I've only written about Bitcoin once before, four years ago.
Since then, my assessment of Bitcoin remains much the same. I still believe that Bitcoin is not a useful unit of account or an even remotely predictable/reliable store of value; that its market price will depend on how much value individuals attach to it; that it has the speculative potential to produce mind-boggling profits in excess of the astronomical profits made by some in the dot-com boom of 1998-2000.
However, in one key respect, I have modified my view of Bitcoin: I no longer believe that it serves as a "medium of exchange" in the conventional sense of how money functions, and therefore I take exception to the terminology "the Bitcoin currency." Yes, Bitcoin does function as a medium of exchange in a technical sense, but in the practical sense of serving as a convenient, easy-to-use money for everyday transactions, it does not.
Last month, reporters for The Wall Street Journal pointed out Bitcoin's deficiencies as an everyday currency. The three main defects were: 1) In the video clip provided in the article, the processing charges for the purchase of a pizza were almost as great as the price of the pizza. 2) Because vendors generally don't use up-to-the-minute prices for Bitcoin, a $10 pizza may end up costing $76. 3) The transaction may take hours to complete, since changes need to be made in the computer records maintained for every unit of Bitcoin.
Another reason why Bitcoin should no longer be classified as a currency is that, in accordance with Gresham's Law, it largely has been withdrawn from everyday circulation. Gresham's Law is commonly stated as "Bad money drives out good money." Rational people will not pay 76 Federal Reserve notes' worth of Bitcoin for a pizza that they can buy for ten "dollars" of paper money, and so – quite rationally – Bitcoin has been withdrawn from general circulation. It is far from being "the most marketable commodity," which is the term that the economist Ludwig von Mises used to denote "money."
This raises an important question: If Bitcoin isn't money, what is it? In earlier historical episodes, when people voluntarily withdrew gold or silver money from circulation, those precious metals actually had greater value as commodities than as money. Those commodities were valued both for their uses in industry (e.g., dentistry, electronics, ornamentation, etc.) and as a reliable store of value grounded on gold and silver's centuries-long track record. Bitcoin, however, has no known nonmonetary uses nor does it have a sufficiently developed track record to provide any reliable parameters for its exchange value. (Note: We must distinguish between Bitcoin and its underlying technology – the blockchain. The latter will, I believe, prove immensely useful and valuable in a variety of applications, regardless of the market's ultimate verdict on Bitcoin.)
Bitcoin has become, I believe, little more than a digital casino in which shrewd financial sharks will devour the wealth of naive, the beguiled, and the pathological gambler. It is a seductive get-rich-quick scheme, with worrisome anecdotes about people mortgaging their houses to get a piece of the action. It's legal, but it's hard for me to see anything redemptive in what amounts to a zero-sum transfer of wealth from suckers to sharks. Am I getting too cynical, or is there something ominously sinister about Bitcoin?
I have no predictions about how the Bitcoin phenomenon will play out. Some critics alleged that the recent breathtaking spike in the market price of Bitcoin was the final blowoff. Perhaps it was, but with so many holders trumpeting the desirability of this scarce thing, and such a large number of fools ripe for being separated from their money, Bitcoin may have a long and tenacious, if volatile, future.
—Mark Hendrickson is adjunct professor of Economics and Entrepreneurship at Grove City College, where he has taught since 2004. He is also a Fellow for Economic and Social Policy with The Center for Vision & Values.