Of Bitcoins, bubbles and B&Q vouchers

10th December, 2013

The object of anarcho-utopian fantasies is of little value if you want a pizza, writes Tim Harford

‘The tiny Channel Island of Alderney is launching an audacious bid to become the first jurisdiction to mint physical Bitcoins.’
Financial Times, November 29

Surely that’s the ultimate sell signal?

Absolutely. It’s like Grandad getting a Facebook account.

I meant to suggest that Bitcoins are in a bubble.

Who can say? One definition of a bubble is that an asset’s price becomes separated from its fundamental value, and driven only by the expectation of the ability to sell the asset to somebody else. But by that definition, gold has been in a bubble for thousands of years – so saying “Bitcoins are in a bubble” is true but not especially useful investment advice.

You think they might go even higher?

If journalists like me keep publishing columns like this, perhaps. It’s never quite clear whether the media buzz drives the price or the price drives the media buzz. There was a moment, recently, when a Bitcoin was worth more than an ounce of gold. Given that, two years ago, gold was worth about $1,800 an ounce – and three years ago Bitcoins were trading at about 20 cents – that’s quite something. Hence the sudden run of stories about millions of dollars of Bitcoins accidentally left on a hard drive dumped in a landfill in Wales; the companies offering discounts on “Bitcoin Black Friday”; and this ludicrous idea from Alderney.

You sound grumpy. You didn’t actually buy any Bitcoins, did you?

No. And if I had, of course I would be desperate to sell, and yet hesitating in case the price leapt up again. And since nobody wants to sell them, nobody wants to use them to buy pizza either – which is a bit of a blow for an idea with pretensions at being a currency.

You’ve got to concede, though, that Bitcoin has arrived on the map.

As a venue for speculation, yes. The total value of Bitcoins is about $13bn – give or take a billion or two per day, because it’s impossibly volatile. The total value of pound sterling notes and coins outstanding is about £65bn – almost 10 times as much. That’s not a huge gap, given that Bitcoin is less than five years old and is a pseudonymous hacker’s anarcho-utopian dream, while the UK is a top 10 economy and sterling is one of the world’s best established currencies. But while Bitcoin is an impressible speculative asset, as usable money, it’s a joke – a unit of account so volatile that nobody can remember what it’s worth, and so prone to sudden price spikes that nobody wants to spend the stuff.

Sounds like the perfect Christmas gift.

Funny you should say that – gift vouchers seem irrepressibly popular every Christmas, and they, too, are awful currencies.

Surely you’re not telling me there’s a speculative bubble in B&Q vouchers?

I doubt that. Most gift vouchers expire after a while, and B&Q vouchers are no exception, so the long-term value of these vouchers is definitely zero – unlike the long-term value of Bitcoins, which is only probably zero.

And regular money is bad?

Not as far as I’m concerned. But true Bitcoin believers love the fact that it has no central bank behind it to mess things up. And gift-givers tend to regard real cash as rather grubby and unimaginative, whereas – for reasons that escape me – they think of vouchers as a more honourable alternative. In both cases, although for very different reasons, plain old pounds or dollars are stigmatised. We humble economists can only scratch our heads at such sentimentality.

I think you’re being a bit harsh.

Hardly. Vouchers are subject to “breakage” rates of about 10 per cent – that’s the euphemism that companies use to describe the vouchers that expire in a desk drawer somewhere. They are also resold at a loss on eBay, which does not say much for their effectiveness as gifts. If you can’t think of a plausible present, just give cash.

Or Bitcoins.

If you must. Just be aware that you have absolutely no idea what Bitcoins will be worth by the time Christmas arrives. That means Bitcoins fail the most fundamental test of any useful currency: stability in comparison to the sort of things you might want to buy. The irony about Bitcoins is that they were initially embraced by people with a fear that traditional currencies were about to suffer hyperinflation. They haven’t. Bitcoins have suffered hyperdeflation, though. Nice for those who bought in early. But, in a real currency, that isn’t a feature: it’s a deadly bug.

Also published at ft.com.

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