Bitcoin in 2021

I’m not really a big cryptocurrency person, but I’ve been following it since at least 2011, which must count for something. For the record, I do hold a long position in Bitcoin but it’s a very small part of my overall portfolio.

Back in the early days, I was quite optimistic about cryptocurrency. I still think there’s interesting stuff going on, but on Bitcoin in particular I’m increasingly pessimistic. I thought it was worth thinking through why I feel this way.

Anyone who’s spent time on the internet discussing currencies knows the three benefits we might want to see:

  1. Medium of exchange
  2. Unit of account
  3. Store of value

I don’t think this is backed by serious scholarship, but my feeling is that a cryptocurrency can’t survive as number 3 alone; it has to serve as number 1 or 2 as well.

The obvious rejoinder to this is to consider all the things that can be used as stores of value without being a medium of exchange or unit of account, but to me these all seem to have direct use value: gold has industrial and aesthetic uses, art and stamps can be exhibited, wine can be drunk. Bitcoin has nothing like this.

As a medium of exchange, I think Bitcoin has failed. Transaction fees are way too high and (almost as importantly) the relationship between transaction fees and transaction confirmation time is unpredictable, at least to people who aren’t closely following the markets.

There are off-chain transactions, but those aren’t really using Bitcoin as a medium of exchange, they are using Bitcoin as a proof of creditworthiness of whoever is handling the transaction.

Then there is Bitcoin as a unit of account. I think I originally expected Bitcoin might get some purchase here. I wouldn’t expect companies to have accounts in Bitcoin, but you can imagine that non-physical goods (apps, in-app purchases, ebooks) might trade for a stable Bitcoin price. Bitcoin gambling might have become widespread. Perhaps online auctions or gig economy tasks (Fiverr, TaskRabbit etc.) would have taken on Bitcoin as a recognisable and trusted worldwide currency. None of this has happened.

I’ve seen second-hand reports that there are a few digital nomads out there who are funding all their outgoings by taking on contract work in Bitcoin. And maybe there are a very few cases of contract work where both parties are treating it as a Bitcoin contract and not using Bitcoin to settle a contract specified in a fiat currency. But let’s be honest, if Bitcoin were to fall in value these people would renegotiate their contracts as soon as the terms allowed. Those who wouldn’t are just Bitcoin lottery winners who can afford to take a massive hit on volatility out of pure principle.

The tension here is obvious in retrospect: The more Bitcoin is hyped as a way to get rich quick by buy-and-hold, the less suitable it is as a unit of account. Every time Bitcoin has undergone a rapid rise in value, people have written about it like these price rises are a proof that it is working as a currency. But the rapid shifts in value are just far too extreme to make it appeal to anyone who might want to use it.

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