What about the fact that those who bought bitcoin early have made huge amounts of money? Well, people who invested with Bernie Madoff also made lots of money, or at least seemed to, for a long time.
The other day my barber asked me whether he should put all his money in bitcoin. And the truth is that if he’d bought bitcoin, say, a year ago he’d be feeling pretty good right now. On the other hand, Dutch speculators who bought tulip bulbs in 1635 also felt pretty good for a while, until tulip prices collapsed in early 1637.
So is bitcoin a giant bubble that will end in grief? Yes. But it’s a bubble wrapped in techno-mysticism inside a cocoon of libertarian ideology. And there’s something to be learned about the times we live in by peeling away that wrapping.
It’s a nifty trick. But what is it good for?
In principle, you can use bitcoin to pay for things electronically. But you can use debit cards, PayPal, Venmo, etc. to do that, too — and bitcoin turns out to be a clunky, slow, costly means of payment. In fact, even bitcoin conferences sometimes refuse to accept bitcoins from attendees. There’s really no reason to use bitcoin in transactions — unless you don’t want anyone to see either what you’re buying or what you’re selling, which is why much actual bitcoin use seems to involve drugs, sex and other black-market goods.
So bitcoins aren’t really digital cash. What they are, sort of, is the digital equivalent of $100 bills.
Like bitcoins, $100 bills aren’t much use for ordinary transactions: Most shops won’t accept them. But “Benjamins” are popular with thieves, drug dealers and tax evaders. And while most of us can go years without seeing a $100 bill, there are a lot of those bills out there — more than a trillion dollars’ worth, accounting for 78 percent of the value of U.S. currency in circulation.
So are bitcoins a superior alternative to $100 bills, allowing you to make secret transactions without lugging around suitcases full of cash? Not really, because they lack one crucial feature: a tether to reality.
Although the modern dollar is a “fiat” currency, not backed by any other asset, like gold, its value is ultimately backed by the fact that the U.S. government will accept it, in fact demands it, in payment for taxes. Its purchasing power is also stabilized by the Federal Reserve, which will reduce the outstanding supply of dollars if inflation runs too high, increase that supply to prevent deflation. And a $100 bill is, of course, worth 100 of these broadly stable dollars.
Oh, and bitcoin’s untethered nature also makes it highly susceptible to market manipulation. Back in 2013 fraudulent activities by a single trader appear to have caused a sevenfold increase in bitcoin’s price. Who’s driving the price now? Nobody knows. Some observers think North Korea may be involved.
As Robert Shiller, the world’s leading bubble expert, points out, asset bubbles are like “naturally occurring Ponzi schemes.” Early investors in a bubble make a lot of money as new investors are drawn in, and those profits pull in even more people. The process can go on for years before something — a reality check, or simply exhaustion of the pool of potential marks — brings the party to a sudden, painful end.
So no, my barber shouldn’t buy bitcoin. This will end badly, and the sooner it does, the better.