So, Where Are We With Bitcoin?

If you get rich betting on a certain currency, does that make that currency real? Or must people and businesses agree to accept it as payment for goods and services?

If these are the criteria for establishing whether Bitcoin is “real” or not, the 8-year-old cryptocurrency has passed the first test with flying colors. As our story “When the Music Stops” in this issue points out, there are people walking around with digital gold in their virtual wallets as a result of Bitcoin’s remarkable runup in value just this year. The coin traded at $1,016 on Jan. 1, and, as of this writing, it fetched $4,093, according to Blockchain.info. You don’t have to be a math genius to spot a quadrupling in value in just nine scant months.

Reasons for this ballooning value vary, but the valuation alone doesn’t confer legitimacy. That’s especially true if a certain prominent banker is right. JPMorgan Chase & Co. chief executive Jamie Dimon made headlines last month when, speaking at a financial-services conference, he likened the rise in Bitcoin to the infamous tulip-bulb bubble in the 17th Century. If he’s right, those Bitcoin arrivistes are in for a somber reckoning, indeed.

But what about the second test? Whose trust in Bitcoin is such that they will take it in payment for something? Isn’t that what the business of payments is really all about? Well, here Bitcoin is still struggling. Some big names, including blockchain enthusiasts like Overstock.com, accept it. So do some corner shops and small Web sites. All told, about 100,000 merchants worldwide accept Bitcoin now, according to Spendbitcoins.com.

Trouble is, while there’s a Bitcoin network, that system is decentralized by design. It doesn’t keep track of things the way a Visa or Mastercard system does. So merchants can start—or stop—accepting Bitcoin without anyone being the wiser, at least for a while.

There are other issues. With the coin carrying so much value, people are reluctant to part with it, fearing they’ll miss out on further appreciation. And network congestion has slowed down transactions and driven up user fees, though developers are working out solutions to that.

So let’s give it time. Some critics argue Bitcoin simply conjures something out of nothing. Yes, it does. But doesn’t the U.S. dollar do this? It’s a piece of paper backed by—what? Not gold, any more. No, faith and trust in the institutions that manage it support the dollar, and have for decades. Some would argue the same faith and trust could one day support Bitcoin. We’ll see if they’re right. We’ll find out whether this digital currency is indeed a coin, or a tulip bulb.

John Stewart, Editor  |  john@digitaltransactions.net