Bitcoin is impossible.
Salvadore Dali: “The Persistency of Memory.” 1931. Source: MOMA
Although the digital-currency is accepted by more and more merchants, it’s hard to see why someone should convert dollars into bitcoins just to have a merchant convert them back. All these transactions are recorded at a bank, so there’s no real gain in anonymity—bitcoin’s main selling point.
Almost no one is paid in bitcoins; the folks with the best incentive to use them are those who bought some earlier and are now cashing out. The currency’s appreciation is its principal problem: there’s no incentive to invest. Since the supply of bitcoins is ultimately fixed, they become more valuable just by sitting in an account–or on a flash drive. Monetary deflation—with its attendant problems—is inevitable. Credit dries up. An economy stagnates without credit—just look at Japan.
But that doesn’t mean that there aren’t lessons to learn from the technology. A key part of what makes bitcoin work is its blockchain—the distributed database that validates every transaction—tracing the coin back to its creation. Blockchain has the potential to make bank payments and securities transactions more efficient and safe. Currently it takes over a month to settle some securities after they’ve been traded. Our financial infrastructure is centralized, antiquated, and insecure—based on 1980s technology.
Just because something’s impossible doesn’t mean it’s worthless. Thomas Edison once quipped that he hadn’t failed, he’d just found 10,000 ways that won’t work. Hopefully, it won’t take that many false starts to learn from bitcoin.
Douglas R. Tengdin, CFA
Chief Investment Officer