Bitcoin craze is sure to go bankrupt

By Charles Gray Source:Global Times Published: 2013-12-2 19:03:01

Illustration: Liu Rui/GT

Illustration: Liu Rui/GT

The recent rise in the value of bitcoins has once again resulted in claims that the bitcoin is somehow going to become "tomorrow's" currency. However, what these advocates fail to understand is that it is this very rise in value that shows that bitcoins cannot effectively replace traditional currencies. Much like trading cards or Dutch tulip bulbs, the bitcoin is a phenomenon that is fundamentally unsuited to ever becoming a useful currency.

At its core, a circulating currency must be dependable. The explosion in value that is currently touted as a sign of the bitcoin's viability would be a complete disaster for the US dollar or Chinese yuan. Put simply, investors and traders alike would realize that what can go up so quickly would be equally likely to fall just as quickly. This would make predicting future exchange rates and purchasing power an exercise in futility.

For serious exchange purposes, a currency must change in value in a dependable manner. While all currencies fluctuate in value, none experience the kind of wild fluctuations in value that the bitcoin is prone to experiencing. A household would find it futile to attempt to plan a budget around savings that might be worth $10,000 one day and fall to $1,000 the next, before rising to $100,000 at the end of the week. Such radical price swings are more characteristic of the stock market than they are of any dependable currency.

The other claim by bitcoin advocates, that by virtue of being difficult to trace bitcoins are more useful than traditional currencies, fails due to the simple fact that unregulated markets seldom stay that way. Already, bitcoins are well known as a favored method for child pornographers and drug traders to attempt to avoid government scrutiny. The weakness of this approach was demonstrated when Silk Road, one of the best-known bitcoin trading venues, was closed by the US. Two other underground trading sites, Atlantis and Project Black Flag also went offline, taking their users' bitcoins with them. Not only does this reputation for criminal transactions bode ill for the public acceptance of the bitcoin system, but it also increases the likelihood of the very government control many bitcoin advocates despise.

Finally, unlike a national currency, nobody is legally mandated to accept the bitcoin as payment. In the US, the dollar is the legal - and legally enforced - currency for the payment of all debts, public and private. A domestic company can choose to accept other types of payment, but they are required to accept payments made in US currency for any domestic transaction. This also applies to every other national currency. Conversely, the acceptance of the bitcoin rests on unstable ground.

It is accepted today because of its perceived potential to grow in value. When that belief falters, its value will fall, as consumers abandon it for more stable financial instruments. Ultimately, this could create a self-feeding cycle, seeing the entire bitcoin market vanish overnight, as has happened to other fads in the past.

This is especially true given the rise of competing virtual currencies. The Wall Street Journal estimates that there may be over 80 competing cryptocurrencies in existence, most of which were launched by individuals hoping to cash in on the bitcoin craze. Should any one of these currencies become popular the value of individual bitcoins could crash. The same thing would happen if a regulatory backlash occurred. Those holding their savings in bitcoins would see millions of dollars turn to worthless strings of ones and zeros. 

In fact, this has happened before. E-gold, a virtual currency developed in 1996 by Douglass Jackson and Barry Downey enjoyed a meteoric rise in popularity - and an equally sudden fall from grace, being shut down by the federal government for a variety of offenses. Although bitcoins are based on a decentralized model, similar government hostility would almost certainly cow businesses and the majority of individual investors alike from accepting this currency.

There have been many "virtual currencies," from Dutch tulip bulbs to the collectable cards used in popular games. Without exception, they have all peaked and collapsed, leaving their owners with worthless inventories. The bitcoin craze is unlikely to end any differently, as it is shut down by government intervention, poisoned by criminal involvement, or simply tossed aside for a newer virtual currency. Ultimately, without a stable regulatory foundation and the ability to reliably predict future valuation swings, a virtual currency will simply be an unpredictable investment opportunity rather than a useful circulating currency.

The author is a freelance writer based in Corona, California.

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