Thoughts on Bitcoin

When news of a new currency dubbed “Bitcoin” first began circulating, I paid little attention: it seemed like a fad, something no one would remember in a month or two. Instead of fading away though, Bitcoin continued to gain popularity until not a day went by without someone writing an article either glorifying the currency for its upsides or crucifying it for any number of perceived downsides, whether real or not. An interesting parallel could be drawn between these fickle emotions and the manner in which many publications report on certain topics as of late, but I will let sleeping dogs lie.

Because I had no more than a passing interest in Bitcoin given my general distaste of the discussions surrounding it and those who participated in said forums, it came as a great surprise when late last month I inadvertently discovered that the internet’s favorite legal tender had peaked at over $1200. Fortunes a long time in coming had been made overnight. I considered writing this article amidst the buzz after a “surprisingly friendly senate hearing” on the subject, but this surprising surge and the articles that came out of it finally prompted me to sit down and lay out some of my thoughts on this topic.

Perhaps the most interesting aspects of Bitcoin lie in its dissimilarities to traditional coinage: whereas the United States Government highly regulates America’s currency, one of Bitcoin’s main draws is its decentralized and anonymous nature. Rather than faith and fiat, Bitcoin’s base worth stems from the much more tangible anonymity it affords, and its value from the economics of supply and demand facilitated by its cryptographic origin. This is an extremely important point, so I will return to it in a moment. The fact that theoretically anyone can make — or mine — it makes Bitcoin an even more interesting proposition.

Unfortunately, the plague of market instability overshadows these upsides almost to the point of making them irrelevant. Herein lies the greatest barrier to entry preventing widespread adoption of Bitcoin in any meaningful capacity: whereas the previously cited U.S. dollars derive their value from complex yet quantifiable sources, Bitcoin’s value flows from intensely personal aspects like anonymity, and thus fluctuates quite literally with the whims of the market. Until those sentiments stabilize, then, the price of Bitcoins will remain in flux. As to whether that will ever happen, however, I have my doubts.

The guarantee of privacy makes Bitcoins worth some number more than $0. In other words, it makes them not worthless; anonymity gives Bitcoins a value proposition. Given the cryptocurrency’s popularity, a sizable contingent holds this offering in high esteem. Bitcoin’s value, on the other hand — as opposed to its worth, which I believe is a very important distinction to make — flows from two sources: a limited quantity in circulation, and a diminishing supply flowing into the market as the total number of Bitcoins closes in on its ceiling of 21 million. Interestingly, in either’s absence Bitcoin would inevitable fail: if an unlimited number of Bitcoins existed in the market, it would hold no monetary value given that anyone could obtain any number of Bitcoins at a moment’s notice without effecting the total supply available to others. Alternately, in the absence of a concrete ceiling and only hindered by its rate of production, Bitcoins would eventually saturate the market leaving us with the scenario I just described. Back to my point though, given that Bitcoin’s value is based on such a subjective notion as anonymity I have a hard time believing it will ever settle enough to serve as a viable currency.

In the volatility of Bitcoin we draw an interesting parallel to the stock market: just as when purchasing a stock, the only guarantee anyone will see any return from buying Bitcoins today is speculative at best. Worst case scenario, the price of Bitcoins has peaked and will only plummet from here, leaving those in possession of the currency with nothing more than useless 1s and 0s. Best case scenario, on the other hand, Bitcoins could continue their impressive climb in value and anyone lucky enough to have bought low will make significant returns on their investment. The exact same thing could be said for trading stock. As I said earlier, this instability is the primary reason for its modest uptake relative to the world’s population. One could argue that a general lack of willingness amongst vendors contributes to the issue of mediocre adoption, but in doing so we would be forced to come to terms with the proverbial chicken and egg conundrum: does widespread adoption beget widespread implementation, or is it the other way around? Personally, I subscribe to the former rather than latter theory. Unlike people, businesses are generally not opinionated: their sole goal is not to put forth any single methodology over another, but to take as much of your money as they can while keeping you reasonably satisfied; as to what form that money takes, businesses have no — or should have no — preference so long as it carries the appropriate value. If consumers genuinely wish to pay using Bitcoins, then, it would be foolish for businesses to oppose it. Consumers are not fervently advocating for the adoption of Bitcoins, however, because they are unsure of its future. Solve that single problem and everything else will fall in line.