Congress got to hear a lot of nice things about Bitcoin from regulators this week. The cryptocurrency's market price has also touched record highs. If you think either development is good news for Bitcoin, you're missing the point.
In Senate hearings Monday and Tuesday, an all-star roster of conscientious public servants -- from the Treasury Department, Justice Department, Secret Service, Federal Reserve, Department of Homeland Security, Securities and Exchange Commission and so on -- all offered very respectful remarks about virtual currencies and their innovative potential.
Yet a common theme they all expressed was that such currencies were something they'll be able to control -- something that can be monitored and policed -- and not an anarchic and impenetrable system that drug dealers and money launderers and tax evaders can hide behind. So: The feds are paying attention.
For future users of virtual currencies, that's a good thing. It'll offer consumer protections and predictability. For Bitcoin, it's a problem.
To the extent using Bitcoin has any benefits now -- convenience, cost-efficiency, putative anonymity -- it's because authorities haven't been taking it very seriously. As officialdom becomes more assertive, Bitcoin will become more difficult and expensive to use, and less anonymous. That's because complying with money-transmission laws such as the Bank Secrecy Act is burdensome and costly and annoying. Bitcoin exchanges are starting to find this out. As the government's tentacles spread through the ecosystem, it's hard to see how Bitcoin will retain any advantages over normal methods of payment.
But its price is booming! you might say. That's true: It's now trading at about $536 per coin, after briefly hitting $900 yesterday. It may go much higher. If you got in a month ago (when it was valued at about $186) and planned to make a speculative buck, that's good news. If you expected it to become a reliable currency, it's terrible news. No asset that fluctuates so erratically can plausibly work as a medium of exchange. If a retailer accepts bitcoins for a product and the Bitcoin price declines sharply the next day, he's made a terrible mistake. If the price increases sharply, the buyer has made a terrible mistake. That's why BitcoinShop.US, an online retailer that prices its products in bitcoins, has seen its orders plummet 20 percent this week.
Here's a stark description of the problem: "The relative lack of acceptance of Bitcoins in the retail and commercial marketplace limits the ability of end-users to pay for goods and services with Bitcoins. A lack of expansion by Bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the Blended Bitcoin Price."
That's from … Wha-hey! That's from the Winklevoss Bitcoin Trust, which succinctly articulated this "risk factor" and 60 others in its Form S-1/a filed with the Securities of Exchange Commission last month. The proprietors forthrightly explain the many reasons Bitcoin could be doomed in the long term, from the potential for "short squeezes" to the fact that "It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries." In the meantime, you can pay them to buy bitcoins for you.
The Winklevii aren't the only ones giving Bitcoin a bad name. Rightly or not, digital dens of iniquity such as Silk Road and the Assassination Market continue to tarnish its public esteem. And because Bitcoin has no intrinsic value -- you can't pay taxes with it or make jewelry out of it -- reputation is all it has. Congress may have offered some validation this week, but that doesn't mean more people are going to use Bitcoin for anything other than speculation. For that, it has to offer clear advantages over the methods of payment we already have, like cash or credit. Increasingly, it doesn't.
That's not to say Bitcoin is completely worthless. It's quite clever as a peer-to-peer payments system. A recent letter from the Federal Reserve Bank of Chicago called it "a remarkable conceptual and technical achievement." Fed Chairman Ben Bernanke said it may hold "long-term promise."
Actually, Bernanke said "virtual currencies" may hold long-term promise, which is more to the point. Virtual currencies of some kind should eventually become a great boon to economies and consumers, especially to the poor. A digital currency without the rickety infrastructure, deflationary bias, security flaws, disappearing exchanges, regressive money-creation mechanism, and luster of criminality and paranoia that attaches to Bitcoin would be a welcome innovation.
It won't be nearly as entertaining. But it might actually work.
(Timothy Lavin is a Bloomberg View editorial board member. Follow him on Twitter.)