LONDON (Reuters Breakingviews) - Bitcoin is in danger of becoming something like respectable. The CME Group plans to start trading futures in the crypto-currency, treating it like a genuine asset with a vaguely predictable value. Devotees are delighted, and critics, like me, look foolish. I predicted imminent collapse back in 2013 when the price was $87. On Wednesday, it hit $10,000.
We doubters have to decide between surrender and struggle. I choose the latter. Bitcoin and its many electronic rivals suffer from numerous incurable flaws – economic, social and cultural.
The biggest economic weakness is not in the underlying blockchain technology, although tales of hacking and lost tokens suggest there are serious kinks to work out. Nor is the main problem the high energy usage involved in creating new coins, although it is alarming.
There’s a more fundamental economic confusion to consider. As a currency, these electronic tokens simply cannot have both of the advantages backers ascribe to them. If they are collectible items, which are expected to rise in value, they cannot also be attractive alternatives to government-regulated mediums of exchange.
After all, when owners of assets think their property will become more valuable, they do not sell. Thus bitcoins can be expected to be hoarded as long as the price keeps rising. And when the market turns, then no law-abiding merchant will be willing to accept them. They do not have to, because there is a great alternative: traditional currencies. Not only does legal tender come with low transaction costs, these monies only lose value at the very slow pace of inflation.
If bitcoin buyers were serious about its potential functionality, they would be devastated by the recent vertiginous price increases – a doubling in three months. After so much volatility, it would take years of price stability for legitimate merchants to take it seriously as a currency.
If that were not enough, bitcoin and its ilk have another fatal economic problem. They are not trustworthy. Even without the numerous breathless websites covering the ever-increasing supply of crypto-currencies, a bunch of mutually suspicious computer nerds who keep tinkering with the formula just cannot inspire confidence.
Again, the alternative is much better. In the world of government-supported money, hyperinflation is extraordinarily rare. And while bank failures that end with write-downs of account balances happen, hacks and other losses of crypto-currencies are far more frequent. Even the 2008 financial crisis, which was a terrible moment for bank-created money, ended with almost no losses for ordinary savers.
One thing that blinds many crypto-currency backers to economic reality is libertarianism. Government-haters believe any temporary problems with private currencies are worth enduring, since they will free societies from the yoke of the state’s monetary oppression.
A variety of that argument clearly works for criminals. It is not an accident that the most regular use of bitcoin is for illegal activities. The logic is simple and persuasive. While movements of the unregulated electronic tokens are much more expensive and less secure than bank transfers, they come with a lower risk of prison terms.
“Bitcoin, the outlaw’s friend” is not much of a slogan. Enthusiasts are undaunted, however. When their reasoning is not merely vacuous – it will work because it is such a good idea – it is frequently apocalyptic. They believe that the end is near for our whole corrupt and violently polarised culture. In this nihilistic narrative, bitcoin (or Ethereum or whatever) will be the end-times currency of choice. It has rules and protocols, so it does not need governments and laws.
Such claims are ridiculous. The internet, the cloud and the whole network of computers needed to keep bitcoin in business can only function with the support of reasonably effective governments. If anarchy ever comes, computer records, especially complex distributed systems like bitcoin, will be totally useless.
The problems with crypto-currencies are so glaring that something irrational must be sustaining the zeal. One possibility is that bitcoin has become what could be called a post-modern luxury good. Unlike most luxuries, they offer no beauty, pleasure or even natural scarcity. They do not really even have artificial scarcity, since it’s fairly easy to create a new one. What they can offer is the strange and decadent charm of self-created value.
Before letting the dogs of cultural criticism loose, though, there is a far simpler explanation: the well-known distortion of judgment caused by greed. When buyers of bitcoin talk about blockchain, dangerous governments or the coming apocalypse they are merely putting a thin whitewash of intellectual respectability over their craving for capital gains.
For now, bitcoin is working out well for speculators, if not for society. Here is a helpful market hint for holders, though. Do not all try to cash in at once. Or better yet, do, and soon. The bigger the bitcoin bubble becomes, the more likely it is to do serious economic damage when it bursts.