While the recent surge in bitcoin price is good news for many bitcoin investors, it should be seen as a death sentence for the functional value of bitcoin. As the price continues to reach new record levels, it becomes obvious that bitcoin is useless for anything else than speculation.
Looking back at Satoshi Nakamoto's original White Paper, Bitcoin is presented as “a peer-to-peer electronic cash system”, an “electronic coin” that would replace money transfers that are currently controlled by the financial system, and which would be almost immune to fraud.
The extreme value fluctuations of bitcoin effectively make bitcoin useless for its original purpose. Some may remember the world’s first real-world bitcoin transaction where one bitcoin enthusiast bought 2 large pizzas for 10 000 bitcoins. I hope those were tasty pizzas because with the bitcoin price as of today they would be worth 150 million USD. This level of currency fluctuation is usually associated with failed currencies that exhibit extreme inflation levels. An indication of bitcoins lack of usefulness as a currency is that Steam, announced that it would stop taking payments in Bitcoin. Valve, the service’s owner, said it had become “untenable”, owing both to its extreme volatility and the rising costs of using the network.
The latter is also an area where bitcoin is underperforming as a means of payment. In the early days of bitcoin, processing fees where at such low levels that bitcoin was a promising way to process microtransactions. This quickly changed as bitcoin increased in popularity, and where a bitcoin payment cost approximately 20 cents one year ago, the processing cost has now increased to an average of 7 USD, with peak fees as high as 20 USD.
Compared to government issued currencies, bitcoins wild ride proves that it lacks the necessary predictability to act as a currency. If we take off our tinfoil hats for a while we should acknowledge that currencies are regulated for a reason. To provide financial stability.
Even with recent advances in the underlying technology to promote bitcoins functional value such as the bitcoin lightning network to increase scalability, the primary value driver of bitcoin is based on speculation and increase in demand from new bitcoin buyers. As long as there are new buyers, the price continues to increase with the invisible hand of supply and demand. It is estimated that there are 500 000 people buying their first bitcoin every day, moving bitcoin way into greater fool territory when it comes to bitcoins extrinsic value. As long as there are more buyers than sellers, the price continues to increase. It is not difficult to see that this increase in demand will diminish at some point.
-- If people use bitcoin as a currency, it will lose value as an investment
While some may argue that the value of bitcoin is in no way different from our collective shared belief that one dollar is worth one dollar, it has one fundamental difference as dollars has an intrinsic value as it is used as an everyday currency.
According to Investopedia bitcoin will derive its intrinsic value both from its use as a medium of exchange and as a store of value. As a footnote to this assumption, it should be stated that bitcoin’s utility as a store of value is dependent on its utility as a medium of exchange. As bitcoin fails to act as a currency, it is no longer a medium of exchange, and therefore not a store of value either following to Investopedia’s assumptions. In short, if people do not use bitcoin for other purposes than speculation, it has no intrinsic value. On the other hand, bitcoin investor Alex Compton told the Wall Street Journal. “If people use bitcoin as a currency, it will lose value as an investment.” By this logic, bitcoin is only interesting as an investment opportunity as long as there is no intrinsic value.
Despite this, bitcoin enthusiasts continue to celebrate the ever-increasing value of bitcoin and see no limits for the potential of bitcoin. Founder of McAfee and data security legend, John McAfee has gone as far as stating that he expects one bitcoin to be worth over a million dollars. If not, he will eat is own dick.
A good sign that the field is overheating is the official warning issued by Coinbase, encouraging its users to invest responsibly as the price leaped from $10,000 to $17,000 before dropping to $15,000. By now it is impossible to predict whether or when the bubble will burst. Saxobank predicts that bitcoin will peak at $18,000 in 2018 and then collapse. This is a fairly bold prediction, and only time will tell when there are no more greater fools out there and the roller coaster ride will come to an end.
The more bitcoin prices surge due to its speculative value and increasing demand, the more useless bitcoin becomes as a currency. And as bitcoin becomes useless as a currency, it loses its intrinsic value as an asset. I still believe that the underlying technology is revolutionary, and there are several use cases where crypto tokens may prove to be useful such as royalty distribution in the music industry or monetizing data and machine-to-machine payments like IOTA just to name a few examples. Whether bitcoin is here to stay or not is beyond my judgment. The future of bitcoin is impossible to predict. The underlying technology is still at an immature stage and there are continuous efforts to fix some of the fundamental issues regarding scalability and energy consumption. But bitcoin in its current state as something that exist almost solely for financial speculation and proves to be harmful to the environment is pretty useless in my book.
This article was first published on Christoffer O. Hernæs' blog Hernaes.com