Are Bitcoin or Ethereum really good as a currency, though? They're quite volatile.
Fred Wilson makes a good point here - it's quite gut-wrenching to send someone a token that might have doubled in value if you had waited a week. And I would imagine the seller might not feel great either if they received a token that took a sharp drop in value upon receiving it.
Buying things is one of the main uses of currency, IMO, and you can't buy much with any cryptocurrency. I don't think that's likely to change - businesses take fiat currency instead of bitcoins or whatever because they have to pay taxes on their business, and those taxes must be paid in US dollars (or GBP or whatever). And if they don't, men with guns will come and arrest them. That's one of the great drivers of demand for dollars that bitcoin can't really compete with.
So where do cryptocurrencies provide value? Well, the main one is in areas where traditional, government-backed fiat currencies can't be used. In other words, mostly illicit cases - drugs, money laundering, etc. Otherwise, especially for those in nations with more developed financial infrastructure, there's no compelling reason to use bitcoin other than purely ideological motivations.
So you're right that cryptocurrencies do have value, it's just that the value is far more limited and based on illegal activity than most of its proponents will claim.
They work fine as currency, they can be exchanged between people easily. Where they have a problem is value storage, due to volatility.
Most proponents believe that developing countries will be the biggest adopters of crytocurrencies, and drive their values higher. This makes sense as many of those countries already have volatile currencies that are difficult to trade on the open market at low volume. For this reason, USD and Euro are highly sought after for even low income individuals in many less stable countries. Anecdotally, I can offer that many Egyptians with any wealth at all try to hold some foreign currency. It's possible cryptos can replace that need.
Plus, the black market was valued at $10 trillion globally in 2011. If it had an official currency that currency would be worth quite a bit.
Cash is still king in the black market. Bitcoin has taken a small slice of it, esp. for money laundering and buying drugs online.
Put it this way: the black market does not rely on bitcoin in any substantive way. Bitcoin, however, depends on the black market for its existence.
So the black market has a combined value of $10 trillion, but bitcoin takes only a small, small slice of it because cash is just better. It's just that this small slice is bitcoin's bread and butter.
While there is a market for those txns the reality is that most adopters, and they recognize themselves as early ones, today, buy bitcoin as an inflation hedge. It's hard to argue against the theory either. People scream 'but the volatility!!' but for people who only six months ago have seen their bitcoin holdings over double in value, they are probably thinking 'sure. But that's a trade-off that seems to be meeting its use-case'
At what market size do people who have criticized it in the past as only for those things, admit that perhaps that categorization isn't reflected in actuality? 100 billion? 500 billion? One trillion? 10 trillion?
> While there is a market for those txns the reality is that most adopters, and they recognize themselves as early ones, today, buy bitcoin as an inflation hedge.
That's my point - bitcoin is most useful for those who wish to engage in illicit activity (this accounts for at least 10% of bitcoin's market size if not more [1][2][3]) and for those who have ideological reasons to support it.
Those who have ideological reasons to fear inflation and support bitcoin are primarily libertarians, who think of inflation as Satan incarnate and view it as worse than murder and only slightly better than outright theft. But that's hardly a consensus view. Beyond those two groups, bitcoin has no real use.
I'm not saying bitcoin is worthless, I'm saying that there's a natural peak to its valuation based on its limited use cases (see above). Maybe bitcoin will make significant inroads in developing countries, and maybe then those $100 billion+ valuations will become reality, but I doubt it.
>Bitcoin, however, depends on the black market for its existence.
Do you have anything to back up this assertion?
I'm going to contradict you here, and say that there is no reason to assume that.
Only idiots would use Bitcoin for black market purchases in the first place, there are better alternatives for the majority of purchases, and the biggest sources of black market are still happening with USD.
I'm not sure why it's even relevant since both currencies would function just fine if we magically removed all illicit activity.
> So where do cryptocurrencies provide value? Well, the main one is in areas where traditional, government-backed fiat currencies can't be used. In other words, mostly illicit cases - drugs, money laundering, etc. Otherwise, especially for those in nations with more developed financial infrastructure, there's no compelling reason to use bitcoin other than purely ideological motivations.
Definitely. Tack ransomware onto that list too.
There's legitimate use cases too though which do present at least a few compelling cases - for example I've had large purchases outright refused because the seller thought there was a chance I was a credit card fraudster. Nothing says "the money is yours now" like a cryptographic proof of that. They straight up told me, even after I gave them proof of ID - "sorry, too risky, pay with bitcoin".
I've also been flagged by maxmind and similar anti-fraud tools before when I made VPS purchases over Tor. But because I paid in Bitcoin support was able to approve the transaction without a second thought - no more fraud risk could occur.
Of course - these types of purchases aren't that frequent - but they do occur.
You can't really decry bitcoin or ether for volatility. They are technologies that, given their intent, have never come close to saturating their intended market. Of course if bitcoin gains adoption and more people want bitcoin the price goes up.
That doesn't mean there aren't structural flaws in their design (mostly meant to enable their initial success) but I don't think you can make a cryptocurrency that can simultaneously attract interest while also not appreciating from that interest. In order to implement a coin payout algorithm capable of handling an influx of on-chain activity you basically tell your early adopters "hey, this is a new and unproven thing, but if it takes off the algorithm just devalues it anyway to keep it where it is at" so you don't even have the selfish self-gamble motive to profit off it and thus no reason to participate if it isn't already a successful means of exchange.
Agreed, illicit transactions is a core use case for Bitcoin & friends.
The other big use case is speculation - because their real-world value is so uncertain, they're easy to create, very hyped, and basically unregulated, the current crop of cryptocurrency tech is basically a bubble factory.
>Are Bitcoin or Ethereum really good as a currency, though? They're quite volatile.
They're mostly used as speculative capital trading right now, and can't be compared to any traditional currency in terms of volatility. If the dollar was magically swapped for one of them in an instant, and we all carried on transacting with it like we did with the dollar it would be a different story.
Volatility isn't an inherent property of a currency. It's a function of market dynamics.
(I'm not an economist so excuse potentially poor terminology and I hope I'm conveying this well)
Fred Wilson makes a good point here - it's quite gut-wrenching to send someone a token that might have doubled in value if you had waited a week. And I would imagine the seller might not feel great either if they received a token that took a sharp drop in value upon receiving it.
Buying things is one of the main uses of currency, IMO, and you can't buy much with any cryptocurrency. I don't think that's likely to change - businesses take fiat currency instead of bitcoins or whatever because they have to pay taxes on their business, and those taxes must be paid in US dollars (or GBP or whatever). And if they don't, men with guns will come and arrest them. That's one of the great drivers of demand for dollars that bitcoin can't really compete with.
So where do cryptocurrencies provide value? Well, the main one is in areas where traditional, government-backed fiat currencies can't be used. In other words, mostly illicit cases - drugs, money laundering, etc. Otherwise, especially for those in nations with more developed financial infrastructure, there's no compelling reason to use bitcoin other than purely ideological motivations.
So you're right that cryptocurrencies do have value, it's just that the value is far more limited and based on illegal activity than most of its proponents will claim.