Bitcoin has been hailed as the greatest thing since sliced bread, but will it, can it, ever become a proper currency like the dollar?
Bitcoin has been one of the financial phenomena of the past few years. Because it is so recent – having been launched on an unsuspecting world in only January 2009 – a lot is known about it, and about the theory of this type of virtual currency. Unfortunately, however good something may sound in theory, if it doesn’t work in practice, it is of no use to anyone. Except perhaps crooks.
Bitcoin is far from the first Internet currency; there is a cautionary tale in e-gold, the self-styled better money since 1996. While e-gold was or claimed to be actual gold, Bitcoin is what exactly? A virtual currency, meaning virtual. If you have a Bitcoin account there is nothing in it except computer code, and that is encrypted, so even if you could read it, you wouldn’t be able to understand it.
In spite of this, its proponents are still gushing enthusiastically over it. There are though, three big problems: crime, governments, and speculation.
The crime problem has been well highlighted recently. In the news at the moment is MtGox which has lost/had stolen bitcoins to the value of $350 million. Because they are untraceable, the anonymity they provide the user makes any meaningful investigation of even such an enormous theft a non-starter. People should ask themselves do they really want anonymity at that price?
The second problem is governments. Bitcoin is said to be impervious to government intervention. Unfortunately, no one bothered to tell the Chinese Government.
The third and potentially the biggest problem is that Bitcoin is being used primarily not for proper financial transactions but for speculation on such a scale that it is extremely volatile. For any currency to be viable it has to be relatively stable. Obviously there will be day to day fluctuations, but a currency that is worth $10 per unit one day, $500 the next, and $50 the day after is never going to compete with the dollar much less supersede it.
If it does not stabilise fairly soon, perhaps by the end of the year, people will lose confidence in it entirely. Should that happen, it could become literally worthless overnight. You think not? Okay, consider this analogy, some rare works of art sell for millions or even tens of millions of dollars, but at the end of the day, what does the successful purchaser do? He hangs it on a wall somewhere. If you are able and willing to shell out tens of millions of dollars for a painting, fine, but if you grow tired of it and decide to sell, you now have the problem of finding someone who wants to buy it for the same purpose as you. We will eventually reach that position with Bitcoin, and when people realise that at whatever price they buy they will be able to sell only at a lower one, Bitcoin will burst like the bubble it surely is.
[The above article was first published February 27, 2014 (UK time) not February 26 as shown on the archived version.]
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