On Tulips and Bitcoins

With the recent meteoric rise in Bitcoin’s value, from approximately 1 BTC/7000 USD less than two months ago to its value of $16,535 at the time of writing this article, economics and news outlets worldwide have begun speaking on a subject they would have rather ignored as an “internet fad” just months ago: a real innovation which has come for the financial world. But as one goes through the articles discussing Bitcoin, optimism seems to be greatly lacking: between comparing them to the Tulips of the 1630’s and constantly referring to its current state as a “bubble”, there seems to be a lot of interest in dissuading audiences from trusting this original cryptocurrency — despite its value outside of the bubbled properties we are seeing now. I’m not here to tell you that Bitcoin hasn’t bubbled (it certainly shows a lot of the properties of economic bubbles), but rather take a different perspective on the causes and meaning of this bubble. After all — even only owning 1BTC for the length of the last year has created grand wealth for not only the earliest of adopters, but the daytraders and market researchers who have spent the last year investing in the platinum-like digital commodity while simultaneously dismissing it as a currency and means of trade.

But like the Housing Bubble and Tech Bubble before it, we’ve watched what was previously an inaccessible or nonexistent market explode overnight with investment and trade. Every day, more and more people find themselves holding at least 1mBTC (milli-Bitcoin, or 1/1000th of a Bitcoin, currently valued at $16.50 USD) in their digital or paper wallets — and from YouTubers to the Stripe transaction processing company to the upstart CME and CBOE Bitcoin Futures corporations, the cryptic Bitcoin wallet address is becoming more familiar to be seen every day, as a means of purchasing from or trading with or supporting the individuals and corporations who take the risk on this growing economic instrument. However, unlike the Tech Bubble, or even Tulip Mania (a topic commonly, if incorrectly, referenced by writers who fail to understand the exaggeration of the tulip craze of yester-century and its documentation in the book, Extraordinary Popular Delusions and the Madness of Crowds), Bitcoin’s value comes not from an expected return on investment, but rather a means of bypassing the corrupt and often-inaccessible centralized banking systems, whether for legitimate or criminal enterprise.

Bitcoin, and its successors in cryptocurrencies such as Ethereum (ETH) and DigitalCash (DASH), rest upon an encrypted ledger system which is distributed to “miners”, or computing systems which trade time, processing power, and electricity, for the rewards distributed in calculating the hash of a specific block, or single record within the ever-growing block-chained ledger they represent: the value comes not from something inherent to the coin but rather its decentralized utility and usage. And while we are still in the early days of even Bitcoin, it captures all the value and power of fiat currency without the concerns of central banks exerting control, or usury, over that currency. But Bitcoin isn’t a currency like the US Dollar or Eurodollar; in going with the metaphor I used earlier, it’s much cleaner to compare it to hard commodities, like gold and platinum. Bitcoin is the platinum standard in cryptocurrency: worth quite a lot to those who want it, but you wouldn’t carry a brick of platinum with you into the grocery store. Ethereum, currently trading at $472 USD to 1 ETH, can be equated to gold: greater utility (through its development of the Solidity contract system), more stable in value. There are even younger coins, such as LBRY or Monero, which come in at a much more stable and grocer-friendly value. But all of them are just as much a fiat currency — with one major difference: anyone can contribute to the forward movement of the decentralized ledger of transactions, rather than just banks with permission from their central bank. And it’s this ledger which makes the difference.

So, should you be investing in Bitcoin? Given its meteoric value currently, it might be a little late to be trying to get your hands on that coin directly. But even if Bitcoin finds itself in a bubble which might pop at any time (a concern which comes from an old understanding of economics, but a concern nonetheless), there are other technologically and socially-valuable coins worth investigating and investing in, which stand to retain their strength even if the perceived bubble bursts. But there’s no reason you shouldn’t have a wallet — even if just for the sake of being able to receive a few Satoshi (the smallest traded unit of Bitcoin, currently worth $0.00016 USD) here and there. After all, tulips may die, but the blockchain is here to stay.