A few years ago I wrote a piece called “Bitcoin Is Dead” and about once a week since then I’ve gotten an email from some aggrieved techno-utopian saying, “Oh yeah? How about issuing a correction—bitcoin rocks!”
The one I got this morning referenced a Wall Street Journal piece noting that the value of bitcoins now stands at an all-time, hilarious high: A single bitcoin is now worth more than $9,000—a value increase of 900 percent in the last year. So is bitcoin really dead?
You betcha.
Bitcoin wasn’t the first internet currency, but it was the first internet currency to gain a measure of acceptance in the marketplace. (There are others: You can think of ethereum and monero as the indie-rock bitcoins.) What set bitcoin apart was the blockchain: A programmatic advance that provided total transparency for the currency—everyone always knows exactly how they’re minted, what the current monetary supply is, and what the total supply can be—married to total anonymity for the user base. Bitcoin is, as I noted back in 2014, a perfectly frictionless currency. And it aspired to be a true, global currency—undercutting sovereign states, rivaling the dollar and the yen.
The first problem for bitcoin stemmed from its defining feature: Who needs total anonymity when paying for things on the internet? Criminals, that’s who. Bitcoin was the common currency of Silk Road and the dark web, meaning that its user base is people buying and selling drugs, gambling, prostitution, exploiting ransomware, and money laundering. Go have a look.
The second problem came when Mt. Gox went bankrupt. Mt. Gox was the world’s largest bitcoin exchange and one day it halted trading before eventually disclosing that someone had stolen 850,000 bitcoins—at the time, roughly 7 percent of the entire monetary supply of the currency. At which point any non-criminal consumers who thought that maybe they’d try out this new bitcoin-thingy realized that if someone can steal 7 percent of a currency’s entire supply (and get away with it) then the risks of using it far outweigh the benefits. The days of people using bitcoin to order a pizza were over.
So what’s behind the sudden rise in bitcoin’s valuation? Institutional investors and hedge funds have been drawn in by speculation.
Now, maybe the $9,000 bitcoin is a bubble. Maybe it isn’t. (Spoiler alert: It is.) But that’s beside the point because the spike in valuation means that bitcoin isn’t even really a currency anymore. It’s a commodity.
A currency is something you use to buy and sell goods. In order for it to have value qua currency, it has to be reasonably stable. If it loses value too quickly (as in Weimar Germany) people abandon it for barter. If it gains value too quickly (as in bitcoin) people stockpile it for investment instead of using it in exchange for goods and services.
But whatever the case, bitcoin is still DOA as a generally accepted currency. The best users can hope for is that it becomes something like digital gold—a widely accepted commodity in which investors can stockpile value as a hedge. But even that seems like a long shot: The economy already has actual gold. What’s the advantage—from a large-scale investing standpoint—in “digital gold.” If there is one, it isn’t obvious.
Which means that bitcoin will probably settle on a value at some point and go back to being the go-to method of bartering for hackers, drug dealers, and prostitutes. That is, unless the dark web simply moves on to something else.
