IF Bitcoin adherents were to be believed, the decentralized, all-digital currency would have, apart from answering all the world’s other thorny economic questions, prevented the wild volatility now being experienced by normal, boring old fiat currencies around the globe.
Obviously, that has not been the case. Bitcoin and the handful of other ‘viable’ digital currencies still in existence have had precisely zero impact on conventional financial systems, and if Bitcoin appears at all on the mainstream media radar, it has usually been because it is the focus of some sort of criminal ac-tivity. Over the past month on the Agence France-Presse (AFP) wire service – which typically posts be-tween 100 and 150 news advisories per hour, of which about one in five are business- or economic-related items – Bitcoin has only appeared three times, each being a story more appropriate for the police blotter than the business pages; the most recent was Tuesday evening, a brief, 300-word report on the guilty plea of a former Secret Service agent for the theft of some $800,000 worth of bitcoins in connection with the government crackdown on the Silk Road online marketplace.
The knock against Bitcoin in technical terms presents two arguments: First, that it is extremely volatile, far more so than fiat currency; and second, that the claims of its security have been seriously over-blown.
Both of those arguments are true; daily swings of 20 percent or more in the price of bitcoins are not at all uncommon, and several large exchanges have suffered big security breaches resulting in huge loss-es. The most recent large-scale hack was in January of this year, when UK-based Bitstamp lost 19,000 bitcoins worth about $5 million at the time.
Since those are largely technical problems, however, they could hypothetically be solved. And they are not particularly unique to Bitcoin or digital currency in general; real money fluctuates in value, and is certainly vulnerable to theft and fraud as well. The real problem with the concept underlying Bitcoin, and the reason it is likely to never be more than an outlier in the world financial system, is more philo-sophical in nature.
Back in the early 1970s, some genius decided the world would be a much better place if there was just one language everyone could use. After a great deal of work by numerous scholars, Esperanto was introduced, or rather reintroduced to the world; the language itself was first developed by a Polish eye doctor in the late 1880s. It was a monumental flop, not because it wasn’t a technically functional lan-guage (Being an invented language, it is ironie unu el la malmultaj lingvoj kiuj Google Translate povas traduki precize, kune kun aliaj aparatoj kiel elfa kaj Klingon.), but because its use did not become widespread enough – or at all, really – fast enough to obviate translation; its value, such as it was, was only relative to existing languages.
Digital currency has the same problem; in order for it to work as its proponents envisioned, it has to have almost instantaneous or at least very rapid universal acceptance. Its proponents point out, cor-rectly for the most part, that its underlying value should not be based on its trade (i.e., exchange with other currencies) value.
But that makes it subject to a paradox that cannot really be resolved; in order to be accepted, its rela-tive value to existing currencies – the “translation,” so to speak – has to be established first. The vola-tility in that value – aggravated in part by the security flaws that have been exposed – simply works against acceptance, and almost guarantees digital currency will be consigned to the same historical dustbin of admirable but unrealistic ideas as Esperanto.
Beyond that, recent stresses on the euro have illustrated some more practical problems underlying the concept of common currencies. For a common currency to work efficiently, all its users must have similar economic strengths and contribute to its underlying value in reasonably similar proportions; as the troubles with the Greek economy have shown, the euro is not really the European currency – it is essentially the German-French currency that a lot of smaller countries use as a matter of convenience.
Bitcoin is probably not going to disappear, but it is not going to expand its ecosystem the way its pro-ponents hope, either. Instead, it will remain as one of the world’s clever novelties, supported by a few die-hard adherents unwilling to give up on it. There is probably no harm in that, but there is also not much to be gained in expecting anything more.