SAN
FRANCISCO — When you talk to tech industry insiders about where Bitcoin
is heading, two vastly different comparisons are inevitable: the tulip
bulb and the internet.
Bitcoin’s
critics say the digital tokens are like the tulip bulbs of 17th-century
Holland. They generated a wild, speculative rush that quickly
disappeared, leaving behind nothing but pretty flowers and wrecked bank
accounts.
Bitcoin believers, on the
other hand, want us to think about cryptocurrencies as if they were the
internet: a broad technology category that took some time to reach its
potential, even though expectations got ahead of reality in the early
years. If that’s true, last year’s crash in Bitcoin prices was like the
dot-com bust; a temporary setback before the big ideas come to fruition.
After
following Bitcoin for several years, I think neither of these
comparisons quite works. Bitcoin is neither an irredeemable flop nor an
economic miracle.
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So
what is it? We are still a few years from any sort of clarity about
where this technology will fit in the world. If we want to imagine where
it might be going, we need to look beneath the gyrating price to
understand how it is being used today and who is using it.
Speculators, drug dealers and the oppressed: How cryptocurrencies are used right now
At
the most basic level, Bitcoin has introduced a new way to hold and send
around value online. Anyone can open a Bitcoin wallet and receive money
from a friend or a stranger. The system works without any central
authority, thanks to a network of computers that is not unlike the
network of computers supporting the internet.
Even
after last year’s bust, Bitcoin users are generally sending somewhere
between $400 million and $800 million worth of Bitcoin across the
network every day, according to data from the blockchain, the public ledger on which all Bitcoin transactions are recorded.
That
daily volume is less than half the daily average of the payment service
PayPal. But it is much more activity than the network handled before
the price spiked in 2017.
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As
the proponents of the tulip bulb version of Bitcoin will tell you, most
of the transactions today are speculative: people buying and selling
Bitcoin in the hope that it will be worth more in the future. A more
generous viewpoint would compare Bitcoin to gold, a scarce commodity
that goes up and down in value and provides an alternative to national
currencies.
Speculative transactions
accounted for roughly 60 to 80 percent of all transactions on the
blockchain, according to Chainalysis, a start-up that does analysis of
the blockchain for big companies and governments. Most of those
transactions are Bitcoins moving between cryptocurrency exchanges around
the world.
There is still quite a
bit of mystery about what accounts for the other 20 to 40 percent of the
transactions. No one can force Bitcoin users to register their
identity, so Chainalysis and other firms are in the dark about many
transactions. But they have identified some useful chunks.
When
Bitcoin was introduced in 2009, it was described as a new way to make
payments online, without the fees that credit card companies charge.
Chainalysis estimates that last year, companies handling Bitcoin
payments accounted for 0.3 percent of all Bitcoin transactions, or $2.4
billion.
This is a healthy dose of
apparently legal commerce, but it was not a good sign for Bitcoin that
it was shrinking for most of last year when the price of Bitcoin was
going down, according to Chainalysis data.
Many
if not most Bitcoin advocates I’ve encountered will admit it doesn’t
offer much of an improvement over traditional electronic methods of
payment. In several ways, it’s worse. Paying with Bitcoin requires you
to become a speculator on its volatile price for the time you are
holding on to tokens and waiting to pay.
The
payment data leads to the question of where this technology might gain
momentum, beyond speculation. The most compelling use that Bitcoin
fanatics talk about is its value to people in repressive countries that
have currencies that are even more volatile than Bitcoin.
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In
Venezuela, for example, Bitcoin can offer a way to move savings out of
the inflating bolívar. Because of the open nature of Bitcoin,
Venezuelans can buy it without the government stopping them.
There are stories
of Venezuelans using Bitcoin to rescue their savings. Venezuelans
bought over $230 million in Bitcoin last year on the most popular
platform for sales, LocalBitcoins, according to the data analyst Matt Ahlborg. Those purchases were growing even as the price of Bitcoin was falling.
But it caught on with only a tiny sliver of Venezuelans. And there are reasons to wonder
how many of these transactions were really just corrupt government
officials or wealthy Venezuelans who had other means of getting their
money out of the country.
People who
have traveled to Venezuela have told me that most ordinary people they
spoke to would prefer to have their money in dollars instead of Bitcoin.
The
bigger problem facing Bitcoin is that the practical and legal uses have
struggled to outpace illegal or clearly unethical activity.
The list of ways that Bitcoin has proved useful to criminals keeps growing, from the ransom payments on locked-up computer files — or even hostages — to illegal drug sales.
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Many
of these misdeeds are hard to quantify, but Chainalysis has managed to
put numbers on Bitcoins used to buy drugs on the so-called dark net.
Chainalysis numbers show that drug purchases rose last year, even when
the price of Bitcoin was falling.
The
total dark net transactions in 2018, around $620 million, were more
than twice the amount that Venezuelans bought on LocalBitcoins.
Bitcoin
fans will tell you that this is a drop in the bucket compared with how
much the dollar is used to buy drugs. But all the data I’ve seen
suggests that drug purchases account for a much larger proportion of the
Bitcoin economy than their proportion of the dollar economy. And
Bitcoin has enabled new kinds of deadly drug traffic, like the synthetic opioids that have flowed from China to small towns in the United States.
Illegal activity, and especially pornography, played an important role in the early internet, but nothing like what we’ve seen from Bitcoin in its early days.
Bitcoin
is accessible to anyone — not so different from the internet. The
problem is that, other than speculation, none of its legitimate uses
have taken hold at anything like the pace of the illegal activity.
Ethereum, Dapps and Facebook: Looking to the future
That
the technology hasn’t gained traction with ordinary people does not
mean it won’t someday. There are still plenty of areas where, smart
entrepreneurs think, the open nature of cryptocurrencies could be
useful.
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Many
venture capitalists have made bets on Ethereum and EOS, alternative
cryptocurrency networks that can be programmed for more sophisticated
applications, like financial contracts, than Bitcoin’s software allows.
Programmers
have already built thousands of so-called decentralized applications,
or Dapps, that use the EOS and Ethereum tokens. Many of them can be used today.
These Dapps can move money around and record ownership of digital
goods, like items in video games, without a central company keeping the
records.
But a majority of these
Dapps still focus on legal gray zones, like gambling. The most prominent
use of Ethereum so far has been by companies, many of them scams and
frauds, that wanted to raise money without complying with securities regulations, through so-called initial coin offerings.
I
have seen little indication that any of the more legitimate uses have
worked easily enough to have any appeal beyond cryptocurrency fanatics.
Perhaps
the biggest thing that cryptocurrencies have going for them is that
serious people still want to fix the flaws. The value of digital tokens —
however volatile they may be — has created incentives for people to
work on them.
The latest big cryptocurrency player is Facebook, which is said to be working on its own digital tokens. So are several other big messaging companies.
I
can’t predict the future of cybercurrencies any more than the holdout
dreamers and the naysayers. But with the serious money still finding its
way into the market, it is far too early to write the whole thing off.
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