Markets frequently froth and bubble, but the boom in bitcoin, a digital currency, is extraordinary. Although its price is down from an all-time high of $2,420 recently, it has more than doubled in only two months. Anyone clever or lucky enough to have bought $1,000 of bitcoins in July 2010, when the price stood at $0.05, would now have a stash worth $46 million. Other cryptocurrencies have soared, too, giving them a collective market value of about $80 billion.
Ascents this steep rarely are sustainable. More often than not, the word “bitcoin” now comes attached to the word “bubble.” The question of what has driven up the price is important, however. Is this simply a speculative mania, or is it evidence that bitcoin is taking on a more substantial role as a medium of exchange or a store of value?
Bitcoin’s recent trajectory certainly seems manic. Retail investors have piled in. Many already familiar with bitcoin investing have moved on to bet on alternatives, such as Ethereum, and “initial coin offerings,” in which companies issue digital tokens of their own.
Bitcoins have real uses. They now buy everything from pizzas to computers.
Goldbugs mistrust governments and their money-printing tendencies, and so too do bitcoinesseurs: No central bank is in charge of bitcoin. A store of value should not bounce around as much as this one does, however: Bitcoin swung from more than $1,100 in late 2013 to less than $200 a year later, before climbing, in fits and starts, to its current dizzying heights.
Rather than being a form of digital gold, bitcoin aspires to loftier goals: to be a means of exchange like the euro, yen or the dollar. Regulators are starting to take bitcoin seriously. Some of the price surge can be explained by Japan’s decision to treat bitcoin more like any other currency.
However, the bitcoin system is operating at its limits and its developers cannot agree on how to increase the number of exchanges the system is able to handle. As a result, a transaction now costs nearly $4 in fees on average and takes many tedious hours to confirm. For convenience, a dollar bill beats it hands down.
If bitcoin and the other cryptocurrencies are unlike anything else, what are they? Like the internet, cryptocurrencies both embody innovation and give rise to more of it. They are experiments in themselves as to how to maintain a public database—the so-called “blockchain”—without anybody in particular, a bank, say, being in charge. Georgia, for instance, is using the technology to secure government records.
Blockchains are platforms for further experiments. Take Ethereum, for example. It allows all kinds of projects, from video games to online markets, to raise funds by issuing tokens—essentially private money that can be traded and used within these projects. Although such ICOs need to be handled with care, they also could generate intriguing inventions. Fans hope that they will give rise to decentralized upstarts taking aim at today’s oligopolistic technology giants, such as Amazon and Facebook.
This may seem like a dangerous way to generate innovation. Investors could lose their shirts: A crash in one asset class could spread to others, creating wobbles in the whole financial system. In the case of cryptocurrencies, however, such risks seem limited. It is hard to argue that those buying cryptocurrencies are unaware of the risks—and, since they are still a fairly self-contained system, contagion is unlikely.
If there is such a thing as a healthy bubble, this is it. To be sure, regulators should watch out that cryptocurrencies do not become even more of a conduit for criminal activity, such as drug dealing. They should think twice before coming down hard, though, particularly on ICOs. Being too spiky would not only prick a bubble, but also prevent a great deal of the useful innovation that is likely to come about at the same time.
© 2017 Economist Newspaper Ltd., London (June 3). All rights reserved. Reprinted with permission.
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1 comment
Unless you have money coming out of your ears, buying or investing in bitcoins is a no no no.