Does it matter if bitcoin is in a bubble? That depends.

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My problem with the gold bugs has always been this: If your imagined apocalypse of “fiat” dollars comes to pass, what next? Would the grocery store or well-prepared neighbor accept your gold bars or Krugerrands for cold cuts, bread and water? Why? In that doomsday — and a currency collapse would be just that — they would have something far more valuable and useful than metal.

Still, gold retains a timeless value because people assign it that. The same has been true in modern times with the dollar. It’s only a piece of paper. But people believe.

Bitcoin is not backed by “the full faith and credit” of the U.S. government, but its enthusiasts want it to become the digital equivalent of gold, or even more. The currency (?) or commodity (?) passed $10,000 on Tuesday and $11,000 today. Let’s call it a medium of exchange or a store of value. Is this a bubble? Count on it.

Many of the features of bitcoin that appeal to the digerati also make it dodgy — and used by criminals. It’s not a real coin, but an asset that lives online, held in digital “wallets” and transacted through “blockchains.” It’s highly decentralized and not subject to regulation or federal insurance. (So, to add to the gold bug’s dilemma, you’d need a functioning internet in the apocalypse and a seller willing to take “a bitcoin” for that $11,000 loaf of bread).

At least one bitcoin enthusiast says people should invest in the medium, even in a bubble, because it’s leading to a technological revolution. Unfortunately, this is not like 19th century railroads (where people lost many fortunes) or the 20th century automobile or aircraft industries. It won’t create useful products or abundant jobs. Might it revolutionize transactions? Maybe. The Federal Reserve is thinking about a digital currency. I still watch people pay with paper currency in the age of plastic.

Another way to think of bitcoin is that it’s another way the wealthy can play games to get richer — because for some, more than enough is never enough. And when the roof falls in on the greater fool, who cares? One problem is the opportunity costs — what we could do as a civilization if the incentives were aligned with investing in healthy, job-creating enterprises. Another is contagion of the larger financial system. Nasdaq plans to launch trading in bitcoin futures next year. Follow that dark alley and a bitcoin collapse would get nasty.

As usual, the people most hurt will be the ones who don’t even know about bitcoin.


Today’s Econ Haiku:

Ah, what, me worry?

NK can hit DC now

Use your bitcoin then