Bitcoin is back in the news, as the digital currency has surged to new all-time highs in recent weeks.
A few weeks ago, it was just above $US100. Today it’s over $US260.
This surge has prompted Timothy B Lee at The Washington Post to ask whether those who have called it a bubble in the past should retract and admit that they were wrong.
Well I’m not totally sure if I’ve called it a bubble, but I have spoken negatively of it, and I’ll say that I still think it’s a joke, and probably in a bubble.
Now first of all, I find the premise of Lee’s post to be hilarious. The currency has been surging several per cent every day lately, and that’s evidence that it’s not in a bubble?
Before going on, I want to be clear that saying something is a bubble is not saying it will go down. It could go to $US500 or $US1000 or $US10,000. That’s the nature of manias.
But make no mistake, Bitcoin is not the currency of the future. It has no intrinsic value.
Now this idea of “intrinsic value” when it comes to currency bothers people, and Bitcoin Bugs will immediately ask why the U.S. dollar has intrinsic value. There’s an answer to that. The U.S. Dollar has intrinsic value because the U.S. government which sets the laws of doing business in the United States says it has intrinsic value. If you want to conduct commerce in the United States you have to pay taxes, and there’s only one currency you’re allowed to pay taxes in: U.S. dollars. There’s no getting around this fact. Furthermore, if you want to use the banking system at all, there’s no choice but to use U.S. dollars, because that’s the currency of the Fed which is behind the whole thing.
On top of all these laws requiring the U.S. dollar to be used, the United States has a gigantic military that can force people around the world to use dollars (if it came to that) so yes, there’s a lot of real-world value behind greenbacks.
Bitcoin? Nada. There’s nothing keeping it being a thing. If people lose faith in it, it’s over. Bitcoin is fiat currency in the most literal sense of the word.
But it gets worse. Bitcoin is mostly just a speculative vehicle. Yes, there are PR stunts about bars and other shops accepting bitcoins. And there is a Bitcoin ATM for some reason. But mostly Bitcoin is a speculative vehicle. And really, you’d be insane to actually conduct a sizable amount of commerce in bitcoins. That’s because the price swings so wildly, that the next day, there’s a good chance that one of the parties will have gotten royally screwed. Either the purchaser of the good will have ended up totally blowing a huge opportunity (by not holding longer) or the seller will be totally screwed (if Bitcoin instantly plunges). The very volatility that excited people to want to play the Bitcoin game is death when it comes to real transactions in the real world.
Again, Bitcoin might go up a lot more before it ultimately ends. That’s the nature of bubbles. The dotcom bubble crashed a bunch of times on its way up. Then one day it ended. The same will happen with this.
In the meantime, have fun speculating!