Writing about Bitcoin’s future is a fool’s errand, so here goes: The cryptocurrency’s long-term value is dependent on whether it becomes a regular, widely-used medium of exchange.
That’s why Bitcoin enthusiasts should temper their confidence in their predictive abilities following Stripe’s announcement Tuesday that it would stop accepting transactions denominated in Bitcoins.
In 2014, the multibillion payment processing firm became “the first major payments company to support Bitcoin payments.” But since then, Stripe said, Bitcoin’s transaction fees and confirmation times have risen dramatically, making it far less practical than the dollar as a medium of exchange.
And what is Bitcoin’s long-term value if people find it significantly more inconvenient than fiat currency?
“People bet on bitcoin because it may develop into a full-fledged currency,” wrote economist Francois Velde in a 2013 essay for the Federal Reserve Bank of Chicago.
But Bitcoin is not, like precious metals, a store of value.
And it is not, like dollars, guaranteed by the state.
It is a currency whose strength lies in its “blockchain” structure — which precludes the need for an intermediary to process every transaction — and its apparent limited supply, which means a central bank can’t print away its value.
But Bitcoin’s underlying technology doesn’t change the fact that, as UCLA economist Lee Ohanian told me, “the parties in the transaction have to buy into the idea that Bitcoin has value, so that the seller in the transaction is confident that they can turn around and use Bitcoin as a buyer in the future.”
“From this standpoint,” Ohanian said, “Bitcoin is like fiat money. There is no fundamental value to fiat currency.”
Take away people’s faith in Bitcoin’s value, and Bitcoin has no value. It is certainly based on sophisticated, genuinely valuable code. But the technology is open source. If governments aren’t already using it, they likely soon will, perhaps to strengthen existing fiat money, or, as Ohanian said, “to offer their own cryptocurrencies.”
Bitcoin and the state are inherently antagonistic toward one another. Much of Bitcoin’s raison d’etre stems from distrust of the state. But what state would tolerate not overseeing a widely-used medium of exchange?
“Throughout most of Western history, the state has involved itself in money,” Velde wrote.
One reason is that debtors and creditors benefit from the state’s governance of processes like bankruptcy — a legal system that only protects a currency backed by the state.
Another, Ohanian said, is the government’s want “to assess tax liabilities and to control resource flows to criminal or hostile organization.”
In fact, anxiety regarding governments’ relationships with Bitcoin are likely a major factor behind the cryptocurrency’s recent sell-offs.
Its meteoric 1,300% rise last year, from just under $1,000 to over $19,000, was slowed by South Korean threats to crack down on cryptocurrency trading.
Just the fear of state involvement has spooked investors.
“Believers in virtual currencies say that one of their selling points is freedom from government meddling,” writes The Economist. “In Asia, the cutting edge of the crypto-world, it is governments that are making—and breaking—their fortunes.”
Since January 1, Bitcoin has twice dipped below $10,000, a nervous-making psychological marker, particularly for some of Bitcoin’s relatively late FOMO investors.
All of this means that even if blockchain improvements reduce Bitcoin’s transaction fees and confirmation times enough so that it can rival the dollar’s advantage in terms of convenience, governments may be a more intractable barrier to widespread adoption than technological limitations ever could be.
And while Bitcoin is tops on governments’ cryptocurrency radar, it has a bevy of smaller competitors. Bitcoin may be the first big cryptocurrency, but will it be the last one standing?
“The risk to Bitcoin is if it is supplanted by an alternative means of secure electronic payment,” Ohanian said. “What if Bitcoin were the ‘Myspace’ of cryptocurrencies, in which it became irrelevant if the ‘Facebook’ of crypto-currencies comes along one day? We know what happened to Myspace.”
Early-adopters have made fortunes off Bitcoin, but speculations, by nature, make a few betters rich, and the rest angry.
Bitcoin is a currency and it may one day become a widely-used medium of exchange. But it also may not.
As behavioral economist Daniel Kahneman has rigorously documented, most people are confident in predictive abilities they don’t possess.
If Bitcoin reaches $100,000 or $1 million, as some people with magical fortune-telling abilities have said it surely will, people who sat out won’t be able to say they didn’t have a friend who told them to buy.
But if this is a modern-day tulip mania, Bitcoiners won’t be able to say they weren’t warned over and over and over.