Bit­coin is not the bold new fu­ture of money. (Blame the hoard­ers.)

The Washington Post Sunday - - BUSINESS - BY MATT O’BRIEN matthew.obrien@wash­post.com

Some­times it’s hard to tell whether bit­coin is more like a Ponzi scheme or a pyra­mid scheme.

What­ever it is, though, it isn’t a cur­rency. It’s a tech stock. Each bit­coin is re­ally a share in a sys­tem that seems tomake it cheaper to trans­fer things online — money, stocks, bonds, even the deed to your house — by cut­ting out the mid­dle­man. Well, kind of. Bit­coin doesn’t re­move the mid­dle­man so muchas re­place him with mid­dle­men who don’t make you pay much, but make so­ci­ety as a whole do so in­stead. Is this progress?

It’s sup­posed to be. Ever since the early days of the In­ter­net, peo­ple have tried to fig­ure out how to trans­fer money online with­out hav­ing to go through the fi­nan­cial sys­tem. The prob­lem, though, is if I send you money, how do you know I haven’t al­ready spent it or sent it to some­body else? You don’t. So the only so­lu­tion has been to use a trusted third party, such as a bank. I send money to the bank, it ver­i­fies that I have this money to send, and then it sends it on to you— all for a 2 per­cent fee, of course.

Bit­coin’s break­through is to have a de­cen­tral­ized net­work of “min­ers” sit be­tween us in­stead. These min­ers cre­ate a public ledger of ev­ery bit­coin trans­ac­tion, what’s called the blockchain. That in­cludes ev­ery bit­coin ever won, used or trans­ferred. So now we don’t need a bank to know that I have the money I’m send­ing to you, and that I’m only send­ing it to you. The min­ers con­firm this. Andthe best part is that in­stead of hav­ing to pay the bank my­self to do this, the sys­tem pays the min­ers in new bit­coins.

The ques­tion, though, is how you get peo­ple to mine bit­coin. Sure, bit­coin is dig­i­tal money peo­ple can use to buy things online, but they al­ready have money to buy things online. And while mer­chants would be more than happy to save the 2.5 per­cent they pay in credit card trans­ac­tion fees, cus­tomers are a lot more blase since they don’t pay them di­rectly.

The an­swer, then, was to do what makes any­thing pop­u­lar: Make it ex­clu­sive. Specif­i­cally, bit­coin lim­its the to­tal num­ber of coins that will ever be cre­ated to 21 mil­lion. Now, for bit­coin’s first year and a half, as Nathaniel Pop­per doc­u­ments in his page-turn­ing history “Dig­i­tal Gold,” only a hand­ful of peo­ple mined it. But that be­gan to change when lib­er­tar­i­ans, con­vinced that the Fed­eral Re­serve’s money-print­ing would doom the dol­lar, dis­cov­ered bit­coinan­dits non-in­flat­able money sup­ply. A boom was born.

But what made peo­ple mine bit­coins is what has kept them from spend­ing bit­coins. Think about it like this: Bit­coin’s fi­nite sup­ply­meansthat its price should go up, and keep go­ing up. So if you have dol­lars that are los­ing a lit­tle value to in­fla­tion ev­ery year and bit­coins that are gain­ing it, which one are you go­ing to use to buy things? The ques­tion an­swers it­self, and it raises another. Why would this ever change? Un­less you can’t buy some­thing online with dol­lars — such as drugs — you’d al­ways want to use dol­lars. Buy­ing things with bit­coin would be like cash­ing out your Ap­ple stock in 1978 to go gro­cery shop­ping even though you have plenty of ac­tual cash ly­ing around.

The Catch-22 is peo­ple buy bit­coins be­cause they think the price will go to in­fin­ity and be­yond once ev­ery­body uses them, but that’s also pre­cisely why they don’t spend their own bit­coins. And so no­body uses them. So the bit­coin faith­ful have tried to not only con­vert peo­ple, but also per­suade them to mar­tyr them­selves, fi­nan­cially speak­ing, for the crypto-cause.

But bit­coin is good for trans­fer­ring money, or any­thing else for that­mat­ter, online.

“The de­sign sup­ports a tremen­dous va­ri­ety of pos­si­ble trans­ac­tion types,” bit­coin’s in­ven­tor Satoshi Nakamoto wrote back in 2010, in­clud­ing “es­crow trans­ac­tions, bonded con­tracts, third­party ar­bi­tra­tion, multi-party sig­na­ture, etc.”

So any­time you need to send any kind of fi­nan­cial as­set or agree­ment to some­body else, you can send it along with a bit­coin and, through the beauty of the blockchain, avoid hav­ing to pay fees. That’s why Wall Street banks are look­ing into whether they can build their own block chains to cut costs be­fore their com­peti­tors do. And while send­ing money is cheap within the United States, do­ing so across in­ter­na­tional borders is not — the av­er­age trans­fer fee is 7.5 per­cent, ac­cord­ing to the World Bank. It’s not hard to imag­ine that bit­coin could claim a big chunk of the $500 bil­lion re­mit­tance mar­ket, although the dif­fi­culty of get­ting the phys­i­cal cash to peo­ple in de­vel­op­ing coun­tries is a sig­nif­i­cant hur­dle.

Wait. How does the blockchain cut costs again? Re­mem­ber, in­stead of you pay­ing the bank a fee to process a trans­ac­tion, the bit­coin sys­tem pays min­ers new coins to do so. Then these trans­ac­tions are added to the list of all oth­ers in the public ledger, the blockchain. But any­time it seems like you are get­ting some­thing for noth­ing, the costs are prob­a­bly just hid­den.

What are those costs? Well, bit­coin min­ing is a pretty ex­pen­sive busi­ness. Even the most spe­cial­ized com­put­ers, which mine bit­coins and only mine bit­coins, re­quire a lot of energy. So much so that bit­coin min­ers have set up shop in far-flung places such as Ice­land, where geo­ther­mal energy is cheap and arc­tic air is cheaper still — free — for them to run and cool their ma­chines at the low­est price.

Okay, but why should we care that bit­coin min­ers have big energy bills? The prob­lem is the price you pay for energy does not in­clude the cost we all pay for pol­lu­tion. So energy-in­ten­sive busi­nesses that are pay­ing less than they “should” can gen­er­ate en­vi­ron­men­tal spillovers for ev­ery­one else. Once you take this into ac­count, it is not clear how much bit­coin is cut­ting costs so much as shift­ing them.

It’s not clear what bit­coin is or what it will be, but it is clear what it’s not. It’s not a cur­rency. Peo­ple don’t set prices in bit­coin and, for the most part, don’t buy things with it ei­ther. The only func­tion of money it comes close to per­form­ing is as a store of value, but it doesn’t even do that well. Even though it seems like bit­coin prices should go up and up and up, they haven’t for a year and a half. In fact, bit­coin’s $225-a-coin price is 80 per­cent less than its De­cem­ber 2013 peak.

That said, bit­coin might be a bet­ter­way to send things online— or at least the blockchain might. In fact, the fu­ture might not be­long to bit­coin but to its tech­nol­ogy.

BENOIT TESSIER/REUTERS

Bit­coin coins are shown in an il­lus­tra­tion taken at La­Mai­son du Bit­coin in Paris. Bit­coin’s fi­nite sup­ply means that its price should go up, and keep go­ing up, which cre­ates a bit of a Catch-22: Peo­ple buy bit­coins in an­tic­i­pa­tion of ris­ing prices, but that is also pre­cisely why they don’t spend their own bit­coins, so hardly any­one uses them.

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