Bitcoin:
$11k and counting

Bitcoin skyrocketsLast week, digital asset broker Coinbase’s vice president and general manager of GDAX Adam White took the podium at the Consensus Invest Conference in New York City to extoll the performance of cryptocurrency. Later that evening, the news was everywhere: Bitcoin had surpassed the $10,000 mark.

Of course, that’s old news. As I was preparing this post, Bitcoin vaulted over the $11,000 mark.

About this time four years ago, Bitcoin made news by climbing past $1,000, up from $200 a month earlier. Then as now, pundits warned against investing in cryptocurrency. Representative of the cautionary side was this piece by Kerry Close, which ran last January in Money:

As bitcoin prices dominate headlines, you might be wondering whether you should invest in the popular cryptocurrency. Probably not: It’s just too volatile. The virtual currency is known for wild fluctuations in price … Those sudden ups and downs would be bad news for your portfolio … “You try to sell it, and by the time the order goes through, the price may have dropped,” said Matthew Elbeck, a professor of marketing at Troy University. “It’s really, really not worth it for the ordinary consumer.”

Or, take this warning from the UK as reported just three months ago in The Guardian:

The financial regulator has issued a stern warning against a speculative frenzy over initial coin offerings (ICOs) in cryptocurrencies such as bitcoin that have been promoted by celebrities including Paris Hilton.

The Financial Conduct Authority said anyone investing in ICOs should be prepared to lose all their money, with some of the schemes floated potentially outright frauds.

ICOs use the language of conventional initial public offerings (IPOs) and are designed to raise money for internet-based startups. But their similarities with IPOs end there.

The cautions are well-taken. Cryptocurrency is volatile by nature, in many ways more of a gamble than an investment. History bears out that rapid price acceleration can presage a crash. For instance, those not living under a rock or on Mars may have heard something about a certain real estate and investment bubble that burst in 2008. That Bitcoin’s gains are legendary is true enough. But Nassim Nicholas Taleb provides an analogy in his book The Black Swan that explains why predicting the future based on the past may be unwise:

Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.

Volatility aside, the utility of cryptocurrency suggests that it is here to stay. Blockchain technology, which underlies cryptocurrency, is transparent and incorruptible (although, per Taleb, I think it’s wise to hedge with words like so far). As Blockgeeks explains, blockchain technology functions by storing identical blocks of information across a network, so that no single entity has control over it, which ensures no single point of failure.

That’s why cryptocurrency has proven (again, so far) immune to counterfeiting, obviates identify theft dangers, reduces or eliminates transaction fees, speeds up larger transactions, does away with foreign exchange complications, and permits anonymous transactions. That last feature doesn’t hold much appeal for law enforcement and the IRS, which is precisely why it’s so popular, and not just among criminals: Many above-board people just don’t like the idea of having their activities tracked by government or any other third party.

Despite its promising growth in use and its meteoric growth in value, Bitcoin must overcome hurdles if it is ever to attain regular, household currency status. The whole concept of blockchains and cryptocurrency, not easy to conceptualize, can be daunting to the average consumer. Even “getting started” sites like this one, though friendly in language and design, can intimidate.

Bitcoin and other cryptocurrencies are a long way from universal acceptance. This presents something of a circular problem, namely, that Bitcoin will not be more widely used until it is more widely used. Still, such problems have a way of solving themselves, Apple Pay and Google Wallet being good examples.

As for blockchain, it proves itself useful beyond cryptocurrency. Nasdaq reports promising applications such as improved cloud storage, linking personal computers into supercomputer-like configurations, more secure transmission and execution of legal documents, and others.

Bitcoin and blockchain technology are here for the long haul. Much like the smartphone, they may turn out to be examples of invented-within-the-last-decade technology that change the world.

Meanwhile, Bitcoin’s price tag keeps skyrocketing. At least, as of this writing. By the time you see this post, things may have changed.

Leave a Comment