Bitcoin has recently received favourable acknowledgement from Apple and significant recognition from the Bank of England, but it has just suffered another serious slump in value and some more fundamental questions are being raised about its future usefulness.
At least it still has oceans of web comment to keep the ball rolling. Bitcoin generates far more noise online than its current financial footprint would suggest. It only amounts to a tiny portion of overall financial activity, currently just under US$6 billion at total market capitalisation – that is the current exchange rate value of all Bitcoins in existence. The most vociferous of Bitcoin advocates continue to talk about it as a kind of dawning social revolution, but the current state of play is a long way behind this rather utopian projection.
Bitcoin’s value fell from US$622 in July to below US$387 at last check, with big investors likely to step in to shore up the value soon. So this marks a useful moment to pause and reflect on where Bitcoin is and where it might be going. The currency has had an extremely volatile history but the latest dip is a rather more significant one – it does not appear to have been driven by any major regulatory warnings or a problem with a major Bitcoin exchange.
In a previous piece I argued that a number of economists and journalists had been far too hasty in declaring the end of Bitcoin. That was partly because they were not recognising the underlying libertarian ethos of many of its users who are not likely to abandon ship any time soon. More recently a new generation of commentators have emerged who are more reasoned and informed, and make criticisms that some electronic currency advocates are also prepared to acknowledge. For example, one of the most perceptive pro-electronic currency investors Tuur Demeester noted on his Twitter feed on August 13: “pain in the cryptomarkets. Now is a day to relax, take a step back and contemplate fundamentals”.
One key reason for this slow down in the Bitcoin party is that the electronic currency still has real barriers to overcome before it can become widely used in everyday transactions, despite a growing number of merchants accepting it. Recently Dell and Overstock.com announced that they were accepting payments in Bitcoin. Smart Bitcoin businesses like BitPay and Coinbase have taken the lead in facilitating this process. Basically these companies offer to process transactions in Bitcoin at cheaper cost than is offered by services like PayPal, and also make the transfer back to national currency to give merchants protection from Bitcoin volatility.
In addition to these positive news stories Apple has recently taken a more favourable position to Bitcoin wallet devices – having reversed its previous decision to block the Bitcoin wallet from its online App Store. The Bank of England also issued a tentatively positive report on Bitcoin’s potential, in which it noted that while Bitcoin was unlikely to become a serious challenge to major banks it was still a significant development that should be watched.
Yet despite this Bitcoin has not taken off at the level of transactions, in fact since May it has been parked at roughly 60,00-75,000 transactions per day with no signs of increase. It is still pretty difficult to get hold of Bitcoin. A user could create their own wallet and find a suitable Bitcoin seller online before then making an exchange from their own bank account – a process that is time consuming and likely to be off-putting for many. Or users hold their Bitcoin in online wallets on exchange sites, but these are dependent on user feedback within electronic currency communities to vouch for their reliability. Bitcoin exchanges have been likened to a “Wild West” of payment systems – a realm without legal recourse – something that was clearly borne out by the bankruptcy of Mt Gox in February.
Currency or speculative asset?
Another reason, of course, for the lack of everyday use of Bitcoin is its continuing volatility. Cyber enthusiasts and speculative investors – who tend to be overwhelmingly male – seem to be the dominant groups shaping Bitcoin at present. One issue that Bitcoin faces is that people hold virtual currency for different reasons and their objectives can be at odds with one another. Speculative investors are interested in Bitcoin as a way to profit from market movements; they are short-term speculators who play the trading data. The trouble is that mid- to large-scale investors in this bracket – including hedge funds – like to see volatility as volatility means profits for some and losses for others. Those interested in Bitcoin as a potential future currency, however, are likely to be discouraged from using it, precisely because the peaks and troughs through which traders gain their profits make the currency unstable as a unit of account.
This means that although Bitcoin will stay with us as a speculative and volatile financial asset or digital commodity of some value, there remain few signs as yet of it going mainstream because of the difficulties around its ease of use and around its volatility. The first issue might still be addressed by some innovative start-ups that manage to make Bitcoin much simpler and easier for everyday consumers to use. But the volatility problem is trickier to resolve.
Having noted these barriers to Bitcoin becoming an everyday currency, the “blockchain” still offers real promise. The blockchain is a clever piece of computer coding in which each Bitcoin transaction that is made is linked to the previous history of transactions which led to that point. This creates the expanding chain of “blocks”. It is essentially an inventive piece of cryptography and it is what makes libertarians and computer scientists so excited because it presents a decentralised platform that effectively cuts out the middleman or indeed the need for a central bank. It may not transform everyday life in quite the way that some have claimed but it presents some interesting possibilities and platforms. A number of decentralised ventures have already been created in an attempt to explore this potential, like Ethereum.
The blockchain presents significant opportunities in some areas of finance and online payments. It could make remittance payments a great deal easier and cheaper; it could lower transaction costs for merchants and consumers and it enables the development of financial innovations like equity crowdfunding – in which all investors get a proportional return on what is invested in a venture. Whether these advantages of the blockchain become more widely utilised remains an open question. As Finn Brunton has said:
Getting a significant new technology that is instilled with cultural values and political goals to “work” is an act of assembly of mobilising different groups, ideas, forces, and stakeholders together.
The key point here is that no digital innovation is groundbreaking in itself – it requires broader communities to utilise it. And this is why for supporters, increasing Bitcoin use at the level of everyday transactions is so very important.