Nearly six months on since Bitcoin reached the $1,000 mark for the first time, several commonly-espoused theories surrounding the virtual currency need to be re-examined. In order, these myths are that the price surrounding Bitcoin at the time was in some way warranted, that Bitcoin provides its users with a safer means to undertake financial transactions and finally, that Bitcoin is a decentralized currency.
Firstly, the current price of around $500 illustrates that the Bitcoin price of the time was a bubble. By comparison, the value of the Russian rouble has only fallen by around 20% in the same period despite significant political instability surrounding Russia and the Ukraine as well as suggested capital outflows from Russia in the region of $150bn.[i] This conjures up the image of people piling out of Bitcoin and heading for the safety of the Russian rouble – not traditionally a safe-haven for anxious investors it must be said.
Secondly, half a billion dollars’ worth of bitcoins going “missing” in late February of this year draws a line under the claims made by some parties that your Bitcoin wallet is any safer than the traditional version that resides in your pocket. As we are all well aware, financial fraud is nothing new. But a precedent for financial fraud on this scale in such a short period of time is difficult to think of.
Finally, it is worth addressing the myth that Bitcoin is decentralized. Bitcoin has now been legislated for in several large economies. The United States recently made it a property and thus subject to tax, Finland has decided it should be given commodity status, while Sweden says it is an asset.[ii] What all of these actions show is that governments will ultimately decide what Bitcoin becomes – and that is the definition of being centralized.
In the defence of Bitcoin
For all the myth shattering, however, Bitcoin’s resilience in the face of so many challenges is also worth considering. With over $6bn worth in circulation[iii], there are several vested interests in keeping the bitcoin phenomenon alive. And the longer it stays alive, the more credibility is given to it as a form of currency in its own right. Credibility is the same tool that central banks themselves have relied on to keep things ticking over for hundreds of years.
Almost every time a central bank in a country makes a statement about Bitcoin (with the exception of the Danish Central Bank who referred to Bitcoin as “beads of glass”), it gives further credibility to the virtual currency. When the IRS made moves to make Bitcoin taxable, it was a blow to the idealist camp who think of Bitcoin as a currency in its own right but at least provided recognition from a government entity that this is here and it’s likely to be here for a long time.
Longevity also brings depth to the market. With each passing day, more online retailers begin to accept bitcoins for payment (probably just for publicity in some case). More opportunities to trade combined with the increased number of bitcoins on the market means more depth and less volatility. Even if something has no intrinsic value, if enough people believe that it does, well maybe holding small amounts of it isn’t such a bad thing.
To read more see Michael's original winning submission:
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