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Bitcoin Is An Asset, Not A Currency

Via Forbes : Over the past year and a half Bitcoin has been on a spectacular run, rising in value 140% in 2016 and now an additional 49% in just the past month. This surge in value has invigorated Bitcoin backers convinced this boost in value makes Bitcoin a more credible currency, that it is a sign of the cryptocurrency’s strength. Yet the wild swings, both up and down, in the value of Bitcoin do not make it a more plausible substitute currency; they make it a speculative asset, a get-rich-quick scheme.

Is Bitcoin the currency of the future? No. There are two big problems with bitcoin as a currency: its value is unstable and its transaction processing is too slow.

The most important feature of a currency is that it be a stable store of value. This credo, ably explained by Steve Forbes here (among many places), is vital for a developing country economy to attract the investment it needs. Even in developed countries, as John Tamny explained here on Forbes.com, a stable currency value is the key to investment because those who invest are expecting a stream of future earnings to earn back their investment plus some profit. Instability in currency values mean that an investor cannot accurately predict the value of those future earnings. This uncertainty makes investments less valuable; thus, less investment happens.

Over the past month the value of a Bitcoin has experienced an average daily change of 2% in value, sometimes down but mostly up. For comparison, over the same month, the exchange rate between the euro and the U.S. dollar had an average daily change of less than 1% and only changed 3% over the entire month. While Bitcoin was rising 49% in the past 30 days, it had seven days where its value changed by over 3%, more than the value of the dollar changed in the entire month. People don’t want investments or debts denominated in a currency whose value can change by 50% in a month.

Another basic feature of a currency, beyond being a stable store of value, is to facilitate transactions. Barter’s big drawback is it is inconvenient. It’s hard to make change and you must find two people who want to exchange goods; three or four way trades get complicated. Currency solves those problems meaning I can buy groceries without having to sell economic services to the supermarket. This convenience is why people moved from barter to currencies (and then from metal to paper, from paper to plastic, and from plastic to electronic bits).

Yet, to protect the security of the blockchain that makes cryptocurrencies like Bitcoin so secure, processing of Bitcoin transactions is very slow. In fact, because of a limit on the number of transactions which can be completed in a day, it sometimes takes days to complete a simple transaction. Resistance to changing these rules from people who mostly like the anonymity and untraceability of Bitcoin mean that Bitcoin cannot become a widely-used currency. Its very security negates its value in everyday use.

Given these drawbacks, the only reasons to own Bitcoins are not to use them as a currency, but to either speculate on their asset value or use them to shield transactions from others. Without a stable value Bitcoin cannot truly be a currency. Rather it is a commodity asset that one trades, like gold or silver, in hopes that its value will rise and yield a trading profit. There is nothing wrong with speculation; the actions of speculators help to add market liquidity and to determine the market value of assets. However, usually the asset being valued also has an actual underlying use: you can invest in gold or use it to make jewelry or electronic components. Bitcoins have no uses other than allowing people to hide wealth, conceal (often illegal) transactions, and make and lose money by trading them.

Clearly, from the popularity of Bitcoin, those limited uses still have quite a bit of value to a nontrivial number of people. I have no objection to these people’s use of Bitcoin for those purposes. However, people should stop expecting it to become a currency that ordinary people use for ordinary transactions. It is destined to stay in its niche as a way to hide things or speculate. A currency, Bitcoin is not, nor shall it be.

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