Bitcoin hasn’t found its killer app, but that might not matter.
In early September, one Bitcoin was worth almost $5,000. Then the Chinese government cracked down on cryptocurrency investments, and Bitcoin’s value plunged 40 percent in a matter of days, reaching a low below $3,000.
But Bitcoin bounced back. By early November, one Bitcoin was worth almost $8,000. Then last week, a controversial effort to expand the Bitcoin network’s capacity failed. Within days, Bitcoin’s price had plunged 25 percent, while the value of a rival network called Bitcoin Cash doubled.
Today, Bitcoin has recovered all of last week’s losses—one Bitcoin is now worth more than $7,800.
Bitcoin’s recoveries haven’t been very surprising to long-time Bitcoin watchers. Over and over again, Bitcoin’s value has seen spectacular plunges only to recover the lost ground and rise to new heights. Bitcoin has seen at least three major Bitcoin “bubbles” over its seven-year life.
Each time, a huge price gain was followed by a spectacular crash, leading many people to declare that the currency had been nothing more than a bubble. Each time, the currency has defied critics, regaining the previous highs and then pushing still higher.
Today’s Bitcoin price might represent a bubble, in retrospect. But it’s past time to acknowledge that Bitcoin isn’t only a bubble.
Lots of prominent people think otherwise, of course. JPMorgan Chase’s CEO labeled the currency a “fraud” in September. That sentiment has been prominently echoed abroad. “I just don’t believe in this bitcoin thing,” Saudi Arabia’s Prince Alwaleed said. “I think it’s just going to implode one day. I think this is Enron in the making.”
But here’s the thing: people have been predicting Bitcoin’s impending demise for years, and they’ve consistently been wrong. Even if Bitcoin were to lose 90 percent of its value in the coming weeks, it would still be worth around $800—a value many people dismissed as an absurd bubble four years ago. If it lost 99 percent of its value, it would be worth $80—a value that would have been considered absurdly high less than five years ago.
Blockchains are an important new technology, and cryptocurrencies are a fundamentally new asset class. Bitcoin, the most popular cryptocurrency, might be overvalued right now, but it might not be. Either way, it certainly isn’t going to suffer an Enron-style collapse.
Bitcoin is digital gold
Adoption of the PC was driven by the invention of the spreadsheet and word processing. The Internet became a mainstream technology thanks largely to the World Wide Web. I’ve been looking for Bitcoin’s similar “killer app” since I started covering Bitcoin in 2011.
Back then, I argued that international money transfers could be Bitcoin’s killer app, allowing money to be sent around the globe faster and more cheaply than was possible before. Today, plenty of people are working on that idea, but so far it hasn’t gained significant traction—hampered in part by the Bitcoin network’s rising transactions fees.
Last year, I argued that Bitcoin still hadn’t discovered a killer app that would allow it to disrupt mainstream financial markets. One year later, I still think that’s true.
It’s possible Bitcoin will never pose a serious threat to conventional payment networks like Visa or MasterCard. And the recent failure of an effort to expand the Bitcoin network’s throughput suggests that the Bitcoin community isn’t serious about disrupting the mainstream payments business—though the Bitcoin Cash spinoff network might be.
But even if Bitcoin never finds its killer app, that won’t necessarily cause Bitcoin’s value to fall.
Think about gold. Gold certainly has useful applications, from jewellery to electronics. But most of the world’s gold isn’t being put into consumer products. Instead, it’s being stored in big vaults—and under people’s floorboards—as a disaster-proof store of value. Many people believe that if the global financial system were to collapse, gold is one of the few items that’s guaranteed to maintain its value. Gold can also be stored and moved in a way that can’t easily be tracked by the authorities.
People believe this even though gold’s value is volatile compared to the dollar or other conventional currencies. And they believe in gold’s value despite the fact that no powerful institution has committed to uphold gold’s value.
Obviously, Bitcoin is different from gold in many ways, but there are important similarities. Its value is a social convention, just as gold’s value is. And as we’ve learned in the last few years, the social convention of Bitcoin’s value is surprisingly durable. Over and over again, Bitcoin’s value has plunged, only to recover.
The decentralized, global nature of the Bitcoin network makes it unlikely the network will ever be entirely shut down. As long as the global Internet exists, there is likely to be at least one country that tolerates the operation of Bitcoin mining hardware.
Bitcoin is easy to store and transport without being traced by the authorities. You can obviously send bitcoins electronically without the know-your-customer checks that apply to conventional financial networks. You can also print out your private Bitcoin keys to create a supremely lightweight and portable way to store and transport value in the physical world.
Most people don’t need or want to own any bitcoins, but of course most people don’t need to own gold either. But there have been enough people who want to own gold to push the value of all gold in circulation to around $6 trillion.
The world’s bitcoins are worth a comparatively paltry $130 billion. Bitcoin competitors like ether and bitcoin cash are worth another $100 billion. That’s absurdly high compared to the value of cryptocurrencies a couple of years ago. But it’s really not that much money compared with gold—to say nothing of conventional asset classes like stocks and bonds.
The lesson here isn’t that you should run out and buy bitcoins. Like gold, bitcoins don’t pay any dividends, so in the long run you should expect bitcoin holdings to underperform stocks and bonds. But the point is, it’s not crazy to think that bitcoins could maintain their value over the long run. Bitcoin may not be useful for very much beyond being a way to store value, but the same is true of gold—and gold has stayed valuable for thousands of years now.
Source: Ars Technica