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Aruba, December 3, 2013 -  The price of Bitcoin as of today is $1,003—or at least it was as of the time I typed that last sentence. By now it could be worth significantly more or less. But as Bitcoin mania drives the price upward, a chorus of skeptics predict—or openly pine for—the moment when everything comes crashing down. I recently mentioned Bitcoin in the office of a venture capitalist, and for a second it seemed like he was going to punch me in the face.
In a column in the New York Times last week, Adrian Chen laid out the basic anti-Bitcoin argument, complete with the sense of personal affront: “All I can say is that the crash is going to be great,” he wrote. “Bitcoin is too dependent on speculative mania to be of practical use as a currency.” Still, he couldn’t help expressing regret that he didn’t buy some of the currency when he first wrote about it in 2011, at a time when it was worth $9.
Chen’s initial discovery was about Silk Road, an online black market based on Bitcoin, and his initial article for Gawker sent the value of the currency spiking by drawing attention to something new and dangerous. The ability for buzz to have this kind of impact remains Bitcoin’s basic problem. While its proponents see it as a new form of economic exchange, the Bitcoin economy is still small and illiquid enough to be sent reeling by any piece of news. When Silk Road was busted up in October, the value plummeted—for a few hours.
Commentators rushed to proclaim the end of the whole experiment, and then the price shot back up and has kept going ever since.
This makes it a compelling vehicle for speculation, and the stories about the Bitcoin millionaires are legion. But for the true believers who think the currency will be a huge boon for e-commerce and remittances and will generally save us all, this volatility is arguably the biggest threat there is. If a currency can’t even stay the same value through the duration of a transaction, it can’t very well serve as the basis for a revolutionary new online economy.
So how does Bitcoin stabilize? Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University, says it’s just a matter of getting more people to use it. The larger the economy grows, he suggests, the less volatile it will be.
Then every incremental development doesn’t have to be a coup or a crisis. A major thing standing in the way of its adoption as a mundane vehicle for economic exchange? Volatility. “It’s kind of a chicken-and-egg problem,” acknowledges Brito.
According to Brito, the increase in the value of Bitcoin does seem like a bubble, but it’s also a vote of confidence in its incredible potential. China loves it. Washington loves it. The drug dealers are out (for now). This thing is going to be huge!
That’s the optimist’s view. The other possibility is the price will go up until the price doesn’t go up anymore. And the 17th century Dutch saw how that turned out with tulips.
It could be that the speculators outnumber the believers, and interest mainly reflects a lack of other good investment opportunities. In that scenario, people will begin pulling out at the first hint the party is over, the bubble will pop, and everyone else will go back to buying Subway sandwiches, haircuts, and spaceflights with boring old dollars (or yuan or whatever). In fact, don’t look now but Bitcoin’s value in dollars is lower than it was last week!
Of course, spotting the bubble seems to be a national pastime of late. If you want to have the exact same argument with slightly different vocabulary, start a discussion about the Dow Jones industrial average or the valuation of tech startups.
Bitcoin is either filling a need for a new kind of Internet currency or serving as a neat new way to place an exotic bet. It can’t be both things forever.