Bitcoin, Still Not a Currency. And Now Crashing.

Photographer: Susana Gonzalez

The U.S. twenty-dollar bill: A widely accepted tool for everyday transactions.

Last month, I wrote a post titled “Sorry, Bitcoin Isn’t a ‘Currency’” pointing out that whatever the merits of Bitcoin as an investment, its use as an actual currency useful for buying and selling was minimal. I wrote it thinking that I was largely reminding folks of an obvious point. Apparently not. The post elicited more than 200 comments. Maybe there were two or three people who agreed with me in there; I might have missed them.

By and large, the comments insisted that actually there were plenty of people doing real business using Bitcoins. They pointed me toward retailers like Bitcoinstore.com, a retailer of electronics and other goods that did more than $500,000 of business in March. So far this month, Bitcoinstore, according to its website, has sold $142,250 worth of products. Good for them: hats off to anyone willing to experiment with new business models.

What really matters though is that it’s a tiny fraction even of the $42.7 million in Bitcoin trades conducted in just the last 24 hours at the biggest Bitcoin exchange. There are folks who make purchases with Bitcoin (one commenter claims he now buys all his pizza with bitcoin; yes, it can be done, but it’s faster and cheaper to call Domino’s directly). In the main, though, the folks making purchases with Bitcoin seem to be those using it as an investment.

Listen to Tony Gallippi, the chief executive and co-founder of BitPay, a Bitcoin payment processor. Bitpay last month processed $5.2 million worth of Bitcoin purchases. He contacted me, through his PR folks, after my earlier post and kindly volunteered to walk me through the Bitcoin transaction process. Merchants who use Bitpay generally set prices in dollars or euros. Bitpay then converts that to a price in Bitcoins.

One striking part of this process: Gallippi’s company guarantees a dollar or euro to Bitcoin conversion rate … for 15 minutes. Yes, 15 minutes. That’s what pricing is like when you’re talking about a currency that fluctuates in value the way that Bitcoin does. If you want to know what you can buy tomorrow for the Bitcoins you have stored today, forget about it. Your two Bitcoins might be enough to buy a cheap laptop today, and maybe a powerful computer next week … or maybe just a box of cookies.

Gallippi himself came to Bitcoin as an investor. He saw the value of Bitcoins rise when it first made the news and fall back down again. Says Gallippi: “You had guys like Chuck Schumer going on national TV saying, ‘You can buy drugs with this.’ All that did was drive up the price.” Like many Bitcoin investors, Gallippi himself is now spending some of his Bitcoins, which he got at prices were as low as two dollars. Gallippi calls that a “wealth effect,” in which investors who got Bitcoins at five or ten dollars are now toting up some of their gains. Gallippi thinks that “not a single one” of those is ready to sell all his investment.

Source: Mt. Gox.

In 24 hours, the value of a single Bitcoin on the biggest exchange, Mt. Gox, has gone as high as $266 and as low as $105.

And that’s precisely the problem. Gallippi points out a few uses in which Bitcoin fills a void, like secure international transactions from countries like Indonesia from which merchants are unwilling to take credit cards because of fraud. We can grant that. Is that likely the main clientele for Bitcoinstore.com? I seriously doubt it. I think Gallippi had it right with the wealth effect and the investors cashing in a bit of their winnings. Gallippi’s biggest client? An outfit that takes Bitcoins in payment for precious metals.

It makes sense that one of the few ways folks actually spend their Bitcoins is exchanging them for gold, another investment. In the short term the value of Bitcoins isn’t driven in any way by the actual use of Bitcoin in trade. It’s driven by speculators who see it as an investment that’s going to rise in value. The main interest in Bitcoin comes from people holding a lot of them as an investment–which, come to think, might explain why they’re so loud in insisting on Bitcoin’s many uses.

After the last few hours of Bitcoin trading, it’s hard to imagine that anyone can really imagine that the Bitcoin market is driven in any way by long-term demand for an anonymous currency. The last few hours provide an excellent demonstration that what we’re seeing here is entirely a speculative mania. Yesterday, when I started writing this post, the value of a Bitcoin spiked up as high as $266. Then it fell as as low as $105, and as of this writing trades at about $151. Mt. Gox, the biggest Bitcoin exchange couldn’t keep up with the demand–or, worse, with the selling.

If you bought Bitcoins a month ago, you’ve done very well. If you bought in yesterday it hasn’t been a very nice ride. The Mt. Gox press release explains the sudden drop as a combination of panic and technology problems. People, the release says, “started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!” Does that sound like a currency you’re eager to switch to for their everyday business dealings?

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