Wired has article arguing that bitcoin is nothing more than a replacement for Western Union. That it is merely a complementary system to incrementally improve our lives.
Wired could not be more wrong.
After making the usual hand-waving at how bitcoin value dropped 90%, yet conveniently skimming over how bitcoin value is up 1600% from a year ago, the article launches into a set of statements without any solid backing.
Bitcoins are volatile in their worth or exchange rate, but that is totally expected and fine. The author makes the mistake of generalising bitcoins performance now, to its future. The worth of a bitcoin is determined by how much people are willing to buy and sell at- its price is set by the market.
If someone decides they want to buy 100 BTC, and there is only 10 BTC being sold at the current market rate of $4, they will have to bid at the next highest ask where there is maybe another 8 BTC for $4.1. In this way they move the market price upwards.
This happens in euros and dollars too. Namely that if a multi-billionaire suddenly sells a huge amount of euros for dollars, they will move the price down for euros and up for dollars. For comparatively small amounts that everyday people buy and sell at, it is not large enough to move the market exchange rate.
The network effect
Bitcoin is a smaller system with less people. Therefore it is much easier to move the market price. Everything has an equal and opposite reaction. When you jump in the air, the earth moves away from you too, but you are so comparatively small that the force you exerted on the earth is not noticeable. However something as large as the moon does cause the earth to wobble in its orbit. A buyer of bitcoins carries far more weight in this small market with their $10,000 than they do in the usd-eur forex market.
Volatility of bitcoin is a consequence of it being the early days. Of bitcoin being small. Of bitcoin being undeveloped. Of bitcoin not having reached its full potential.
The author then goes on to tout that credit card fees are great because they offer consumer protection against chargebacks and fraud. The author then explains how such systems could exist alongside bitcoin if you pay for them, at which point bitcoin has no benefit over credit cards.
What the fuck! How about I get to choose whether I want those services or not! Let the consumer decide whether they are important benefits worth paying for; don’t mandate that everyone has to subsidise the service at over-inflated prices!
Bitcoin v Western Union
The article now reaches its penultimate conclusion: wire-transfers are very expensive, and bitcoin has low fees. Bitcoin is kick-ass at free international transfers. Ignoring all the benefits of bitcoin like decentralised, impossible to shut-down, privacy, divisibility/microtransactions, security and efficiency the author suddenly decides that this one aspect of bitcoin is the only dimension of bitcoin.
Bitcoin as a metacurrency.
This makes no sense. The term is meaningless. One does not hold US dollars because one loves the beautiful designs on them. No, US dollars are a useful mechanism of trade for you.
Likewise, if bitcoins are useful for buying foreign currency or buying online services, then at some point you will need to be holding bitcoins. That interlude when you have aquired bitcoins will be when you spend them in the general economy.
I know what the author is trying to get at- that nobody would ever what to hold bitcoins because the price is volatile and that the only use for bitcoin ever is as a service for changing money. That’s all.
What the author fails to realise is this: market volatility is a consequence of bitcoin being small, and if the economy booms due to people using bitcoin as a forex tool then the volatility would disappear suddenly. If market trading became more professional then we would see arbitrage and professional speculation.
Arbitrage is where a person sees the price of the USD:BTC to be $4, and the GBP:BTC price to be 2.7. Because 4 USD = 2.55 GBP, they see that by buying bitcoins at $4 and selling them for 2.7 GBP, they can make profit. This also works the other way with selling bitcoins for GBP and buying USD. The net effect is that the price across all exchanges matches each other.
Professional speculators stabilise the price. If a sudden news story generates a lot of excitement, then the price may spike upwards. A professional speculator sees that this is nothing more than irrational exuberance and sells, driving the price downwards. This also works the other way; if a sudden scare happens and the price nose-dives, the speculator buys and brings the price back upwards. Speculators cushion the price movements to not be so erratic.
Chicken and egg
Right now because bitcoin prices are so volatile, merchants are at risk. If I price a good in bitcoins at a certain dollar rate, the market can move and my customers pay less than they would. If there are no limits set, they can repeat the process and make big profits off the merchant. Therefore a merchant not only has to pay a mark-up on the price to account for volatility, but they must also limit their daily bitcoin volume.
With a growth in bitcoin, and a decrease in fluctuating bitcoin prices, people are more willing to hold bitcoins. Merchants are more likely to price their goods in bitcoin. With the increased services, bitcoin users are encouraged further to hold bitcoins and spend them within the system. There currently exists many traders, but nothing in particular that I need or want. If more merchants were to exist, then it is conceivable my needs will eventually be catered to- in bitcoin.
Bitcoin is young. And there is far more to bitcoin than any single one property. Bitcoin has far reaching effects on a global scale.