Column: Bitcoin provides competition
Bitcoin forked this fall. Most of us have no idea what that means, but what has happened since is creating a future we all can appreciate. Bitcoin is leading the way in a major cryptocurrency revolution, introducing much-needed competition in the world of money.
Bitcoin’s price had risen above $5,300 — over four times the price of an ounce of gold. Bitcoin’s market capitalization is around $88 billion, making the total value of Bitcoin in the world similar to the total value of Netflix stock. If Bitcoin were a stock, it would have been the 74th largest on the S&P 500 in mid-August of this year and its market capitalization is on the rise.
This growth has been swift and strong. To put it in perspective, Amazon has increased in value about 64,000 percent since it went public 20 years ago. Bitcoin has increased in value 64,000 percent in just the past five years. From July 2012, when it was priced around $8, to today, where it has hovered around $5,300, Bitcoin has moved from internet chat rooms to major boardrooms.
Because of this flabbergasting success, many have made predictions about Bitcoin’s demise. Every time the volatile price drops it makes headlines. But as summer was winding down, these worries seemed somewhat justified: On Aug. 1, the Bitcoin blockchain actually split in two. The currency experienced what is called a hard fork and established two separate forms of bitcoin — Bitcoin Cash and Bitcoin.
Bloomberg called the event a civil war and a critical juncture for Bitcoin. It probably was, but it survived. There’s no denying that Bitcoin could fail like other internet currencies before it. I would not be too surprised if at some point in the next few years its price dropped 25 percent overnight. But what is truly important about modern day cryptocurrencies is not Bitcoin’s success — it is the process by which we are discovering if it will succeed.
Is Bitcoin a store of value like gold or a unit of exchange like the dollar? Is it best as a supplement or a replacement for the dollar? The great thing is that we do not actually have to answer these kinds of questions about cryptocurrencies via politicized debates. For years there have been currency debates about continuing with a fiat system or returning to a gold standard. We can make arguments on either side, but the only way for us to ever truly know is to allow them to compete. Federal governments have long precluded any competition in the provision of money, but over the past few years Bitcoin has changed that paradigm, opening up the doors for new and exciting alternatives.
Competition is a discovery procedure, Friedrich Hayek said. Competition helps us figure out what works and what does not. Many think of competition as a way to make sure prices stay low for consumers. That may be true, but competition also unlocks knowledge.
With Bitcoin’s survival of crisis and subsequent rise in price and prominence, the market dream of competing currencies has in part arrived. We can now truly start to discover what Bitcoin will be. We can begin to figure out if Bitcoin will help us transact with businesses and shop online. Or maybe we will realize that it functions best at the individual level, with people using ATMs and smart contracts.
Another fork soon is possible, but instead of panic, there is now a sense of optimism. Even when the price dropped over $1,000 during one week in September, worries that “Bitcoin was dead” remained minimal and those specializing in the currency were not all that worried.
Bitcoin as a movement seems to be screaming “bring on the forks!” We’ve left behind survival mode and have entered the era of competition. And for that, we should all rejoice.
Michael J. Clark is an associate professor of economics at Hillsdale College.