Are Bitcoin believers the new Apple fanboys?
Watching true believers in action is always fascinating and often terrifying. Consider the mobilization of the bitcoin faithful every time someone writes an article questioning whether bitcoins really are the greatest advance in currency since Yap islanders invented the stone coin.
Like me, for example, and my recent post reporting that the value of bitcoins had plunged by half in a matter of hours after Chinese authorities cast their disapproving eyes on the bitcoin trade. The post attracted a cascade of negative commentary from bitcoin fans on Twitter and other online forums.
They generally seemed to think I was casting doubt on bitcoins’ suitability as investment vehicles. (they were right.) Among the counterarguments, many claimed to have bought into bitcoins when they traded at a couple of bucks, and therefore were sitting on more than $800 profit per coin even after last week’s crash. Several noted that last week’s plummet wasn’t the first bitcoin “crash,” not even the first this year--as if that’s an argument in bitcoin’s favor.
Several also pointed out that other investment markets have also experienced big crashes. The housing market, for instance. The stock market, for another instance.
Well, yes. But investment experts don’t normally point to the housing crash of 2008, or the stock market crashes of 1929, 1987, 2000, and 2008 as proof that these markets are safe or profitable. They’re arguments for caution, and that’s how last week’s bitcoin crash should be taken too.
Journalists and other commentators aren’t surprised when their challenge to conventional wisdom elicits a strong pushback from fanatics. For years, anyone writing anything negative about Apple Inc. or its signature products could expect to be inundated with responses questioning their intelligence, foresight, character, parentage or worse. That phenomenon seems to have ebbed; even Apple’s one-time fanatics are feeling the shock of disappointment. Many of those who once spend their free hours writing, “Sir, you must be an idiot” to the company’s critics now spend their days wondering when Steve Jobs will come back from the dead.
Bitcoin fanatics show some of the same pathologies as they did. They’re utterly convinced that all doubters are stupid, blind or in the pay of (a) the banks or (b) the cabal of central governments. They tend not to read an entire article before hitting their own “send” buttons, and they promise, with some glee, that the critics will learn the truth, to their own disadvantage, soon enough.
First, they’re not going to replace traditional, government-issued currencies. To quote (again) Francois Velde of the Federal Reserve Bank of Chicago, “It is hard to imagine a world where the main currency is based on an extremely complex code understood by only a few ... without accountability, arbitration or recourse.”
If you really think bitcoins are a hedge against a global financial meltdown and widespread civil disorder, I know a guy who’ll be happy to sell you a steel shelter to bury in your backyard. (If he knows his clientele, he’s probably accepting payment in bitcoins by now.)
Second, the price volatility of bitcoins is what makes them a lousy investment vehicle. Volatility by its nature is unpredictable. Volatility drives smart money out of a marketplace. Though it’s true that any investment device can rise or fall, not always rationally, market exchanges spend a lot of money to try to make sure that price changes happen incrementally so that all participants have a fair chance of profiting, or losing, by them.
For everyone who claims to have made gains of thousands of percent on bitcoins, there are people on the other side. Someone may claim to have bought in at $5, ridden the trend to $1,200, and still own $800 in BTC, but that means someone bought at $1,200 and rode the flume ride down. It’s during price booms that the average sheep gets taken in to be sheared. Clue: If you can’t tell where the baa-ing is coming from, it’s coming from you.
Still, bitcoins do have a useful purpose, chiefly as a medium of transfer from one official currency to another, without having to go through the international banking system or pay banking fees. They can circumvent government foreign exchange rules.
But don’t expect those conditions to last indefinitely. Government authorities, including the U.S. Treasury, have already taken steps to bring bitcoin trading under their regulatory regimes.
Conventional banks are sure to start offering trading services in bitcoins, just as they now facilitate trades between, say, dollars and euros. They won’t do it for free, but they will offer guarantees and safeguards that many of today’s bitcoin traders can’t. If you’re a legitimate business looking to move money via bitcoins, would you prefer to have your transaction handled by some character “in a trench coat lounging in a green armchair” upstairs from a supermarket, as was described recently by my colleagues Chris O’Brien and Andrew Tangel, or by Bank of America?
Nor are bitcoins going to be the only “crypto-currency” in town. There’s already competition from alternative services, because moving assets from country to country doesn’t require bitcoins. It can be done with quatloos, or any other medium you can devise, as long as the transactions are reliable, accountable and frictionless.
Bitcoins are the best known such medium today, but they won’t be the last. The next iteration may solve the many flaws in the original conception. If you’re inclined to bet on bitcoins, wager that something better is lurking right around the corner.