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BLOG: The one real reason Bitcoin isn't a serious alternative currency

Fredric Paul | Oct. 22, 2013
There are lots of reasons to question Bitcoin, but only one that really matters

I love the idea of Bitcoin. I really, really do.

I love the concept of separating money from government control and of enabling truly anonymous electronic transactions. I love the fact that it's decentralized and open source. I even love the notion of "mining" Bitcoins. It's so much cooler than, say, printing money, much less having to earn it.

I get excited every time I hear of another legitimate vendor deciding to accept Bitcoins in payment for goods or services (last week, it wass beer in Holland). I applauded the announcement of an ATM that lets you easily convert cash into Bitcoins (though an ATM that let you do the reverse would seem far more useful). And I actively follow my friends' and acquaintances' adventures with Bitcoins.

Not worried about the seamy side
I don't even have a problem with seamier side of Bitcoins. I don't care if alleged Silk Road marketplace mastermind Ross Ulbricht amassed an $80 billion Bitcoin wallet from a site built on selling drugs and murder-for-hire. To me, it's absurd to think that a payment mechanism has a moral responsibility to control how it's used and what it can buy. Cash isn't evil because you can buy bad things with it, and it's not saintly because you can give it to charity. The good or evil lies in what you do, not with how you pay for it.

More fundamentally, I even think its fine that Bitcoin isn't backed by any real-world value. The reality is that even government-backed securities are pretty much polite fictions — they work because enough people are willing to agree that they work. The U.S. Government prints money as it chooses, and the market determines what those dollars are worth. Bitcoins are not so different — as their market value fluctuates according to perceived value.

Currency = Stabilty
There's nothing wrong with that concept, but how it plays out in the real world is Bitcoin's fatal flaw.

The problem is that the value of Bitcoins has fluctuated incredibly widely. Sure, "legitimate" currencies also float, but typically rather slowly and within limited ranges. When those fluctuations get out of hand, either in hyperinflation or deflation, it's usually a sign of deep underlying problems in the economy.

But has any real currency ever experienced the wild swings that have buffeted Bitcoins in their brief existance?

The value of a Bitcoin has jumped from less than $1 in 2011 to somewhere between $168 and $192, depending on the market, as I type this. Just as troubling, the rise was anything but smooth. The price spiked as high as $266 in the Spring, before falling back below $100 in the Summer.

 

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