As recently as March 1, a unit of the mystery money was
trading for $33 (
), having doubled its value since the beginning of the year.
that it "may be the global economy's last haven" comes as the
currency surpassed a $1 billion monetary base on March 28, and as
of this writing, the exchange rate for an individual coin is
netting north of $141.
In the last few weeks, the Web has been ablaze with a torrent
of commentary about Bitcoin, the digital crypto-currency fruit of
a pseudonymous Japanese hacker with a value that's accelerated
higher than a North Korean rocket.
Not surprisingly, the ongoing cacophony that's had critics
crying "BUBBLE!" from their balconies for months has reached a
fever pitch in the past few days.
The lines in the sand have begun to be drawn, with many online
pundits siding with 'fad' over 'fab.' Many have signaled their
belief that Bitcoin's bull run will soon come to a predestined
The Bubble Boys
Over at Forbes,
Tim Worstall lamented
Bitcoin's uselessness as a currency. Compared to the $15 trillion
in US GDP that the dollar supports, Bitcoin represented a
figurative blip -- it simply doesn't provide a base for enough
economic activity to justify its current worth. Worstall is
"reasonably certain that it will all turn out to be a bust in the
Other critics think the Bitcoin hoopla is too rooted in
speculation as opposed to spending, potentially manifesting
itself as hyperdeflation and posing as a deterrent to purposeful
George Mason University economist Tyler Cowen has been a
skeptic since 2011. One of the preeminent justifications for
transferring one's assets to Bitcoins has been the system's
anonymity, but Cowen doesn't see the advantage of holding
Bitcoins over diamonds, let alone dollars in Cayman Islands bank
Plus, the true worth of Bitcoin's rise is mitigated by the
fact that the currency isn't easily transferable into non-Bitcoin
assets, Cowen noted.
There are only a few Bitcoin exchanges online and most of them
are based in foreign markets where protections for traders are
Even if Bitcoins were extremely easy to change into dollars,
"Then I will, and many other people will (there is a lot more
wealth tied up in the Cayman Islands than in Bitcoin), and the
velocity of Bitcoin assets accelerates. That encourages even more
conversion out of Bitcoin assets. Why hold Bitcoin assets?"
Taken together, the bubble proponents' case can be summarized
by three simple points:
1. Bitcoin does not support enough commerce to justify its
worth. 2. It's not easy to short Bitcoin, let alone transfer
between non-Bitcoin assets. 3. Rising Bitcoin values only
encourage conversion out of Bitcoin.
To top it off, there's several other external influences that
could drive a plunge in Bitcoin's value.
Bitcoin's $1 billion market capitalization is still small
beans, meaning that network effects are amplified in a relatively
tiny market. If one or two rogue investors decided to sell off a
million Bitcoins, the act could send the market into a downward
spiral back to zero.
Bitcoin's technological vulnerabilities:
"Someone could conceivably take over Bitcoin mining, the
process by which Bitcoins are produced and new transactions are
verified and added to the blockchain, by commanding 51 percent of
the overall processing power. Given the current rate hashrate,
the combined processing power of all Bitcoin miners, such an
event would require only a few million dollars investment."
While these crash-and-burn scenarios run contra the profit
motive, there's always the chance of Bitcoin terrorism, too.
One can't rule out software glitches either, which are
difficult to address in a Bitcoin economy, as its completely
The U.S. Treasury has recently began to take notice of virtual
currencies, paving the way for future regulations that may kill
Bitcoin as we know it. As Motherboard noted, "[A] value
transmitter outside the direct control of government could be
viewed as a threat. And at some point, the U.S. could always play
the, 'well this funds terrorism' card."
With all these liabilities, why would anyone waste their time
with digital dough?
As a basis, Bitcoin's viability depends on a justification for
holding the digital money over conventional, fiat currencies. And
to date, Bitcoin's largely succeeded in proving its worth in this
For all the security risks listed above, Bitcoin's
decentralized block chain -- which works similar to BitTorrent --
makes it nearly impossible to counterfeit. Its degree of
anonymity is unparalleled, so there's virtually no risk of
Since there's no credit cards and the business is the entity
that swallows the loss if a payment is later reversed, there's
little risk of fraud.
The hockey stick increase in Bitcoin's value has corresponded
with financial instability in Cyprus, resulting in the state
seizing deposits. Taking heed,
the wealthy across Europe
have taken a leap of faith in the online currency, particularly
Like a Cayman Island bank account, Bitcoin offers the ability
to park one's wealth offshore where governments can't get their
paws on it.
Of course, there's also Bitcoin's popularity in the "deep
web," where the online currency is utilized to purchase items of
questionable legality on websites like the Silk Road, but the
advantages to Bitcoin stretch far beyond shady activities.
One example where Bitcoin
is international money transfers, where reimbursement charges
cost virtually nothing, a vast improvement over eBay's (NASDAQ:
) Paypal charges of four percent.
Timothy Lee is a Forbes contributor who
labeled Bitcoin a bubble
as far back as 2011. But he's since come around.
Lee took time
to Joe Weisenthal's claim that Bitcoin is entering a state of
"Deflation is harmful for conventional currencies because
[they're] a unit of account as well as a medium of
exchange...[B]ut Bitcoin is rarely, if ever, used as a unit of
account. If you go to a website like Silk Road that sells stuff
for Bitcoins, you'll generally find the prices listed in both
Bitcoins and a conventional currency. The Bitcoin price is
automatically adjusted as the value of Bitcoin rises or falls
against dollars or euros...[S]imilarly, no one has
Bitcoin-denominated salaries, borrows money in Bitcoins, or pays
Bitcoin-denominated rent every month. So the rapidly rising value
of Bitcoin isn't going to cause the kind of economic dislocations
that dollar deflation would cause."
In response to Worstall,
that, "the Bitcoin economy has a lot more potential for growth
than a conventional national economy...[S]ince there will never
be more than 21 million Bitcoins in the world, the only way the
Bitcoin network could accommodate a higher transaction volume
would be for each Bitcoin to be worth a lot of money."
According to Lee, the demand for Bitcoins is rooted in the
belief that lowered barriers to entry and the lack of regulations
are the perfect catalysts for commercially significant
applications down the line.
There's no expensive or anti-competitive regulations that
would prevent the establishment of new financial services and
banks. All it would take is one Internet vendor to revolutionize
the Bitcoin economy with a killer product, turning online
currency into a staple.
In a sense, Lee's defense of Bitcoin is a bit of cop out. He
believes Bitcoin may eventually support enough commerce to
justify its worth, boosting the popularity of exchanges and
reducing speculation or the incentive to transfer assets out of
But the trendline is certainly on Lee's side. In the last two
months alone, firms with big Web presences like WordPress,
Reddit, Mega and Expensify have begun accepting Bitcoins as legal
Perhaps the best argument against Bitcoin is that its rapid
price expansion is not a good thing in the short-term, and that
its value may soon drop to sub-orbital levels. There still aren't
too many practical Bitcoin uses for the layperson and merchants
need price stability.
But as long as the digital currency's forms of usage grow,
becoming an accepted unit of exchange across more of the Web, can
we really call Bitcoin a bubble?
Scott Sumner accurately noted
, "What does the term 'bubble' actually mean? One definition has
to do with prices not equaling a rational expectation of
fundamental values. But there's really no way of testing that
definition. If you say you don't think the price is right, you've
basically assumed the answer...[M]any bubble proponents
don't...give [a] date. Then when prices rise after their
prediction they brush it off, saying prices will later fall. If
prices later fall they say it proves they were right, even if the
later decline leaves prices higher that when the bubble
prediction was made."
Is Bitcoin a bubble? Tell us what you think in the comments
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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