BITCOIN: FAD OR the future? The question has dogged the digital currency since its inception nearly a decade ago, and recent developments raise it anew. Last week, a new variant of bitcoin emerged via a “fork” in its underlying code, threatening to confuse and divide the still-small world of bitcoin adherents. Meanwhile, the price of a coin has soared to record heights above $3,000, from about $1,000 at the year’s beginning.
Skeptics remain. Consider the severe missive penned in late July by Howard Marks, who runs Oaktree Capital, which manages north of $90 billion. Marks wrote to his investors that “digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it.” Not surprisingly, he cautioned clients about investing in the currency. His perspective is widely shared, amid concerns about the currency’s recent price spike and extreme volatility. Past security breaches on bitcoin exchanges, as well as the limited options for using bitcoin in transactions, only add to the skepticism. The “bitcoin fork” will do little to allay such anxieties about an unfamiliar form of currency that relies on software and a network of computers linked over the internet to record and process transactions.
There’s nothing particularly new about Marks’ critique. It reflects suspicion of the unfamiliar. On one level, it’s hard to see what the fuss is about: Even after its recent surge, bitcoin has a total market valuation of about $55 billion. The next-largest digital currency, Ethereum, has also spiked in value, yet still amounts to less than $20 billion. That compares with a global asset market of stocks and bonds and loans of nearly $300 trillion. Bitcoin gets a good bit of hype but remains tiny.
Instead, the attention seems derived from what these currencies might become. Bitcoin’s promise—that it can supplement and ultimately supplant national currencies and global financial institutions and allow for seamless commercial transactions without either banks or governments—is vintage Silicon Valley: disruptive technology opening new avenues of exchange and enrichment, empowering individuals, and weakening the hold of the state and large corporations. For now, of course, promise is about all it is, and that’s why it attracts such skepticism.
Another source of concern—that bitcoin is dicey because it lacks “intrinsic value”—is a weak argument. In truth, almost nothing in the world of trading and money has “intrinsic value.” Money has only the value that is ascribed to it over time. Fiat currency, issued by nations, has always faced distrust from skeptics who say it is backed only a government’s good faith. That helps explain the nostalgia for the gold standard, when dollars and other government paper represented a fractional interest in gold.
Dig a bit deeper, however, and it becomes clear that gold itself has no intrinsic value. Its supply is limited (as is bitcoin, a strength of the digital currency), creating a relationship between supply and demand that cannot easily be manipulated. But gold itself has no value per se other than that ascribed to it by humans over time. It’s easy to believe in its value because people have done so for thousands of years, but that doesn’t translate into actual value, only greater trust.
While bitcoin may have only the value that its users ascribe to it, that in and of itself says nothing about what price it should command or whether it is a viable digital alternative to traditional currencies. All new mediums of exchange spawn skepticism, and should. For much of the 19th century, paper money was held in ill repute because it seemed so ephemeral and detached from value that could be easily recognized: land, gold, size of armies.
The arguments against bitcoin bear a startling resemblance to earlier roiling debates about which currencies have substance and which do not. In the late 19th century, the populist presidential candidate William Jennings Bryan crusaded against the erosion of value perpetrated by Wall Street financiers and their gold-backed paper money, at the expense of true value measured by the work of laborers. In fact, you could troll through reams of 19th- and early 20th-century fulminations, replacing the words “paper money” with “bitcoin,” and be hard-pressed to tell the arguments apart. Even today, a sizable minority of people remains ill at ease with fiat currency, hence some of the fear and animus toward central banks. It is no wonder, then, that bitcoin makes many nervous.
None of us know, of course, if bitcoin will survive or have any value in the years ahead. I own some myself, and have adopted the wise words of Wences Casares, one of the apostles of bitcoin: own less than 1 percent of your net worth, don’t buy and sell bitcoin, and don’t do anything with it for at least five years, at which point it will either be worth a lot more or absolutely nothing. I have yet to use bitcoin for a transaction, and wouldn’t know where to do so. That alone says something about where we are in its evolution.
What bitcoin does have in its—still largely theoretical—favor is ease, speed, security, and a final benefit less evident to denizens of the developed world: its users don’t need a bank account and don’t need to trust their government. For hundreds of millions in the emerging worldwide middle class, those are not givens, and bitcoin and its digital brethren offer alternatives to too few banks and erratic financial systems managed by unreliable governments. It is perhaps not surprising that Casares hails from Argentina, whose governments over the past decades have shown a ruthless disregard for the value of the peso and have manipulated the currency to maintain power at the expense of public and private savings and livelihoods.
Bitcoin’s path is unclear. There’s less doubt that the next century will reveal radical shifts in how people conduct commercial transactions. Financial services remain among the least disrupted walks of life. Yes, ATMs have changed retail banking and algorithms have altered trading. But much of the infrastructure and basic business of finance remain unaltered from a century ago. Bitcoin and digital currencies are one wave of change that will alter how we understand money and how it is used within and across borders. With bitcoin or without, the world of money will not remain unscathed by the digital revolution.