The eye-popping rise of Bitcoin’s price this year has taken the world of cryptocurrencies out of the dark web and into mainstream media. The nature and behavior of Bitcoin and its 1,400+ competitors are understood by relatively few people. The attractiveness of its price has overshadowed everything else. The moment when one man first exchanged 10,000 Bitcoins for two pizzas on May 17, 2010 may feel like a century past. But, this was not even eight years ago.
Bitcoin followers have staunchly defended its unreal price inflation. Some insist that a future price of $50 million per Bitcoin is not out of the question because of its inevitable acceptance and inherent usefulness. You can divide one Bitcoin into 10 million Satoshis. Thus, theoretically each of these smaller units could be worth five dollars and cover the world’s monetary needs.
But the cryptocurrency’s metoric price rise ironically undermines one of two requirements for something to be considered a currency: fungibility. That is, a currency needs to be able to be exchangeable, transferrable, and acceptable.
Until this year, Bitcoin fit that requirement relatively well. Even pizzas were purchased using Bitcoin at participating pizzerias. That is not the case today. Now the entire justification for Bitcoin’s existence is its breath-taking price inflation.
Recently, investor Peter Schiff reiterated his claim that “Bitcoin is going to zero”. He predicted much sorrow among investors. Famed as an opponent of the 2008 bailout of the Wall Street banks, Schiff lost much credibility among his followers. There were repeated warnings of financial depression emerging from the Federal Reserve’s quantitative easing programs, as well as hostility toward Bitcoin.
But Schiff’s skepticism has foundation. Hackers have made bold heists by exploiting Bitcoin’s security weaknesses. Slow authentication by the Bitcoin network make transactions unwieldy and exploitable. Constant changes to the protocol to fix these problems results in “forking”. This forking creates alternate versions of the cryptocurrency.
Finally, “mining” or creating Bitcoins consumes much time and energy. Advocates claim this is what gives Bitcoin its inherent value. But digging a ditch by hand does not make it more valuable than by using a backhoe.
Because of Bitcoin’s inherent problems, there is no valid reason for its current price rise.
Only fame and fortune can explain its popularity. It can and likely will crash to a ridiculously low price in the future. Bitcoin may become nothing more than a “collector’s item.” But cryptocurrencies are here to stay.
There are many that perform far better in terms of security, authentication, mining process, and transferability. Ethereum, Veritaseum, Ripple, Dash, and others display the real future of electronic money. This is where there is price stability and ease of fungibility, making acceptance and use a priority over speculation and gambling.
Also, the blockchain technology underpinning cryptocurrencies works for other purposes. These are new cloud storage applications, ledgers for corporate and legal documentation, and secure communication networks. This is all based on the elderly and nearly obsolete Bitcoin.
Indeed, the future of cryptocurrencies is bright, if only Bitcoin can get out of the way.
Sidney Petron is a historian and political analyst currently situated in New Haven, Connecticut.
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