Bitcoin currency speculation
Seems like you’d have to go out of your way these days to block yourself from the intense media attention given to Bitcoin, a popular if not already notorious virtual currency. Even though the total value of Bitcoin is just a drop in the bucket, at $7.9 billion by The Economist’s last count, the attention it is receiving is well deserved. The potential to send innovative shocks to the financial sector is large and it promises to bring general costs down, if not for its cost-saving attributes but by shear virtue of competition.
The metaphysical question still remains, however. Is it a currency; is it an asset; is it just plain code that gobbles wasteful amounts of energy to ‘mine, ’ ie. create it? In 2066 Macroeconomics, we’ve learned that money must serve 4 functions.
1. Medium of Exchange
2. Store of Value
3. Unit of Account
4. Use as Deferred Payment
In its current form, most economists believe that Bitcoin falls miserably short of the latter three functions.
Start with Store of Value. The volatility of Bitcoin in comparison with the US Dollar has been enough for even the most risk-seeking roller-coaster enthusiasts. Beginning at a paltry 30 cents per Bitcoin on 1 January 2011, it rose in value to over $1, 200 before crashing down to its current price of $453 as of today, 30 March, 2014. See the fluctuations here. As an asset, then, Bitcoin is little more than a penny stock that went gangbusters, bringing in returns of over 4, 000% to those who invested on the ground floor. Supporters have little more than ‘Believe in Bitcoin!’ to bring to the discussion. As a fiat store of value, it falls incredibly short.
As The Economist has pointed out, when transacting in Bitcoin, users are nonetheless transacting in ‘real currency’ equivalents. Given the aforementioned volatility, few would post prices for a good which simultaneous has a real currency cost. A car costing $10, 000 will be posted in dollars, perhaps with an up to the second Bitcoin equivalent, in parenthesis. Further, few would accept a deferred payment in Bitcoin with interest. Doing so would be pure speculation on its future price.
There seems to be a troubling Catch-22, wherein Bitcoin will never gain widespread acceptance until more people accept its risk, but the risk associated is namely what prevents it from widespread acceptance. Unlike other financial assets, stocks or bonds, say, which are priced based on anticipated dividends/cash payments and future prices, holding Bitcoin is a pure gamble on its future price. Unfortunately, nothing more.
