Waiting For Bitcoin To Get Boring

 |  About: Winklevoss Bitcoin Trust ETF (COIN)
by: Felix Salmon

Something of a milestone was reached very early in the morning of Friday, November 29, a time when most Americans were either sleeping off their Thanksgiving excesses or out seeking Black Friday bargains. At the end of Wednesday, the price of gold, on Comex, had closed at $1,240 per ounce; that market would not reopen until Friday morning. And then at about 1am Friday, EST, there was a trade on Mt Gox, the largest bitcoin exchange, which valued each coin at $1,242. If only briefly and theoretically, at that point in time a bitcoin was worth more than an ounce of gold.

Bitcoin, by its nature, is a highly volatile asset, which is prone to astonishing run-ups in price. Check out these three one-year charts of the bitcoin price:

Click to enlarge

Click to enlarge

Click to enlarge

The first chart is the year to June 2010; the second is the year to April 2013; and the third is the current chart. Without looking at the y-axis, they're basically identical.

To put it another way, there is nothing surprising about what bitcoin is doing right now; it has done it many times in the past, and it will probably do it in the future as well. After all, there's no way to calculate the fundamental value of a bitcoin: indeed, it's probably easier to justify a price of $1,000 per bitcoin than it was to justify a price of $10. At least now it's increasingly looking like a Thing, complete with Congressional hearings and front-page-of-the-FT publicity stunts.

The latest bright idea from Alderney - that the tiny island (population: 1,900) should print physical bitcoins backed by electronic bitcoins - is certifiably bonkers. For one thing, the whole point of bitcoin is that it isn't going to suffer the same fate as all those currencies which the government promised were backed by something else. (The dollar was backed by gold, once; the Argentine peso was backed by the dollar. Neither lasted, and if the burghers of Alderney ever change their mind about the bitcoin backing, or it gets hacked or stolen, the owners of the physical bitcoins are going to have no recourse.)

More weirdly, the Alderney bitcoins are going to have about £500 worth of gold in them, which makes no sense at all. Let's say that the gold in the coin is worth $800, while the bitcoin backing it is worth $1,000. What, then, would the coin be worth? It can't be much less than $1,000, at least as long as it can be redeemed for an electronic bitcoin, or a bitcoin's worth of pounds sterling. But by the same token, it can't be worth much more than $1,000, because numismatists don't tend to value gimmicks very highly, so it's not going to have significant value as a collector's item. And the most you could sell it for, in terms of its fundamental value, is the value of one bitcoin. Which means that there's no point whatsoever in pouring £500 worth of gold into it - the gold doesn't increase the value of the coin at all.

All of which is to say that the FT is splashing all over its front page a crazy bitcoin scheme which is never going to happen. "An independent company will provide the Bitcoins," explains the newspaper, credulously. "If the price plunged, neither Alderney nor the Royal Mint would lose anything." But what independent company would ever do such a thing? The company would essentially need to hand over its bitcoins to Alderney, would probably have to help fund the cost of manufacturing the coins out of gold, and would get essentially nothing in return for the huge risk it was taking that all its coins would become worthless.

The news here, then, is not so much that there's some new cockamamie scheme involving bitcoins - a new such scheme is dreamed up every day. Rather, it's the way in which the bitcoin bug has infected news editors to the point at which they'll splash any old vaporware silliness all over their front pages. One of the less reported aspects of the bitcoin story is the way in which editors tend to be much more excited about it than reporters, who are generally more skeptical, and who worry that their own reporting will only serve to inflate the bubble even further.

This is something which should worry the bitcoin faithful, if they really want to see bitcoin become a broadly-used global currency. After all, press coverage of bitocins runs in lockstep with the bitcoin price: it's times like this, when the price is at its fluffiest, that bitcoin gets written about the most. (If it's not physical bitcoins, it's hard drives in landfills.) The largely unspoken assumption behind all such stories: bitcoin is an asset class, and people should get excited about it when (and, implicitly, only when) the price is going up. This is what I think of as the CNBC Premise: when an asset rises in price, that is necessarily a Good Thing, and when it falls in price, that is always a Bad Thing.

The CNBC Premise has never made much sense with respect to currencies, however. And with respect to bitcoin in particular, its most exciting aspect is not its value, but rather its status as an all-but-frictionless international payments mechanism. If you want bitcoin to really take off with respect to payments, you actually don't want to see crazy price spikes - such things are the best possible way ofstopping people from using bitcoins for payments. After all, if your bitcoins are doubling in value every few days, why on earth would you want to spend them?

For me, the most interesting period in the short history of bitcoin was the period from roughly the beginning of May to the end of September, when the volatility in the price of bitcoin was relatively low, even as the price was pretty high - more than $100 per coin. And more generally, it's the long flat areas of the three charts above, rather than the attention-grabbing spiky bits, that bitcoin bulls should get excited about. If and when those long flat areas last for years rather than months, bitcoin might start becoming a boring, credible currency. We'll know that bitcoin has made it to the next level not when editors all want to write about it, but rather when editors don't want to write about it, because it's just another way of people paying each other for stuff.