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Bitcoin Isn’t Money — It’s Like Diamonds

Bitcoin value - Bitcoin Isn’t Money — It’s Like Diamonds

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Prices of bitcoin went through the roof and into the sky this week as traders decided it was the one true cryptocurrency. In just seven trading days, between Oct. 7 and Oct. 13, the bitcoin value has skyrocketed from $4,384 to $5,621. The new all-time high is $5,829, achieved overnight.

At $5,621, the bitcoin value represents nearly 55% of all cryptocurrency market cap — almost $94 billion. Ethereum, the next most popular coin, is worth about $31 billion. No other coin market is valued as high as $10 billion.

This has happened despite forks in both the bitcoin and ethereum blockchains; and a pending fork (dubbed SegWit2) in bitcoin scheduled to take place in November.

Nearly 95% of the bitcoin market had signaled support for SegWit2, which is designed to speed transaction processing. The decision by mining pool F2Pool, however, to back off its support set off a speculative frenzy.

What’s Going On?

It’s ironic that buyers have voted for bitcoin, as it has well-documented problems that make trading it difficult and expensive. While cryptocurrencies are touted as being highly liquid, bitcoin is the least liquid among them. That’s because its blockchain is old. It’s the equivalent of running all trades through a single PC in a cloud-based world.

But this is precisely why the latest boom has happened. Holders of bitcoin have simply held on. With no coins available to buy, prices skyrocketed like Cubs World Series tickets did last year.

The pending fork in bitcoin was supposed to have been settled by a New York agreement, engineered by Barry Silbert, whose Bitcoin Investment Trust was profiled by me this week as a “safe” place for retirement accounts to buy bitcoin.

Now, some bitcoin developers are condemning the fork, writing that coins held by Silbert’s Digital Currency Group may not be safe after the fork. DCG includes Coinbase, the most active bitcoin market in the U.S.

People or Technology

What’s being sold to traders and the media as a technical argument seems more like a political struggle. Bitcoin Core seems to resent the control Silbert and his fellow signatories have over the market and are revolting against it.

Under the New York agreement, control of the reference client after the fork will move next month from a “/bitcoin” directory at Github, the open source repository, into a /btc1 directory, under the control of Jeff Garzik in Atlanta, co-founder of blockchain developer Bloq. This will let the standard bitcoin block size grow, by two megabytes, which would ease trading bottlenecks.

From a technological perspective, the fork makes sense. From a market perspective, where traders want maximum value for what they have, it doesn’t. Bitfinex, a Hong Kong trading house, has created a futures market for speculating between the coins, which it has designated BCC, for Bitcoin Core, and BCU, for Bitcoin Unlimited.

These “Chain Split Tokens” show the new BCU coins created through SegWit2 trading for $447, less than 10% of what the older tokens are worth.

The Bottom Line

Bitcoin was designed to be a single global market, under decentralized control, but it is evolving into multiple markets, with Chinese and American players battling for control.

Right now, the Chinese have the advantage, because for all its technical problems a bitcoin token is rare and illiquid, thus highly prized for its scarcity. That’s behind the price rise, not the idea that bitcoin is money but the idea that the true bitcoin value is like diamonds — worth the extraordinary expense to mine and traded among elites based on that scarcity.

Dana Blankenhorn is a financial and technology journalist. He is the author of a mystery novella involving bitcoin, The Reluctant Detective Saves the World,  available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story. To follow the value of cryptocurrencies bookmark

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