Why I Haven’t Changed My Mind About Bitcoin

A Bitcoin ATM

Photo by David Ryder/Getty Images

Joe Weisenthal announced Sunday that he’s changing his mind about Bitcoin. I am not.

My primary interest in Bitcoin is that I think it’s a great platform for making jokes. So, for example, Sunday night I made a joke about how for all Bitcoin’s exciting appeal as a medium for conducting illegal transactions, paper money also does this well.

Then I got a reply:

I think that about sums Bitcoin up. It is a 21st-century version of gold whose primary appeal is as a speculative asset purchased by people with an irrational fear of inflation.

That’s not to say Bitcoin is a “bubble” or Bitcoin prices will inevitably tumble or everyone who buys Bitcoin is a fool. Plenty of people have made money at different times by buying gold.

But Bitcoin’s other properties aren’t particularly impressive. It is being used right now by Chinese people as a means of evading that country’s exchange-rate controls. That’s clever. But it’s really something that only works if the Chinese government keeps tolerating it. And there are any number of loopholes that work as long as they’re tolerated. Perhaps the most famous one is that you can use RMB to buy chips at a casino in Macao and then after gambling a bit you can cash those chips in for Macao money that isn’t subject to exchange rate controls.* I heard in Hong Kong that some wealthy Chinese people are using Hong Kong real estate as a kind of loophole. My guess is that China probably won’t crack down on these loopholes too hard because the Chinese government is in the process of liberalizing the exchange rate controls and lax enforcement of loopholes is part of that process. But eventually we’ll either get liberalization (in which case Bitcoin-as-loophole stops being useful), or else we’ll get a reversal of policy in which case we’ll get a crackdown.

Black-market transactions are a thing, though. And Bitcoins are more portable than either suitcases full of $100 bills or diamonds. So there’s some use there. And even though I think inflation paranoia is dumb, it’s certainly a real phenomenon. And anything gold can do Bitcoin can do better. In essence you’ve combined the smuggling utility of pieces of paper with pictures of Ben Franklin on them with the inflation hedging properties of gold. That’s a decent achievement. But it’s not going to set the world on fire. And to the extent that it becomes more popular as a means of conducting illegal transactions, it’s going to tend to get squeezed out of legitimate uses by government crackdowns.

Correction, Dec. 2, 2013: This post originally misidentified the Chinese currency RMB as RMD.