Bitcoin. The world’s newest and hottest virtual currency. It has become the story du jour for a financial media hungry for stories, and its sudden surge in recent weeks, going from a price of less than $200 barely a month ago to $1200 last week, certainly attracted attention. And of course, rarely do things gain so much so fast without a concomitant fall.
It is perilously easy to dismiss the bitcoin phenomenon as Exhibit A for financial bubbles. With everyone from Nobel laureate Robert Schiller to the day traders who troll the web declaiming the perils of a world awash in central bank money and warning of asset bubbles, bitcoin is perfectly poised to fit that narrative. A virtual currency only invented in 2009, with a limited number of units in circulation that sees its value quintuple in a matter of days to command a total market of more than $10 billion simply begs for the word “bubble.”
But is it? Here’s where everyone has an opinion. Some have pointed to the eerie similarities between the bitcoin phenomenon and the South Sea Bubble of the 18 century or the Tulip mania of the 17 to prove that of course it’s a bubble. Others have taken the more recent history of the late 1990s internet boom – when companies traded on hopes, dreams and delusions of price to expectations – as the more recent parallel. Those arguments, usually hyperbolic, do seem at least apt in the case of bitcoin.
But then there is the fact of what bitcoin is: a virtual peer-to-peer currency that seeks to bypass governments and allow for individuals and organizations to do business without the mediation of the state. That is the truly dramatic trend that bitcoin represents. Bitcoin itself may be a bubble but the trend is most definitely not.
There are two speculated reasons behind what has happened with bitcoin of late. One was the congressional testimony of the assistant attorney general Mythili Raman who validated bitcoin both by refuting that it was a primarily vehicle for money laundering and by acknowledging that “many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce.” The signal from a senior government official that bitcoins are not an immediate subject of regulation and are a potentially valid means of exchange corresponded with the sudden surge.
The other reason floated is that Chinese millionaires have turned to bitcoin as a way to evade China’s rigid capital control, and that the signals from the United States that regulations isn’t imminent made bitcoin appear to be a safe haven for their money.
What then to make of this? Certainly the intense volatility of bitcoin has to be a negative for using it as a currency. In past examples of currencies undergoing wide gyrations, whether hyperinflation Weimar Germany or in more recent times Argentina and Zimbabwe, people simply stop using the currency because there can be no confidence in its actual value. How can you accept payment in bitcoin when the price could go up or down 25% a day, as it has recently?
The other question is whether it is, in fact, a currency, or rather a security, or perhaps neither or both. In all possible scenarios, it is hard to see why governments would not attempt to control or squash it. One of the immutable pillars of government sovereignty everywhere is the power to mint coin (or print paper money). Governments do not allow and rarely much like others to issue currency. And if bitcoin is a security then there will be inevitable pressure to regulate it, put it on an exchange, and subject it to various levels of scrutiny that could well undermine its utility as a viable peer-to-peer, private and largely anonymous international mode of exchange.
Standing back from this noise, however, bitcoin is part of a multifaceted move towards private commercial transactions that are not intermediated by the state. From fundraising sites such as Kickstarter, to investing networks, to new ability under the JOBS Act of private groups to fund themselves without onerous regulations, people are racing ahead to use and invest and spend their money without reference to states and governments that seek to protect them, constrain them, and track them. That appetite is one that no government will successfully contain (though they will try), and no bubble will effectively sate. Nor will the pricking of a bitcoin bubble (if one exists) spell the end of these innovations.
As a particular, bitcoin may be a proverbial flash in a virtual pan. As a symbol, it is potent. It is part of the next stage of global capitalism, one that could see vast sums of money in motion without the state having a central role. There is much to celebrate in that, and much to be concerned about. Who will care for the commons if too much economic activity circumvents the state? But the ability of people to connect financially, to transact, invest, and exchange as they see fit without permission from the state is also liberating and potentially transformative. We are in the very early stages here. Deriding bitcoin is easy. Dealing with the issues it raises, that is hard, and necessary.
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