Bitcoin exists only as the product of a computer algorithm whose origins are unknown and whose ultimate purpose is unclear. It has attracted a varied collection of users, including individuals who want to keep questionable dealings private, people who may want to keep part of their wealth hidden from authorities who have access to conventional financial accounts, and end-of-the-worlders who think civilized society is on the highway to hell and that for some reason they will be better off owning bitcoins when we all arrive there.
Bitcoin enthusiasts like to call it a digital currency, or cryptocurrency because of its encrypted nature. But it is clear now, amid the wild fluctuations in Bitcoin’s price, that it is not a true currency at all. It is really a commodity whose price fluctuates according to its quality and according to supply and demand.As of this week, there are two grades of Bitcoin. One of the Mt. Gox variety, which nobody can access while the site is down and which may no longer truly exist at all, was worth only about one-sixth of every other bitcoin yesterday. bitcoin blog
Some people are always willing to offer value, albeit not very much value, to take a chance on a possibly worthless asset. This is why shares of companies that are obviously about to go bust can trade for a price greater than zero. But at least we know the shares exist, whether in tangible or intangible form, and there are government authorities available to vouch for their validity, if not their value. Bitcoin, sponsored by no government and outlawed by some, has no such backing. Ask any Mt. Gox user today whether that is a plus, as bitcoin holders have heretofore maintained. (Authorities from Tokyo to New York are already probing the Mt. Gox collapse, and some sort of follow-up action seems likely.)True money serves two functions: as a store of value and as a medium of exchange. Bitcoin thus far gets only fair marks as a medium of exchange, since there are only a limited number of places where you can freely spend it. You can swap your (non-Mt. Gox) bitcoins for real money, but you can do the same with any other commodity, like diamonds or Hondas. Diamonds and Hondas are worth money, but they aren’t money.
Bitcoins utterly flunk the store of value test because their wild price fluctuations do not store value; depending on blind luck, they either create or destroy it. Collecting bitcoins is speculating, not saving. There is a big difference.Bitcoin does address certain real-world issues, such as the sometimes exorbitant cost of exchanging currencies and the cumbersome nature of the modern banking system, which is laden with regulation to try to prevent everything from insolvency to money laundering to identity theft. But the regulations exist because insolvency, money laundering and identity theft exist, too. As Mt. Gox vividly illustrates, a system without such safeguards is prone to create problems much more serious than the ones it purports to solve.
The Mt. Gox debacle might or might not permanently undo Bitcoin’s credibility. We won’t know before we know what happened in those computers in Tokyo. The crisis should, however, strip whatever is left from the veneer of safety that Bitcoin’s supposed cryptosecurity was supposed to provide. Bitcoin is no more secure than the structure that is built to hold it. Lacking all the backstops that have evolved over time in the traditional financial system, that is not secure at all. Either we recreate those backstops in the Bitcoin world, in which case we have to wonder why we bothered with Bitcoin in the first place, or we live dangerously without them.There will always be people who don’t trust banks and the government to secure their savings. They used to stuff cash into mattresses. Maybe some will continue to use Bitcoin instead. My own guess is that Bitcoin’s chance of becoming a mainstream form of payment, like debit cards or PayPal, is virtually zero. This may not be the beginning of Bitcoin’s end, but we have definitely seen the end of the beginning.