February 21, 2020

The conclusion Of Bitcoin’s Beginning

This week’s halt, and possible collapse, of the Mt. Gox exchange might or may not prove to be the beginning of the conclusion for Bitcoin – but to borrow Winston Churchill’s phrase, it is certainly the end of the beginning.

Mt. Gox had already lost its location as the leading Bitcoin exchange prior to the murky chain of events that will led the Tokyo-based site to shut down. An apparently leaked inner document indicates that the site might have been the victim of a major robbery, in which perhaps more than $300 million worth of Bitcoin “disappeared” in the exchange’s accounts. I put “disappeared” in quotes because, of course , Bitcoin has no physical manifestation.

Bitcoin is available only as the product of a personal computer algorithm whose origins are unknown and whose ultimate purpose can be unclear. It has attracted a diverse collection of users, including individuals who want to keep questionable dealings private, folks who may want to keep part of their prosperity hidden from authorities who have access to conventional financial accounts, and end-of-the-worlders who think civilized society is on the highway to hell and that for whatever reason they will be better off owning bitcoins when we all arrive there.

Bitcoin lovers like to call it a digital currency, or even cryptocurrency because of its encrypted nature. But it is clear now, amid the outrageous fluctuations in Bitcoin’s price, it is not a true currency at all. It is really a commodity whose price changes according to its quality and according to supply and demand.

As of this 7 days, there are two grades of Bitcoin. One of the Mt. Gox variety, which usually nobody can access while the site is down and which may no longer truly exist at all, was worthy of only about one-sixth of every other bitcoin yesterday.

Some people are always willing to provide value, albeit not very much value, to consider a chance on a possibly worthless resource. This is why shares of companies that are obviously about to go bust can trade for a price greater than absolutely no.
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But at least we know the stocks exist, whether in tangible or even intangible form, and there are governing bodies available to vouch for their validity, otherwise their value. Bitcoin, sponsored simply by no government and outlawed by some, has no such backing. Ask any Mt. Gox user today whether that is a plus, as bitcoin holders have heretofore maintained. (Authorities from Tokyo to New York already are probing the Mt. Gox failure, and some sort of follow-up action appears likely. )

True money acts two functions: as a store of value and as a medium associated with exchange. Bitcoin thus far gets only fair marks as a medium of exchange, since there are only a limited variety of places where you can freely spend it. You can swap your (non-Mt. Gox) bitcoins for real money, but you can do the same with any other commodity, like diamonds or Hondas. Diamonds and Hondas are worth money, but they not necessarily money.

Bitcoins utterly flunk the store of value test because their own wild price fluctuations do not shop value; depending on blind luck, they either create or destroy this. Collecting bitcoins is speculating, not saving. There is a big difference.

Bitcoin does address certain real-world issues, like the sometimes exorbitant cost of exchanging foreign currencies and the cumbersome nature of the modern banking system, which is laden along with regulation to try to prevent everything from insolvency to money laundering to identity theft. But the regulations exist since insolvency, money laundering and identification theft exist, too. As Mt. Gox vividly illustrates, a system with out such safeguards is prone to generate problems much more serious than the ones it purports to solve.

The Mt. Gox debacle might or might not permanently undo Bitcoin’s credibility. We won’t know before we know what happened in those computers in Tokyo. The crisis should, however , strip whatever is left from the veneer of safety that Bitcoin’s supposed cryptosecurity was supposed to provide. Bitcoin is no more secure than the structure that is built to hold it. Lacking all the backstops that have evolved over time in the traditional financial system, that is not secure at all. Either we recreate those backstops in the Bitcoin world, in which case we need to wonder why we bothered along with Bitcoin in the first place, or we reside dangerously without them.

There will regularly be people who don’t trust banks and the government to secure their savings. They will used to stuff cash into mattresses. Maybe some will continue to use Bitcoin instead. My own guess is that Bitcoin’s chance of becoming a mainstream form of payment, like debit cards or PayPal, is definitely virtually zero. This may not be the beginning of Bitcoin’s end, but we have definitely seen the end of the beginning.

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