Bitcoin

John Doe     12/06/2020 10:30     114


Bitcoin.

Cybercurrencies are here to stay.  Maybe Bitcoin is too, but not at the levels it currently holds.  Tulips are still here, but the tulip mania of the 1630s has passed.  Bitcoin was originally intended to be a medium of exchange that would be insulated from almost all external control.  This anonymity made it an excellent means of exchange for illegal activities, most recently illustrated by the fact that most of the ransomware attacks on private data have demanded payment in Bitcoin.

Bitcoin transactions are recorded by blockchain, which is like an old accounting ledger.  It contains every Bitcoin transaction, although looking at blockchain from the outside, you can tell that a transaction is verified, but you cannot tell who the parties were or how much Bitcoin was involved.  As one of the parties to the transaction, however, you can pull out the specific information.  So, if Elon Musk for example says you never paid him for your Tesla, you can prove that you did using blockchain. 

The Economist magazine recently explored what would happen to the financial markets if Bitcoin went to zero.  It illustrates how far Bitcoin has come from mainly being a payment mechanism for drug dealers and other criminals to store of value rivaling gold bullion.  Many old school financial institutions — banks, hedge funds, and payment systems like PayPal — have begun to invest in and accept Bitcoin.  The Economist speculates that a Bitcoin crash would also crash the broader financial markets, and the more widely accepted Bitcoin becomes, the bigger the crash would be.  Because there is so much speculation today in Bitcoin, much of the investment is leveraged, likely leading to margin calls and liquidations in the event of a Bitcoin crash. 

The Economist says that “because changing dollars for bitcoin is slow and costly, traders wanting to realize gains and reinvest proceeds often transact in stablecoins” pegged to the dollar, like Tether.  The fact that traders think Bitcoin transactions are slow and costly is ironic, since Bitcoin was conceived as a payment mechanism.  But the reliance on Tether and other stablecoins creates problems for these currencies, which are somewhat like money market funds that are vulnerable if they are insufficiently backed, which many regulators believe they are. 

It is ironic that as Bitcoin has become seen as a store of value, it has become less used as a transaction mechanism, which was its original purpose.  But many Bitcoin proponents tout Bitcoin as a way for the poor, unbanked people around the world to participate in the financial system with their wealthier cohorts. 

Because of that prospect of some kind of cybercoin becoming a worldwide medium of exchange, central banks around the world, like the US Federal Reserve, are looking a creating cybercurrencies that would not have some of the negative aspects of Bitcoin.  If cybercurrencies become widespread, will that take some of the luster off of Bitcoin. 

Bitcoins will always represent the massive amounts of energy that were required to produce them.  This unenvironmental aspect of Bitcoin is supposedly what make Elon Musk change his mind and refuse to accept Bitcoins for Teslas.  If Bitcoin were to go to zero, that would be an awful lot of wasted energy and greenhouse gases. 

Bitcoin will have to find its long-term value.  When it was first being mined, it was worth a few thousand dollars.  I would guess that in the long term, it will return to something like that, less than $10,000 per Bitcoin.  It will retain some value as a medium of exchange for criminals, since national cybercurrencies will be more traceable.  Also, national central banks will probably be able to print their new cybercurrencies like the Fed now prints paper dollars, making the new currencies less valuable as a hedge against inflation.