Beyond the bitcoin bubble

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The value of money to its users depends on how well it serves these functions. It could be argued that at present, bitcoin serves none of these functions. One key issue with bitcoin has been the high volatility of its price. In the last five years, there were more than days where the price of Bitcoin fluctuated by five per cent or more.

This makes bitcoin unattractive as a store of value. A certain amount of bitcoin might buy you cappuccino today, but the same amount might only buy you a babyccino or around half a coffee the next day. Currently, only a handful of merchants accept bitcoin as mode of payment in Australia. Picture: Getty Images No one with an interest to store value would want to hold bitcoin for any period of time as a result.

The same issue makes bitcoin unattractive as a medium of exchange. Imagine a farmer who sold her produce in exchange for bitcoin because of the high uncertainty about how valuable bitcoin will be the next day when she needs to pay for her own expenses. In addition to buying coffee at a few select places, you can pay bills at Australia Post using bitcoins albeit at a very high transaction fee of around seven per cent. The Australian government, through the Reserve Bank, controls the supply of money and guarantees its stability.

The Australian dollar is also legal tender in Australia, which means that an Australian store cannot refuse to accept Australian dollars as a mode of payment. Picture: Getty Images One possible explanation is that its investors expect bitcoin to offer value in the future even if its current adoption is sparse. There has been a recent interest from financial institutions in bitcoin, and this could have raised the expectation of it being a serious player in the currency space.

Until Bitcoin. To quote that Nyaruka post: Someone in Rwanda that builds a compelling service can instantly start taking payments from the rest of the world, without asking for permission, without filling out any paperwork and with the same fee structure as the biggest retailers … So Bitcoin is exciting to me not so much because it is a new currency, but because it has the potential to be a globally recognized, yet completely decentralized, form of digital payment.

Of course unofficial distributed international payment networks are as old as the hills. Our own John Biggs points out that Bitcoin is in essence much like a modern day hawala network; but it is to hawala as PayPal is to money orders sent by Pony Express. No ID required, no setup costs, no nothing: just send and receive.

Bitcoin is no threat to the modern nation-state…but it is conceivably an existential threat to PayPal. In other words, if a true computing megapower say, Amazon, Apple, Google, or one of a handful of national governments really wanted to break Bitcoin, they could. But not the First World.

In the developing world, though, crippled by weak currencies and byzantine payment infrastructures, a simple, seamless, frictionless, reliable international peer-to-peer payments system could be a huge deal. But not until the volatility diminishes…which is to say, not until the hype here fades away.

Image credit: Len Radin, Flickr.