious individual or individuals known as Satoshi Nakamoto, who designed Bitcoin and apparently have a lot of it. He/she/they must be super-rich now — good for him/her/them!
But to be honest, when I hear debate about “which side of the Bitcoin are you on?” my eyes glaze over.
This is not to inform, obviously, but rather an attempt to inspire fellow feeling, because I imagine many people who watch markets and think about economics are similarly confused. I’m not even going to argue about intrinsic value — it’s a silly point, since Bitcoin doesn’t have any. Its backers like to say that neither does gold or fiat currency, which isn’t really true, but I get their point. The value is what the market says it is.
But I do wonder: What is Bitcoin for? It’s an honest question. There might be value in a digital currency of exchange, but last time I checked, my debit card was doing a pretty serviceable job of letting me buy things without handing over some combination of paper and nickel. At Starbucks, youngsters wave their phones in front of a doohickey or thingamabob in exchange for coffee, and I hear from friends that everybody in China and India buys everything with their phones, too — kind of like a plastic card, but easier to break.
I haven’t seen any serious studies showing that for legitimate larger or international transactions, the efficiencies promised by the blockchain (the tech that underlies Bitcoin) are likely to be more than incremental. About the only proven benefit so far seems to be in moving money under the radar of regulators. And while you can apparently buy actual goods and services with Bitcoin, the level of transactions done with it is vanishingly thin.
So it’s not a currency of exchange, crypto or no. Maybe it will be, someday. But won’t lawmakers and central bankers, who like to keep control of the money levers for such old-school purposes as regulating economic growth and employment in sovereign countries, have something to say about it if that day ever comes?
Most transactions involving Bitcoin only involve Bitcoin, and, of course, good ol’ cash — in other words, buying and selling Bitcoin. The recent offering of futures by major derivatives exchanges might give that process a sheen of legitimacy, but the underlying marketplace looks fraught with risks and challenges, and they go beyond Bitcoin’s astronomical price and wild intraday fluctuations.
The many exchanges out there — Coindesk uses four of the bigger ones to put together its price index, by the way — have been plagued by site outages because they can’t keep up with volume, and reports of price manipulation (spoofing seems to be the game of choice) keep popping up. The exchanges also seem unusually subject to hacking: Youbit, an exchange in South Korea (which is collectively crazy for cryptocurrency trading), declared bankruptcy on Wednesday after hackers made off with a fifth of its clients’ holdings.
As an alternative, many buyers and sellers — who knows how many? — transact directly over peer-to-peer websites. That cuts out the middleman, but…
A buddy of mine remembered recently that somebody paid him in Bitcoin a few years ago — .0167 BTC, to be precise, which was worth a couple bucks back then. So he thought he’d try to unload it. First he had to look around and find his PIN code, which took a while, and then he went online, found a peer-to-peer site, negotiated with potential buyers and eventually came to an agreement with one. The “deal” was set to go down at a street corner downtown, but then the buyer backed out at the last minute (by text). So it was back to the drawing board for my friend, who eventually made the sale online and got paid, via email transfer. (There’s an irony in there somewhere.) True, he ended up making more than $200 on his 1/60th of a coin — but it took him literally a day to transact it.
So, as it stands, the Bitcoin market is neither reliable nor efficient. Maybe, if it continues to acquire what proponents call “legitimacy” (I’m not sure how it does that, by the way, short of regulatory or government fiat, which is kind of weird to imagine), then it will become a safer place for investors. But what if there isn’t time for that? I can imagine a scenario where a run on Bitcoin seizes everything up while retail investors watch their holdings go from “worth less” to “worthless” really fast.
Of course, Bitcoin could keep going up forever. But that usually doesn’t happen. So one last question: Why is it different this time?