From practically the time bitcoin launched in early 2009, I have been wondering what the heck it is good for.
Alas, neither of these theories has panned out. Indeed, as in Monday’s market meltdown, cryptocurrencies have often done the opposite of what they were supposed to do.
Though bitcoin and other cryptocurrencies might be useful in places such as Venezuela, where monetary policy is so awful that anything — including a can of mackerel — is an improvement over the local currency, it isn’t a good substitute for money anywhere that has a reasonably well run central bank. Its architecture is too cumbersome; transactions take minutes, even hours, to be processed through the blockchain. You can ameliorate this problem by using a third-party processor, like an exchange, but at this point you’ve started to re-create the financial system you hoped to replace, except without the protections against theft and abuse that have developed over centuries.
Rather than a currency or a substitute for the banking system, bitcoin evolved into its own volatile asset class, whose value has ranged, within just the past year, from about $25,000 to about $70,000. The crypto ecosystem that grew up around bitcoin and all the other cryptocurrencies appears to be less reliable and stable, and more corrupt, than the established banking system. The best thing that can be said about it is that it doesn’t matter much.
The volatility is also a problem for the people who viewed crypto as a haven from government depredation.
Many of them, of course, just wanted a way to avoid the prying eyes of the taxman, or the Drug Enforcement Administration — but found, to their dismay, that crypto was not as anonymous as initially assumed. If investigators can link you to your bitcoin wallet, then bitcoin’s decentralized ledger will provide them with a complete and quite indictable record of all of your transactions.
But other crypto enthusiasts were worried that the government would steal from them, by inflating away the value of their hard-earned savings. They hoped that crypto, with its algorithmically controlled supply, would supplant inflationary fiat currencies, or at least become a kind of digital gold, a haven from not just inflation but all other kinds of global instability.
As I said, it might serve that purpose in countries such as Venezuela, where the government has taken a wrecking ball to the economy and the currency. But elsewhere … well, in the spring of 2020, when the world was looking for safe assets and gold was soaring, bitcoin was flat.
True, it eventually began climbing, but it’s hard to say it became a counterweight to the pandemic’s economic gyrations. Though it might be tempting to attribute this rise to inflation, bitcoin’s price peaked in November 2021, then fell almost 50 percent while inflation was still climbing. Around the start of 2023, it bottomed out when inflation was beginning to wane. And as inflation fell, it quadrupled in value.
Then came Monday. As if to put the final nail in the coffin, as if to bury once and for all any hopes of using cryptocurrencies as “digital gold,” bitcoin dropped by 15 percent. This is not how a hedge against inflation or disaster acts. As Bloomberg News’s Joe Weisenthal put it, it behaved more like “3 tech stocks in a trenchcoat.” If that’s what you want, why not just buy the tech stocks?
What, then, is crypto good for? Possibly it can help people evade currency controls that prevent them from moving their wealth out of the country — though this will work only as long as people in places such as the United States and Europe remain willing to trade valuable local currency, or goods and services, in exchange for crypto. Certainly, it seems to be useful for collecting ransomware payouts.
But beyond this, it seems less like digital gold than a digital slot machine. I can’t shake the feeling that most people use it not because it’s a good substitute for anything they need, but because it’s fun to watch the reels spin without knowing whether they’ll pay off. In other words, bitcoin’s not good for much of anything except giving people who have money to burn a novel way to set it on fire.
