Acton Institute Powerblog

A cryptocurrency? Tech stock? Bubble? What exactly has Bitcoin become?

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Four years ago I wrote a series of posts on what Christians should know about bitcoin. At the time a single bitcoin was worth $266, and I wasn’t sure it’d be around for five more years. This week a single bitcoin was trading for $17,800 and it looks like it’ll be around long past my five-year mark. But the rapid and inexplicable rise in price of bitcoins has caused some people to wonder what’s going on—and even become confused what bitcoin is anymore. What is bitcoin nowadays? Here are a few possible answers.

Is bitcoin still a cryptocurrency?

Not really. Bitcoin has become the most popular mainstream cryptocurrency by ceasing to be a form of currency. Sure, you can still technically buy some goods and services with bitcoin. But because it is prone to deflation you’d be foolish to do so.

Deflation, a decline in the general price level, occurs when the price of goods and services decline relative to a specific measure. The value of the goods and services themselves do not have to decline for deflation to occur; all that is required is for the value of the currency itself to increase. This is exactly what has occurred for the entire existence of bitcoin.

Because of its deflationary nature, bitcoin is a terrible form of currency. For example, in 2010, a developer named Laszlo Hanyecz traded 10,000 bitcoins for two Papa John’s pizzas. At the time the bitcoins were worth about $40. Today, those coins would be worth $1.7 million dollars. Anyone who bought anything with bitcoins prior to 2017 is likely regretting their purchase.

It bitcoin a tech stock?

Definitely not. There are several ways that stocks are valued, but most of them are based on the assumption that the underlying company has or will have future earnings which will either justify the rise in price or will lead to a distribution of dividends to shareholders.

While bitcoin sometimes acts like a stock (i.e., it can be traded on exchanges, is subject to technical analysis, etc.), there is no company underlying bitcoins—only a blockchain. Bitcoin will also never have earnings, though it currently pays out a form of “dividend” to bitcoin miners (see my previous series for more on how bitcoin works).

Is bitcoin the “new gold”?

Bitcoin is like Gold 2.0, says Tyler Winklevoss.

No, it’s not. While bitcoin appeals to many of the same people who once preferred gold as an investment vehicle, bitcoin has few similarities to the precious metal. For starters, bitcoin is a pure “fiat currency” similar to the U.S. dollar. Gold is commodity money. Gold is also an actual physical asset that has some use for real-world applications. Bitcoin is an intangible asset whose monetary value is solely dependent on how much hard currency people are willing to exchange for it.

Additionally, gold has the advantage of being a long-term illusion: gold is valuable because for thousands of years we humans have convinced ourselves that gold is valuable. Bitcoin and other cryptocurrencies have a long way to go before they can create a similar “money delusion.”

Is bitcoin a wealth redistribution system?

Yes, it is. The question is what type of wealth redistribution system. The most generous take is that similar to Valentin Schmid, who contends that bitcoin “favors risk takers, innovators, savers, and people who are curious and persistent enough to learn new technology as well as history.” Those people, who jumped on the bitcoin train early enough “will be richly rewarded and their purchasing power will increase.”

That’s certainly true to some extent, since 40 percent of bitcoin is held by about 1,000 people. As the price of bitcoin increases, the value of the holdings of these early movers is rising almost exponentially. The key for them is when to unload bitcoins for hard currency and collect the wealth that has been accumulating to them. When they do (and they can even collude together on the timing since bitcoin isn’t subject to financial regulations) the bitcoins held by the late movers will be worth much, much less than they bought them for.

Another, less congenial, term for this is a ponzi scheme. The price of bitcoin is currently rising based solely on the idea that the price will rise even further. And as long as there are “greater fools” to bid up the price of the cryptocurrency, the price will continue rise. Eventually, though, when there are no more fools left, the bubble will pop—and thousands of people will have lost real money.

Is bitcoin a speculative bubble?

Yes, almost assuredly. Financial bubbles involve outsized growth in the price of an asset beyond its true value. Bitcoin has no intrinsic value so why do people hold it as an asset? Because they think it can be sold an even higher price in the future (see: greater fool theory). As economist John Cochrane explains:

[I]f the price [of an asset] is greater than zero, either people see some “dividend,” some value in holding the asset, beyond its cash payments; equivalently they are willing to hold the asset despite a lower expected return going forward, or they think the price will keep going up forever, so that price appreciation alone provides a competitive return. The first two are called “convenience yield,” the latter is a “rational bubble.”

“Rational bubbles” are intriguing, but I think fundamentally flawed. If a price goes up forever, eventually the value of bitcoin must exceed all of US wealth, then all of world wealth, then all of interplanetary wealth, then all of the atoms in the universe. The “greater fool” or Ponzi scheme theory must break down at some point, or rely on an irrational belief in the next fool. The rational bubbles theory also does not account for the association of price surges with high volatility and high trading volume.

The fact that bitcoin is a speculative bubble, though, does not mean that it will pop anytime soon. As long as the people who hold the most coins—the “bitcoin whales”—think there are greater fools who will bid up the price, the bubble is likely to last a long time.

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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