This piece in Mind Matters takes aim at bitcoin as a speculative mass hype. This is on the level of the Dutch Tulip bubble, the South Sea bubble, and the dot-com bubble. Of course, not all bubbles are the same. But at least the dot-com bubble period (late 1990s-early 2000s) was based on the realities of new technology breakthroughs. And it produced companies including Amazon, eBay, and Priceline.
Greater Fool Theory
In any event, the author goes on to make the case that the bitcoin (and other cryptos) craze will end badly at some point. This is based on the argument that it produces nothing and has its basis in the “Greater Fool Theory.” This theory means one will pay a foolish price for the asset as long as one can find a greater fool to buy it later. He explains the bubble cause as “an asset’s price rises far above its intrinsic value.” Of course this is what people have been asking now for a decade, but what’s the underlying value of bitcoin? I suppose one could ask the same vis-à-vis fiat currency, which is a means to exchange value and has no real value other than the backing government’s promise to recognize it as legal tender—at least since the gold standard was removed in 1971.
The author certainly makes compelling points. And in light of the FTX situation unfolding as we write, it surely gives one pause as to where this all might be going. The author mixes in blockchain technology as being “slow, expensive, and environmentally unfriendly.” It’s not necessarily blockchain, which has many different uses and is being widely adopted in global trade workflows and the basis for cross-border CBDC payments, but the method of mining bitcoin and gaining consensus, which is where all the computing power is applied and time delays arise.
Bitcoin at the Point-of-Sale
That’s why bitcoin has not gained wide adoption as a method of payment at the point-of-sale (POS). Since the throughput time is not practical for immediate payment. Decentralized cryptos have not been widely adopted as transaction currencies in general. And they certainly have not been accepted wholesale since value fluctuations are too volatile. This hasn’t prevented major card networks and various fintechs and PSPs from incorporating crypto exchanges into their products and acceptance flows. Readers should have a look and add this to the spectrum of perspectives around bitcoin and other decentralized cryptos.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.
