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Bitcoin: A raging fireball of finance

Updated: Jul 22, 2021

Goodness gracious, what a scene in South Florida!

"A raging fireball of finance, technology and joyful anarchy, of unfathomable wealth and desperate striving." That's how the New York Times described the city of Miami during last week's "Bitcoin 2021" a combo conflagration of conference, crypto-culture pep rally, and bacchanal. Is Bitcoin now truly mainstream? Will cryptocurrencies soon rule the world?

Not too soon, at least, say the experts; it will take time to reach "hyperbitcoinization," the awkward term crypto-enthusiasts use to describe the point at which Bitcoin could become the dominant currency of global finance. At least a decade, maybe more. Maybe a lot more.

Or maybe never.

The sticking point is that Bitcoin isn't actually a currency; it's a speculative commodity. Yes, in a few places it can be used as a form of payment for things you want to buy, but so can live chickens. Just don't walk into Bloomingdale's and expect to trade your clucking poultry for a purse. Neither can you buy a Tesla with Bitcoin: Elon Musk recently conceded defeat on that front, announcing that his car company would no longer accept the crypto as a form of payment for its vehicles.

There are multiple reasons Bitcoin has so far not been adopted for widespread use in consumer transactions. Its price is disconcertingly volatile, which creates risk for both consumer and vendor. It is also frightfully inefficient to use due to its underlying technology, based on a public blockchain implementation, and therefore can't scale up to handle high transaction volumes. Plus, Bitcoin mining and usage consumes obscene amounts of energy, which contributes to global warming.

“Bitcoin uses more electricity per transaction than any other method known to mankind, and so it’s not a great climate thing.” -- Bill Gates in March 2021

Bitcoin's only significant use case in transactional terms today appears to be facilitating ransomware attacks and other criminal activities due to its digital, global ease of use and its total lack of traceability. Cryptocurrency backers retort that none of this matters because the collapse of "fiat" currencies like the US Dollar is inevitable, so the world of global finance as we know it will soon collapse, ushering in the dawn of crypto-domination. But such Henny Penny inflationary hysteria is complete baloney.

In short, Bitcoin is today a currency for crooks, not consumers, and appears likely to stay that way.

This does not mean, however, that Bitcoin and other cryptocurrencies have no economic value. Precisely because it is a volatile commodity, crypto can be invested in and traded as an asset class. Bitcoin has the potential to serve as a store of value and/or inflation hedge, similar to precious metals. Institutional investors have begun putting some capital into cryptocurrencies as an asset class, even if their total asset allocations on a global basis are still today quite small. And as the institutional investors go, so go the futures markets: you can already trade Bitcoin futures at CME Group.

Whether you should put some of your own assets into Bitcoin is a question for your financial advisor. But unless you have an Elon Musk-ian capital base to work with, the crypto's price volatility would seem important to bear in mind. And for the armchair speculator considering a day-trade or three, perhaps a moment to also consider that in1987, Warren Buffet cautioned in his annual letter to Berkshire Hathaway shareholders, “As they say in poker, if you’ve been in the game 30 minutes and don’t know who the patsy is, you’re the patsy."


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