You Know The More Bitcoin's Value Goes Up, The More Useless Bitcoin Likely Becomes -- Right?

Despite a recent market correction, Bitcoin's trading value is now sky high:

On May 24, bitcoin hit an all-time high of $2.791.69. But on Monday, the digital currency was trading at an intra-day high of $2,267.73, marking a more than $520 drop or 18.7 percent decline since the record high, according to data from CoinDesk.

I keep seeing Bitcoin enthusiasts super-excited about this rise, which seems seriously strange for several reasons:

• The higher Bitcoin's price goes, the less likely anyone is to buy Bitcoin.
• The less likely anyone is to buy Bitcoin, the less likely it is to become useful as an actual currency for buying actual goods and services.

This strengthens the observation from a Bitcoin insider that it's really a Ponzi scheme: When the currency goes up, the few buyers who got in early at a low rate can only hope that some rich sucker will make them an offer. As Edmund Edgar put it early this year:

Demand to send transactions still seems to be going up, so the cost of sending a transaction has been increasing. I think (although I'm not confident) the amount of value in each transaction has been tending to increase, so effectively low-value transactions are getting priced out, and it's being used for progressively higher ones. The upshot is that Bitcoin is becoming progressively less useful as money, and being used increasingly as a "store of value" (or phrased less charitably, an enormous Ponzi scheme).

But as the cost of entering the Bitcoin market grows, the pool of likely buyers shrinks. And so it's stuck where it's been for the last twelve months:

... with less than 400K daily transactions, and no sign of that figure growing any time soon. Analysts argue this lack of transaction growth is a function of how Bitcoin transactions are processed, and which is likely to improve soon:

Transactions were taking longer than ever to process and the broader community was trying to figure out a way to boost the capacity of the bitcoin network. A solution was created and backed by major parties within the community.

But that's one of the reasons CNBC's analyst gives for the value of Bitcoin going up! Which puts us in a paradoxical place -- even if Bitcoin becomes easier to use on the backend, it's already too expensive for anyone to buy into. Or worse, want to use Bitcoin as money.

I mean, look at it this way: say you owned some highly valuable baseball cards, and you knew that there were thousands of business owners around the world who were also baseball card fans who'd accept your cards in lieu of cash. Would you swap your mint condition Mickey Mantel card for a new car? Or would you put it on eBay in hopes of selling it for the most cash possible?

As always, I welcome Bitcoin enthusiasts to tell me what I'm missing in this analysis -- something I've been asking for like the last four or five years.

Comments

[Patchouli Woollahra]

There IS a way to get around the apparently insane prices of BTC, but it requires a sea change in thinking about money. People need to start getting used to wilder variations in scale:

On an internal basis in the BTC system, BTCs are denominated into 'satoshis' (and usually converted into BTC terms for most displays), named after the inventor and seeder of the first block ever of this cryptocurrency. This unit is about 1/10000000th of a BTC, so at the May 24th Intraday High of US$2267.73/BTC, you're still looking each satoshi costing US$0.0000226773, or to denominate it in US cents, just under 441 satoshis per US cent or 44097 satoshis to the US dollar.

The main barrier here is the immense numbers of satoshis required to make up the equivalent of any real-world currency amount. Unless you've been living in a country with banana republic hyperinflation, or an extremely large and/or overmonied grouping (a military brigade? Koch bros familia? late era Syonan-To?) , paying for a week's groceries with 4.5 million of anything (even if it amounts to only US$100 or so) sounds scary to the average American, European or even Japanese layperson raised to consider much smaller amounts of money as 'large'.

For BTC to truly take off, people need to be introduced to the satoshi as a valid subdivision of the currency that can still be traded and used for transactions requiring much less money that US$2k to fulfil. BTCs should be thought of as something like a high-denomination note for use when satoshis become too unwieldy (amounts that start running into more than six or seven digits when expressed as satoshis), just as we have terms for 'thousand', 'million', 'billion' etc when handling US dollars.

\Just my 882 satoshis on this issue.

[BavidD]

My calculations show that 1 L$ is worth about 100-150 satoshis, which puts it in perspective

[sirhc deSantis]

Fascinating. According to http://www.btcsatoshi.com/ as of nowish 10:54 BST
1 Buck = 45,045 Satoshi
So where on earth does that 100-150 fugure come from. Wonder why it never caught on. Maybe I should make a digital wheelbarrow to carry them all in.

[sirhc deSantis]

Ach misread, too little coffee was L$ =^^=

[Carlos Loff]

I dont know why they made this currency so high value in relation to worlds currency

If one bitcoin was worth 20 dollars I might have tried it and have some 100 or 200 dollars of bitcoins

Or can we buy bit cents ???

[Summer Haas]

Carlos, "they" is demand. When Bitcoin first started up they cost 3 cents each and have changed value based on demand since. I had the opportunity to buy a bunch when they were worth $20 each. I decided not to because I thought it was s fad at the time. Boy do I regret that now.

[Megabucks Winsmore]

The true value in BTC is in its utility, always available to anyone, to transfer value or make a payment over the internet without the oversight of a centralized third party payment processor like Visa or PayPal. If I send you USD$100 of Bitcoin it is still worth about US$100 BTC when you receive it. And you can use Bitcoin like that. BTC does not become more useless the more USD$ value the BTC token gains, because you can always use it like that.

There is a difficulty with transaction scaling, which means the "mining fee" for transactions have been increasing as the number of transactions increase as well. This is due to there being limited space in any 10 min block of transactions on the BTC blockchain. Expensive fees are indeed squeezing out the idea of "micro payments" with Bitcoin however many of the smartest cryptographers in the world are working on the scaling issues so I expect this will be solved eventually. Lots of Bitcoin competitors claim to have solved these issues but there are always compromises.

Actually, the Bitcoin fees have gotten so high, that I will probably need to stop my Bitcoin giveaway in Second Life. I have maintained it a few years in the Shiromani sandbox, with hundreds of unique avatars receiving a small amount of Bitcoin for them to experiement with, because I love Second Life and want to give an opportunity for SL people to learn about BTC. But now the fee is about the same as the giveaway (roughly $USD1 per unique avatar), so I will probably need to stop my faucet soon.

Bitcoin certainly isn't a ponzi scheme. Saying that is rubbish. It's like saying that Paypal is a ponzi scheme because the early investors in that company made a profit. Bitcoin will eventually find a stable value when its users collectively establish what it's worth.

Hamlet ps: Your blog should enforce https to default, but doesn't. And the https version of your blog seems broken ( try https://nwn.blogs.com ). If you value your users you should fix that.

[Satoshi To USD]

Convert Satoshi to USD: satoshitousd.com