As Bitcoin’s exchange rate against the dollar reached an all-time high on Monday, media outlets responded with amazement. An article in Business Insider read, “On May 22, 2010, developer bought two pizzas using 10,000 units of a then-little-known digital currency called bitcoin. Today, 10,000 bitcoins are worth more than $20 million (£15.4 million). Bitcoin is going nuclear.” These prices may continue to rise, but how close is Bitcoin to becoming an important part of the global economy? At the time of this writing, at record prices, the total value of the 16.3 million bitcoins in circulation is $36.8 billion. That’s a little less than the annual GDP of Ghana.
Rather than Bitcoin itself changing the world, it might be more accurate to think of it as a beta test of a technology that could change the world. Blockchain, the distributed database technology that was invented to run Bitcoin, can and does power numerous other digital currencies with wide array of features. It also has numerous other potentially important applications in banking, information management and other fields, as we’ve previously discussed. With such a new technology, it would be naïve to assume that digital currencies or other applications in use decades from now will look anything like Bitcoin.
Casual empiricism is enough to know that only a tiny fraction of the retailers with whom we shop today accept Bitcoin. In the amount of time it would take for consumers and firms to build the infrastructure and especially trust to make Bitcoin a fully viable currency, we will likely see numerous new innovations related to digital currencies. The current debate over changing Bitcoin’s code to speed up transactions is just one issue that new competing currencies could solve.
None of this means Bitcoin is necessarily overvalued, nor that it couldn’t have a much larger impact on the global economy than it currently does. Rather, it means we should view Bitcoin as a useful test case of the underlying technology. Its future successes or failures are not the last word on the viability of digital currencies—failures are in fact very useful in improving the next generation of Bitcoins. It took a shakeout of massive proportions before the internet became fully integrated in our economy—we would be wise to expect the unexpected with digital currencies and other applications of blockchain technology as well.
Source of chart: https://www.worldcoinindex.com/coin/bitcoin
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