Since the start of the pandemic, Bitcoin has enjoyed an impressive bull run. With its powerful price increases, old talk has resurfaced about how Bitcoin will become a new global currency and supplant the U.S. dollar’s dominance. To its younger enthusiasts, Bitcoin will also bring world peace and even the much sought-after goal of economic equality. Admittedly, that is a snarky thing to say, but it’s not really that far off from some of the rapturous forecasts now circulating. If traders in gold or tin or zinc were to make such claims for their commodity, people would be highly — and rightly –– skeptical. But with Bitcoin, such notions seem to be gaining currency. (Pun perhaps intended.)
The bottom line is that Bitcoin will not replace the dollar as the world’s dominant currency –– what central bankers refer to as the reserve currency. Yes, Bitcoin has many money-like qualities. One can make payments with it, to buy a car, for instance, or fund a vacation, and many other things. All that is necessary is get the seller to accept payment in Bitcoin –– and all the hype has increased the number of sellers willing to do that. At least one government, a Swiss canton, will let citizens pay their taxes in Bitcoin. Of course, providing you can get the seller to agree to it, you could pay in gold or zinc or tin. Right now, Bitcoin has more hype on its side than these other commodities, but otherwise there is not much difference. However, Bitcoin does have something other commodities do not, something vaguely sinister, which may in fact have increased its current sex appeal: it allows people to make transactions anonymously, the way you could with suitcases of hundred-dollar bills. Like those suitcases, except with much greater convenience, Bitcoin’s attraction is especially great to buyers and sellers who want to hide their dealings from the law.
In one crucial way, Bitcoin fails miserably as a substitute for the U.S. dollar. Its value is highly unstable. It is true that the dollar’s value fluctuates: Its worth in terms of foreign currencies changes by the minute, and inflation over time has eroded its value in terms of real goods and services. But by comparison to Bitcoin, the dollar is the very picture of stability. Inflation runs less than 2 percent a year and the dollar’s fluctuations against other currencies seldom exceed 5-6 percent. So if you hold assets in dollars, you have a pretty good idea of what those holdings will be worth in a year or two next to other currencies and especially when it comes to buying (or selling) real goods and services. In other words, the dollar remains a pretty good store of value. Now compare the dollar’s record to Bitcoin’s: Its early surge in 2018 against dollars, foreign currencies, and real goods and services, took it up some 350 percent in a matter of months. But over the rest of that year, it gave back just about all those gains. It was on the rise again in the second half of 2019, paused during the last months of that year, and then took off again with the pandemic, and now has finally recovered its mid-2018 highs.
These are wild swings, and definitely not the stuff of a stable store of value. Of course, Bitcoin’s price gyrations make it highly attractive to speculators. They can make a lot of dollars if they can time Bitcoin’s price swings right. But these same swings hardly give most people (saving, say, for a house or retirement) a stable sense of what Bitcoin-denominated assets will be worth next year or even next month. It gives most of us no way to plan for the future –– near or long term –– as we could with a traditional and stable currency. Thus, though the dollar’s value is less stable than we might like, it has a much better track record and is a much better store of value than Bitcoin––and that gives the dollar a huge edge as a currency.
No doubt, clever Bitcoin enthusiasts would respond by saying that the huge fluctuations in the dollar price of Bitcoin speak to the dollar’s instability, not Bitcoin’s. That might be a compelling argument if Bitcoin and the U.S. dollar were the only two measures available. But contrasting their movements against, for instance, the value of an hour of a person’s labor, or the value to a hungry person of a good meal, it is equally apparent that Bitcoin’s fluctuating worth is far greater than are the dollar’s, the yen’s, sterling’s, the euro’s, the Chinese yuan’s, or whatever other major currency is currently in circulation. Someday, perhaps, Bitcoin will become widely accepted and acquire a stable value in terms of the many real things people care about. When and if that day arrives, Bitcoin might challenge the dollar and assume the status that gold had in the nineteenth and early twentieth centuries.
In case readers are tempted to join the speculators and take advantage of Bitcoin’s huge swings, I would say two things: First, if you use Bitcoin this way, you are not dealing in a currency but rather in a volatile commodity, like zinc or copper or pork bellies. Second, it is worth repeating that investing is not gambling and wise investors never buy on hype. And if this rule occasionally causes them to miss a big rise, it prevents the many occasions when hype leads to losses and tears, as happened with Bitcoin in the second half of 2018, the last time we were told that it would conquer the world.
Bitesize Investing 