It is hard to see bitcoin’s price surge as anything other than a bubble that will ultimately collapse. Bitcoin’s ostensible social function as an anonymous, nongovernmental means of payment carries big risks of its demise. And while blockchain, the platform that records bitcoin transactions, may well have staying power, there is no reason to believe it needs to rely on bitcoin for its success.
Bitcoin’s promoters claim that bitcoin will outshine the dollar because it offers anonymity as well as safety from reckless monetary policies (since the supply of bitcoins is determined by an algorithm rather than a politicized central bank that may choose to print money).
These arguments are clever. They could be correct. On balance, they are probably misplaced. The dollar and other national currencies are legal tender that can be used to extinguish a private debt or a public obligation such as a tax. No governments accept bitcoins for taxes, and none are likely to do so in the future, as that would forfeit the government’s seignorage (resources the government claims through its monopoly on legal tender) and would lessen its control over the money supply. Nor is any individual or business obligated to accept bitcoins in payment for debts in national currencies.
Bitcoin’s anonymity is also its practical weakness. Governments insist on being able to trace financial transactions. They fight tax evasion, economic crimes, and terrorism by following the money. Some governments, of course, also monitor the activities of their political foes in the same way.
Governments are not likely to give up such prerogatives easily. Many observers claim (though without much hard evidence) that bitcoin transactions are heavily directed toward human and drug trafficking, tax evasion, and other illicit activities. Whether or not that’s true, it surely could be, and will likely become the leading justification for suppressing the trade in bitcoins, threatening its long-term value.
Bitcoin supporters emphasize the remarkable innovativeness of blockchain, the decentralized ledger that tracks the flow of bitcoin trades and updates the record of ownership. Many businesses and organizations are indeed turning to blockchain or to more updated variants as innovative ways to record financial transactions, votes, contracts, and other claims, without the need for a government or central clearinghouse.
Yet bitcoin owns no patent on blockchain or other decentralized ledgers. The creativity of the methodology has no bearing on the market price of bitcoins. One can marvel in the idea of blockchain without believing that bitcoin will retain its current market value.
It’s hard to see any real case at all for the 14-fold increase in bitcoin prices during 2017, or the 30-fold increase since the start of 2016. Actual transactions in bitcoin remain very small. Only a few hundred thousand merchants supposedly accept bitcoin, and many of those businesses are shadowy or worse.
Eulogy made by Jeffrey D. Sachs
