Bitcoin in the Headlines: A Clash of Economics

Bitcoin in the Headlines is a weekly look at bitcoin news, analyzing media and its impact.

Despite featuring its fair share of salacious material – including the run-up to the sentencing in the Ross Ulbricht trial, this week's news cycle was perhaps more mature in its assessment of bitcoin as a financial technology.

Spurred by the inclusion of former US Department of Treasury Secretary Lawrence Summers to Xapo's board of directors, more enterprising journalists sought to venture into topics that aimed to illuminate debates on bitcoin as a monetary system.

Arguments centered largely on whether bitcoin represents a truly unique breakthrough in the history of money, one that can only be compared to disruptive technologies like the Internet, or whether it is a passing fad, one that, despite promise, is doomed to repeat past mistakes.

Summers meets magnifying glass

FT Alphaville's Izabella Kaminska, one of the more outspoken and well-spoken bitcoin critics, produced a retrospective piece which questioned Summers' motives for joining the board of bitcoin firm Xapo.

Kaminska made her opinion of the company known, chiding Xapo for its business model. A specialist in deep cold storage, Xapo uses a process by which bitcoins are kept secure in reinforced underground bunkers with all manner of military-grade protections.

Here, Kaminska reintroduces the idea that bitcoin is a speculative bubble that will eventually deflate, one akin to the 'tulip mania' of the 1600s where the value of tulips skyrocketed, only to again fall.

Using past statements, Kaminska aimed to suggest that Summers should perhaps be against the idea that bitcoins could have lasting value.

She wrote:

"Worth noting in this context, of course, is that Larry Summers is also the man arguing that bubbles are a bit of an inevitability in a secular stagnated world."

Kaminska cites Summers' statement in the Financial Times from last year, in which he is quoted as saying:

"It is better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognise that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely."

Summers himself has presented mixed views on bitcoin in public appearances. For example, Summers has sought to portray the payments network as one that requires the help of regulation to succeed.

Further, much of his praise for bitcoin seems based in its comparison to the Internet, which he noted was also roundly dismissed in its early days.

Still, this didn't stop Kaminska from poking fun at Summers' appointment to the company's board.

"You might as well sit on the advisory boards of the companies pumping [bubbles] so as to advise and steer them?" she concluded.

Speculation on speculation

Elsewhere, the evolution of the bitcoin economy was discussed by Barry Silbert, founder of Digital Currency Group and a noted early-stage investor in bitcoin startups.

Speaking to Entrepreneur, during the Inside Bitcoins Conference in New York last month, Silbert discussed whether he felt bitcoin could become a stable form of money, or rather, how it could develop into a perhaps more mature means of value exchange.

Silbert said:

"I do think today the main use of bitcoin is speculative investment, which I think is OK, because in order for bitcoin to become a rail we have to have a monetary base. The monetary base of bitcoin today is about $4bn, which does not lend itself to be used as a rail.

Silbert added that he believes bitcoin must still be "established as a form of value", suggesting that this evolution will likely take place over time.

"For bitcoin to be a global currency the volatility has to decrease or we need to hedge out risk," he said.

Silbert's statements follow Bloomberg's Bitcoin Brief, released last week. The report, to which Silbert contributed, tackled the question of how speculation is affecting the bitcoin economy, suggesting that this is perhaps holding back bitcoin from becoming a true digital currency.

"There's a rule in economics called Gresham's law, which is that when you have two currencies, people tend to hoard the one with greater material value and spend the one with less material value," it reads, continuing:

"If people think bitcoin has value as a speculative asset, they will hoard it, and buy their groceries with greenbacks instead – after all, they expect bitcoin's price to go up, and the price of greenback to go down."

"This makes it more difficult for bitcoin to establish itself as a medium of exchange, because no one wants to actually spend them," concluded the report.

A question of worth

Linking into the debate, Forbes, a regular in this weekly series, re-posted a Quora piece with the following headline "Is the Price of Bitcoin Going to Bounce Back?"

The piece again takes on the question of how the health of bitcoin's economy should be assessed.

"Given that the price of bitcoin is determined solely by supply and demand, and that the supply of new bitcoins is predetermined, with new coins being issued steadily at a rate that drops sharply in the future, the only variable of interest is demand."

The piece continued:

"And the demand for bitcoin is determined by how useful bitcoins are to people. So if you want to know whether the price of bitcoins will go up in the future, you have to ask yourself how useful you think bitcoins are going to be."

The article seemed less positive with regard's to the digital currency's potential, at least today, arguing that there has been little evidence to suggest the technology is mature enough to compete against traditional financial incumbents.

"To somebody who already has access to modern financial tools like bank accounts and credit cards, these are very few new things bitcoin has to offer," the report read. "The compelling uses for bitcoin so far are to serve as a vehicle for speculation [...] and as a method of gambling and making purchases on the dark markets".

Pete Rizzo contributed reporting.

Newspaper image via Shutterstock