Arguing that Bitcoin will never be successful seems to be the cool thing to do every time the market takes a dive. It’s tempting, especially for those whose minds can’t escape the world of government money, asset pricing theories like ICAPM, or the gold bug tangibility demand. Paradigms are sticky, I get it, but the naysayers need to realize that Bitcoin is already massively successful!
Focus on the Assumptions
In Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero WSJ columnist James Mackintosh argues that Bitcoin should be ultimately worthless because it isn’t likely to completely displace gold or cash in black markets.
Building on two simplistic premises, that Bitcoin could only plausibly have value in black markets or as a replacement for gold, Mackintosh wastes a bunch of time going through childish valuation exercises, e.g. if Bitcoin entirely replaces other currencies in black markets, then its value should be…
Asset prices don’t derive value because of models, models try their best to explain prices we observe in reality. All models are wrong, some are useful! In this case, the Mackintosh Bitcoin Pricing Model (MBPM) is both wrong (Bitcoin is not zero) and it is useless (no forecasting ability). Those two binary variables may make for a cool WSJ opinion piece especially when prices are dropping on bad news, but you wouldn’t want to bet on them.
Ignorance Breeds Criticism
Mish Shedlock is another market commentator who routinely bashes Bitcoin. With every market correction, we can look forward to a deluge of critique pieces, so with the 30% peak-to-trough drop last week with the bad news out of China, Mish did his thing and posted Bitcoin Silliness, Myths, and Fatal Flaws.
Mish takes the same outraged perspective that the idea that Bitcoin could be likened to gold in store of value function is “preposterous.” He simply declares "Gold is gold, nothing else” as if that’s sufficient to dispel any store of value component to pricing. Venezuelans looking to diversify outside of the chaos of their collapsing economic system might disagree, which is why they’re mining Bitcoin.
There’s plenty of stupidity in the crypto industry, and there will likely be a lot of wasted capital going to speculative endeavors by investors who don’t really know, or care, what they’re buying. Mish is right to point out these instances, but such a laundry list doesn’t invalidate many of the potentially disruptive, or just decent, projects in the space, including Bitcoin.
Problems are Opportunities in Free Markets
The fact that within half a week, Bitcoin price is just about right back to where it started should be indicator enough to take these well-timed critiques with a grain of salt. There are certainly issues with Bitcoin and the entire industry, volatility is likely to remain above that of other asset classes, but the great thing about the crypto market is that it’s the freest market in the world and most of these issues are merely entrepreneurial opportunities to solve.
Bitcoin may ultimately end up with zero value, but the verdict is far from out. As of now, Bitcoin is massively successful and need not grow one more user or one more percentage in market capitalization to declare it a success. Continuing to debate whether or not Bitcoin can be successful is for people who don’t know much about it and are too lazy to learn more.
The fact that in just 8 years we’ve gone from nothing to millions of users, tens of thousands of businesses, and $135 billion in market capitalization is more than sufficient for at least people like me who are happy to have new options outside of traditional banking and finance.
Image source: https://chralash.wordpress.com/2013/04/16/eight-bitcoin-inventions-that-will-change-the-world/
Rob Viglione is co-founder of ZenCash, a privacy-oriented cryptocurrency hyperfocused on usability, and President of the Zen Blockchain Foundation where he's helping "Uberize" finance, create a freer, fairer, and nicer world by bringing fintech to the disenfranchised, and pioneer decentralized blockchain-based systems of governance. As a PhD Candidate in Finance, Rob's research interests span cryptofinance, venture capital, and asset pricing. He teaches "Bitcoin & Blockchain Applications in Finance" at UofSC, is President of the Carolina Crypto Club, volunteers to help create startup societies with the Seasteading Institute, and serves as an advisor to Hero Engine World, where they're using a blockchain-based platform, artificial intelligence, and real-time massive scale 3D modeling and scenario simulations to help SmartCities with Disaster Recovery and Emergency Management. He is a passionate libertarian who advocates peace, freedom, and respect for individual life.