Set aside, for a moment, the argument about the Bitcoin price. Ignore the short-term movements, both in the recent past and the near future. Bitcoin, as a trading vehicle, no doubt is exhilarating and terrifying, as recent performance has shown. And with the overwhelming majority of potential investors still figuring out how to invest in Bitcoin, there conceivably could be more upside, and another run to $20,000 or higher.
But that’s just short-term trading noise. Investing in Bitcoin is essentially a game of “musical chairs”. Long-term, the Bitcoin price has to be based, in some way, and at some point, on its value to society. And that value would seem to revolve around its use as a currency.
After all, Bitcoin and rivals Ethereum, Ripple, and the like, are called “cryptocurrencies”. The anonymity promised by not only Bitcoin itself, but the blockchain technology in general, is seen as enough to potentially decentralize the entire financial system. According to bulls, Bitcoin will usher in a new paradigm. Its value in that new paradigm, then, should be a function of its eventually capped numbers and its importance in whatever the new system looks like going forward.
But there’s a key problem. Bitcoin is an awful currency, for a number of reasons. And if it doesn’t work as a currency, what, exactly, is the point — no matter the Bitcoin price?
Why Bitcoin is a Terrible Currency
There are endless reasons why Bitcoin is not a functional currency. For one, particularly at the moment, it’s far too volatile. Few people will accept Bitcoin as payment — or pay with Bitcoin — if its value in even a fiat currency like the U.S. dollar could move from $15,000 to $19,000 (or $8,000) in the course of the transaction.
Bitcoin also requires fractional payments for the majority of purchases: at the moment, a Starbucks Corporation (NASDAQ:SBUX) coffee would cost 0.0001649622 Bitcoin, an unnecessarily small and complex number.
There’s more. There’s the deflationary/liquidity trap problem highlighted by Paul Krugman’s famous babysitting co-op story. Bitcoin processing is ridiculously complex. It’s unnecessarily slow as well. We live in an age where companies like Visa Inc (NYSE:V) and PayPal Holdings Inc (NASDAQ:PYPL) can move money across the world in a nanosecond. Why wait an estimated 78 minutes, and pay much higher fees?
Bitcoin is complicated, particularly for unfamiliar users. And it’s unsafe, with exchanges repeatedly hacked over the years.
The argument from Bitcoin supporters is that it has enough to function as a currency once adoption kicks in. That might be true in theory, but, in practice, Bitcoin — and its fellow cryptocurrencies — are impractical at best. The Winklevoss twins, reportedly the largest owners of Bitcoin in the world, literally have their Bitcoin keys printed on papers secured in bank vaults across the country. That alone should negate any of the arguments for Bitcoin as a currency.
Store of Value?
What should be concerning to any trader/investor holding Bitcoin is that the story has changed as the currency’s value has run up. Now, Bitcoin is a “store of value,” akin to gold.
There are two problems with that argument. The first is that it’s not the original story — or the original intent of creator Satoshi Nakamoto. And, when investing in any kind of asset, fitting the story to the value (and not the other way around) is very dangerous.
More broadly, there’s a huge problem with the “store of value” argument. Yes, the amount of Bitcoins is capped at 21 million (functionally fewer, as some are damaged and lost over time). But the supply of cryptocurrency as a whole is infinite. Arguing that Bitcoin is a “store of value” suggests not only that it has intrinsic value a la gold, but that it has more value than Ethereum, or Ripple, or the multitude of initial coin offerings made over the past few years. Why, exactly, is that the case?
What Is the Real Bitcoin Price?
The claims for Bitcoin’s value seem to fall apart under even modest scrutiny. The justifications for a $14,000-plus price are rationalizations, not real support. It’s true that I was wrong before about the Bitcoin price. It’s true that the Bitcoin price very well may rise again. And the blockchain technology underpinning the currency has real value, even if it’s not the ridiculously high value being priced into stocks like Riot Blockchain Inc (NASDAQ:RIOT) and Longfin Corp (NASDAQ:LFIN).
But none of those truths support the idea that Bitcoin itself should be worth $14,000 — or anything at all. Its supposed value as a currency has been debunked. Its ability as a “store of value” is limited. What, exactly, are Bitcoin investors buying?
It’s a question that simply doesn’t have a good answer.
As of this writing, Vince Martin has no positions in any securities mentioned, or any ownership of any cryptocurrency or related derivative.