What is bitcoin good for?
This may be a question you've asked yourself, looking at the recent run-up in prices. Why, exactly, would you want to pay $18,000 and change to get your hands on one?
I myself have been asking that question. Is bitcoin in a bubble? Or do all those folks who are eagerly snapping it up know something that I don't?
Maybe they do. That's the magic of markets, isn't it? As individuals, we're often wrong, but markets aggregate the opinions of individuals, and over time, the errors ought to cancel each other out. So the market's guess at the value of bitcoin is probably better than mine.
Except: Markets do go into speculative bubbles (just ask anyone who bought a house in 2006). Also, the bitcoin market is a little strange. At the moment, it consists of a relatively small band of heavy enthusiasts. A bunch of those enthusiasts work in media or Silicon Valley, so their fixation gets more attention than, say, the market for Hummel figurines. But essentially, the market is similar to a market for collectibles, in that it is disproportionately composed of people who are obsessed with bitcoin.
Now, in and of itself that doesn't mean the price reflects a bubble. But it does mean that we have to go back to the original question: What is a bitcoin good for?
There are basically two answers to this: Either a bitcoin is money, or it is a payment system. This is a problem that very smart economists grapple with all the time; the question "What is money?" is perhaps the most delightfully dizzying metaphysical mystery to be found in modern economics.
The best way to think about it is that if bitcoin is a payments system, it will compete with Visa, or PayPal, or bank settlement, or some other system of moving money hither and yon. If it is money, it will compete with the dollar and the euro and the yen.
