Bitcoin. It’s been in the news a lot recently, what with its meteoric surges and breath-snatching plummets. It’s even garnered the attention of Federal Reserve Chair Janet Yellen. Beneath all of that coverage, however, there runs a common, unnerving thread, an existential crisis gripping journalists and economists alike. And that crisis is not at all unjustified. Because, at its essence, bitcoin represents a radical departure from the status quo within one of the most fundamental elements of our economy: money.
When it first appeared on the internet in January of 2009, bitcoin’s promise of a decentralized monetary system independent from any government authority or central bank seemed almost impossible. Almost. Time, as it turns out, would prove otherwise. Built upon the foundation of a novel blockchain ledger, and promising users financial anonymity, the world’s first cryptocurrency did struggle for a few years before finding its niche. By 2015, though, bitcoin had weathered the Silk Road scandal and Mt. Gox hack while accumulating millions of users and hundreds of dollars in value per coin. By 2017, well, you’ve seen the coverage. None of that drama changes that bitcoin is fundamentally nothing more than a medium of exchange…built upon nothing but zeroes and ones.
Laid out in such uncompromising terms, it would be easy to dismiss bitcoin as nothing more than a fad, a bubble, or even a scam. But to do so would be to ignore the inherent nature of money at large. After all, the dollar’s value currently rests on little more than the “full faith and credit of the U.S. government,” and our entire fractional reserve banking system is dependent on the faith of consumers (and the good will of the Baileys). Even the species-based economies of old can’t trace the value of their currency to much more than “ooh, shiny!” The point is that for a monetary system to work, all it needs is the trust of multiple parties. It doesn’t matter how exactly that trust is created and maintained, or why. If the trust is there, trade will follow.
Obviously, bitcoin deserves that trust, at least in the eyes of many. And beneath that façade of zeroes and ones, it’s done a lot to earn it. First there’s the aforementioned blockchain ledger. Admittedly, the technology underlying this process is quite complex, but the end result is basically a crowd-sourced system of accounting that is difficult, if not impossible, to manipulate. In a world rife with cooked books and identify theft, there’s a lot of inherent value in such a system. There’s also a lot of inherent value in bitcoin’s ability to make those transactions anonymous. (Okay, pseudoanonymous, but who’s counting.)
It’s more than likely that if bitcoin dies, it’s that last bit that’ll do it in by running it afoul of governments and regulators. South Korea is debating a tax, Venezuela is already cracking down, and at least one Nobel laureate economist is calling for an outright ban. To an extent, this is an understandable response from government authorities. On top of being integral to illicit enterprises such as the Silk Road, the hard-to-track nature of bitcoin also makes it ideal for skirting taxes or capital controls. But is that really justification to end the bitcoin experiment before it really gets going in earnest? The answer, as is often the case, is less about economics and more about personal values.
How about this most recent frenzy, though? Is the surge into a five-digit valuation merely the work of overzealous speculators, or is there something more at play? In truth, it’s probably a bit of both. On one hand, $18K+ swings in a single day scream of speculation of the worst sort. On the other hand, short-term risk-taking does not necessarily tell the whole story. It’s possible that bitcoin’s broader arc—from 50 digital coins worth literally nothing to 16 million coins with a $270 billion market cap—tells the story of a new technology coming into mainstream usage. In today’s economy, physical manifestations are not a necessary element of creating value. All that is needed is a good idea or new technology that people are excited about, and the money will flow accordingly. That could be what we’re seeing with bitcoin.
Alright, so that’s all well and good, but it still leaves one final question: what does any of this mean to the average American. The answer is probably best left to Google, but for anyone looking for a good place to start, there are a lot worse bits of advice than this headline.