2013-04-17

So, Bitcoin Crashed. Now What?

The trouble with tracking Bitcoin is that it moves so rapidly that a lot of noise looks like news. We're not interested in the currency's every single movement; instead, we want to know what it's becoming and what utility it offers the world. Here's our take on what the last week of events mean for the future of Bitcoin.



Writing about Bitcoin is difficult because it's hard to determine what's actually news. Since I last wrote, Bitcoin rose above $200, proceeded to lose over 70% of its value, and is now trading at around $90 after a small recovery. Part of the reason I didn't cover these movements was that I was on vacation, but I also hesitated because Bitcoin has always been subject to wild fluctuations. Keeping track of these movements is important if you're trying to make money on Bitcoin or buy and sell products using it, but it's not really anything out of the ordinary given the history of the currency. In fact, it would be more newsworthy if, all of the sudden, it stopped fluctuating wildly.

Instead, the tumultuous movement makes Bitcoin a risky investment, and most of the people who follow it simply aren't convinced of its long-term utility. The experts I talked to are all still waiting for Bitcoin to stabilize at a predictable price point over a 30- to 60-day period, which doesn't seem likely to happen anytime soon. Other analysts are far more bearish, and see the crash as a sign that the experiment with Bitcoin is over.

Mirroring concerns I wrote about two weeks ago, Washington Post economics columnist Neil Irwin advanced a theory that Bitcoin's built-in deflationary tendency caused the bubble because the ecosystem was unable to cope with demand rising much faster than supply. This could be a major, lasting vulnerability. Because Bitcoins are produced at a reliable rate of one block every 10 minutes, there is effectively no way to use monetary policies that might counteract speculation. Further compounding the problem, there is still no easy way to short-sell Bitcoin, making it difficult to determine whether a rapid rise in price is a bubble or an actual increase in value.

In addition to structural problems, both Irwin and New York Times columnist and Nobel Prize-winning economist Paul Krugman pointed to a philosophical problem with Bitcoin: By attempting to be completely free of human intervention, it may be impossible for it to ever meet the definition of currency.

Money is, as Paul Samuelson once declared, a "social contrivance," not something that stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment.

This point becomes especially important when you look at how drug traders on Silk Road, still the most popular use of Bitcoin, have adjusted to the currency's movements: Surprisingly little according to Forbes writer Andy Greenberg, who collected quotes from traders and the site's founder. For users of the site, the value of the currency isn't that it "stands inside society," but in fact the opposite: It operates on the fringes and this, combined with the anonymous nature of transactions, allows for more secure trading of illicit merchandise than any traditional currency can provide. Although Greenberg found that some dealers are ceasing trade in the hope that the currency's appreciation will make money faster than selling goods, the site has seen little disruption because most users don't value the currency itself. They just want drugs.

For law-abiding citizens, what is Bitcoin good for right now? At the moment, probably just gambling:

If that changes, I'll let you know.

[Image: Flickr user sackerman519]



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