November 28, 2017 Reading Time: 2 minutes

I’m turning 40 next year, and I’m fond of telling people that the only reason it’s a significant number is because humans happen to have 10 fingers, leading to our base-10 numbering system. It comforts me immensely, though others mostly smile politely and change the subject. At the time of this writing, Bitcoin is having its own 10-finger moment, flirting with an exchange rate of $10,000.

I’ve written before about how the long-run price of Bitcoin will depend on whether it actually becomes a widely used currency. Though it may seem counterintuitive, the dramatic increase in the cryptocurrency’s value we’ve seen this year may prove an impediment to that future being realized.

More and more retailers are accepting Bitcoin as payment, though not in the way you might think. The vast majority of businesses quote their prices in dollars. When you pay using Bitcoin, they charge you the number of bitcoins that equal the price of the item in dollars at the current exchange rate. Then they almost always turn right around and convert those bitcoins back to dollars.

The consumers most likely to take these retailers up on their offer are Bitcoin enthusiasts, most of whom likely believe the cryptocurrency’s price will continue to rise. The problem is that nobody in their right mind who expects Bitcoin to continue to appreciate would ever spend it in the way described above. Why on earth would I pay you at today’s BTC/USD exchange rate if I believed the price of Bitcoin could quadruple in the next year?

There are certainly instances where this method of payment isn’t a gimmick — for instance, any cross-border or highly confidential payment that is better settled on a blockchain than by traditional methods. But to become a viable store of value that businesses accept and hold, Bitcoin’s price against the dollar will have to stabilize significantly. If Bitcoin truly became a global currency, simple math tells us its price would be far higher than it is even today. But ironically, to maintain such a high value in the long run (and thus be used as a currency), its dramatic rise would have to moderate.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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