The Future of Bitcoin

A friend asked my opinion recently about the future of bitcoin.  Given that he is a banker, and my areas of expertise are literature and film, this seemed an odd request.

Nevertheless, let's consider...

The purpose of a currency is either as 1) a means of exchange or 2) a storehouse of wealth.  

Apropos 1) For now, as far as I can tell, there are not enough actors in the legitimate economic sphere using bitcoin regularly for it to be a widely-accepted conventional means of exchange.  If in the future there are instances of currency restrictions on international exchange it could become useful but would presumably constitute flouting of some rule or another.

Apropos 2) Given that there is nothing tangible supporting the value of bitcoin (not commodity, nor treasury, nor even a "final guarantor" such as taxpayers) bitcoin would not seem an attractive long-term storehouse of wealth.

Whether it can, in purely speculative terms, be a profitable short-term play is an entirely different matter.  Other than its inability to flower, how is a bitcoin different from a tulip bulb?  I am sure that in the 17th century Dutch tulip mania there were some who safely stored their wealth in tulip bulbs, recognized the developing bubble, transferred their wealth into property (which many in Amsterdam at that time likely predicted would soon be literally under water) and then got out in time.  This is not to knock speculation during a market rise, it's just that very few ever get out in time.  And this is not to knock tulips.  They're beautiful.  If the Dutch treasury had figured how to modulate tulip mania and let the air out of that speculative bubble, things might have worked out okay and tulip bulbs would still be an alternative means of exchange in Northern Europe.

In any case, given their intricacy, a better comparison for bitcoin might be to Native American wampum belts.

How might a bitcoin bubble develop?  Here's one possible scenario: China right now has a problem of too much debt, and probably too much bad debt. I believe they will work through that challenge okay, with some pain along the way.  That said, this week S & P lowered China's credit rating.  It could be that a crowd of Chinese investors, while enduring a market shock, grow less enamored of their currency, and also of the dollar and the pound, and see bitcoin as an alternative store of wealth.  That could be a mistake.  But who knows.

Here's hoping for smooth sailing. 

More about the S&P downgrade HERE.

About tulip mania HERE.

About wampum belts HERE, via the Haudenosaunee Confederacy Chiefs Council.