If you’ve ever wondered what “cryptocurrencies” such as bitcoin, litecoin and ethereum are for, ask one of their legion of techie-libertarian fans.
And it’s dollars to dogecoins (yet another one) that the conversation will go something like this:
You: So what’s the purpose of bitcoin?
Fan: The technology is absolutely amazing!
You: Yes, but what’s it for?
Fan: Really, the “blockchain” technology is a total masterpiece, way ahead of its time!
Fan: You don’t understand! It’s a completely decentralized money system! Totally revolutionary!
You: Honestly, does it have a purpose? Any purpose at all?
Fan: It’s the wave of the future!
And on it will go.
It’s now a $100 billion market
Cryptocurrencies, or cybercurrencies, which have been in a massive financial mania until their sudden selloff this week, have two actual applications: online gambling and money laundering. Neither is the heart of a major business model. But that’s it.
And these, preposterously, are the fundamentals behind a mania that has driven these currencies up thirtyfold, so that today, in aggregate, the market for them is a staggering $100 billion.
None of the defenders’ other arguments stack up.
Online currencies are hardly a “store of value” when they have fallen about 30% in a week.
Are they really protections against the ravages of “inflation” and “monetary debasement” imposed by wicked governments? If so, how come people who keep their money in bitcoin and ethereum and the like have experienced Weimar Republic levels of consumer-price inflation just this week?
That is, after all, what it means when the price of your “currency” plunges. Bitcoins aren’t just down 30% against the dollar in the past week. They’re down 30% against the potato, the sack of rice, the gallon of gasoline and the new car.
Pure speculation
Admittedly, before all this, the price of these cybercurrencies had skyrocketed. Those who got in at the start of the year have turned $1 into $30. But this looks more like a speculation than a currency. And what will tomorrow bring? I have a pretty good idea how many potatoes I can buy with my dollars next week.
Bitcoins? Good luck with that.
You notice, incidentally, that these bitcoiners continue to measure the market price of their beloved new currencies in terms of, er, old-fashioned U.S. dollars.
Cybercurrencies may make online purchasing and international money transfers marginally more efficient in theory, if hardly in practice. Would you risk moving your money from dollars into bitcoins just to save a few percentage points in transaction fees? You’ve seen that wiped out many times over this week just in price fluctuations.
Competition from all sides
Bitcoin, the grandaddy of them all, might at one point have claimed value as a unique entity. If it held a monopoly among the people who wanted to use a cryptocurrency so they could play online poker or finance international crime, it would have some worth. Yet in the past few years multiple competitors have erupted. There are now 25 with individual market values above $100 million, several above $1 billion. Yet all the bitcoins in the world are still “valued” at around $40 billion.
Fast-growing rival ethereum was worth bupkis at the start of the year. Today it’s valued at $31 billion, or almost 10 times as much as the company ESRT, -0.05% that owns the Empire State Building.
Preposterous? You make the call.
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