Why Bitcoin Will Never Be a Currency – in two Charts – The Atlantic
Why Bitcoin Will Never Be a Currency—in two Charts
Bitcoin could be Paypal Two.0, but it will never be the dollar Two.0. Not when prices would have had to fall 98.Five percent the past year if they'd been set in terms of Bitcoin.
The Very first White President
- Ta-Nehisi Coates
- Five:00 AM ET
Why Glad People Cheat
- Esther Perel
- Sep 6, 2017
The Awkward Truth About Campus Rape Policy
- Emily Yoffe
- Sep 6, 2017
Have Smartphones Demolished a Generation?
- Jean M. Twenge
- Aug Three, 2017
The RINO Hunters Become the Hunted
- Conor Friedersdorf
- 8:07 AM ET
- Matthew O’Brien
- Dec 15, 2013
Falling prices sound like a good thing, but they’re not.
When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. Even worse, people are stuck attempting to pay back debts that don’t fall with wages that do. So bankruptcies pile up, and so do bank losses. That makes people too funked to borrow, and banks too funked to lend, which only makes prices fall even more.
This self-perpetuating cycle of doom is what buried the global economy in the 1930s, and what, to a lesser extent, has buried Japan since the 1990s. And it’s what has been burying us since 2008, tho’ this time central banks have at least kept prices from falling, just slightly.
Now, it doesn’t make much sense, but there’s actually a currency designed to create these kind of economic calamities. A currency designed for deflation. That’s Bitcoin, the virtual currency you can theoretically use to buy things online. See, there’s a predetermined number of bitcoins that will only grow at a low rate until 2040—and then stop. This artificial scarcity means that the dollar value of a bitcoin should go up considerably. And it has. In just the last year, it’s gone up something like sixty four times. That’s enough that “Bitcoin millionaires” are now a thing.
Of course, a stronger Bitcoin is just another way of telling that things cost less in terms of Bitcoin. In other words, there’s Bitcoin deflation. Just how much? Well, as you can see below, Peter Coy calculates that prices would have had to fall 98.Five percent the past year if they had been set in terms of Bitcoin. As point of comparison, prices fell about ten percent a year during the worst of the Good Depression.
But prices aren’t set in terms of Bitcoin. They’re set in terms of dollars. So it doesn’t hurt the real economy when the price of Bitcoin goes up. People just go on living their lives, mostly unaware of the virtual currency. But it does hurt the Bitcoin economy, such as it is, when the price of Bitcoin goes up. Why would anyone use their bitcoins to buy things when those bitcoins might dual in value in a day—or hour—or two?
They wouldn’t. Researchers found that sixty four percent of bitcoins are in accounts that have never been used. And the ones that are being used aren’t being used more. You can see that in the chart below from Jason Kuznicki, which looks at the dollar value of all bitcoin transactions each day divided by the dollar value of all bitcoins each day. It’s hard to see any pattern here—and that’s the point. If people were using bitcoins more, this ratio would be going up. It’s not.
Bitcoin won’t work as a currency as long as it’s so deflationary. Why spend bitcoins today when they might be worth much more tomorrow? The only reason would be to buy or do things online that you can’t buy or do with dollars (or euros or yuan)—something illegal. Now, black markets can be big markets, especially when it comes to evading capital controls, but not so big that Bitcoin would ever become more than a niche “currency.”
What Bitcoin indeed needs is a central bank to stabilize its value. When the request for Bitcoin goes up, they need to print more to keep it from skyrocketing. That is, they need to determine whether they want Bitcoin to be a Ponzi scheme for techno-libertarians or an actual medium of exchange. See, the technology of Bitcoin indeed is revolutionary, but the currency of Bitcoin is holding it back. In other words, Bitcoin truly could have use as a payments system if it had a stable value. But it doesn’t, so it’s just a dotcom stock. And one that could be co-opted by banks that take its technology and use it with dollars instead.
So who’s the flawless person to run Bitcoin? It’d have to be someone with central banking practice. Someone who understands why deflation is a problem. And someone who thinks virtual currencies hold promise. Someone like . Ben Bernanke.