Financial Times Capital Markets Editor Dan McCrum has written another piece about how bitcoin is a pyramid scheme and will eventually fall to zero. You’d think people would learn their lesson after the 118th time bitcoin was falsely declared dead, but it appears that the critics are going to keep saying bitcoin is destined to crash to zero no matter how many more years it proves its usefulness in the global economy.
In his most recent piece, McCrum appears to accidentally make the case for buying bitcoin. The reasons for doing so may be that McCrum has not done much research on the topic. How else could you mistakenly refer to Blockchain, which is the most popular and well-known bitcoin wallet provider, as “Bitcoin Info.”
Let’s take a look at McCrum’s most recent article to see what he got right and wrong.
Bitcoin is Still a Drop in the Bucket
The opening section of McCrum’s piece is quite accurate. When compared to the vast majority of government-backed currencies around the world, bitcoin is nothing more than a drop in the bucket—both in terms of market cap and liquidity.
Having said that, the mere fact that an experiment in digital cash can compete with the currencies of sovereign nations by any metric is remarkable.
Bitcoin as a Medium of Exchange
Where McCrum begins to go off the rails is when he talks about bitcoin as a medium of exchange. He writes:
“Except treating bitcoin as an investment means it can’t be a currency, and vice versa. The problem is that a medium of exchange prone to collapsing or quadrupling in price is useless as a practical currency, whatever the cryptographic elegance of its creation.”
The first thing to get out of the way is that bitcoin volatility has been declining since it was first possible to trade it on an exchange. It makes sense for the world’s first ever digital bearer ecash to be volatile in the early years after its release into the wild.
Secondly, people are already using bitcoin as a medium of exchange. Ransomware became a $1 billion industry in 2016. The darknet markets are possibly an even bigger industry as over $300 million is estimated to be traded via publicly viewable listings. McCrum and others may not like that these types of use cases for bitcoin as a medium of exchange exist, but that doesn’t make them any less real.
Ironically, McCrum has written about the need to use bitcoin for darknet market payments and access to Ponzi schemes, such as MMM Global, in the past.
In reality, one of the biggest issues with bitcoin right now is that too many people are using it as a medium of exchange. Demand for on-blockchain bitcoin transactions is so high that the network is approaching its effective capacity limit for transactions. Whenever that capacity limit is reached, users begin to outbid one another for precious space in the next block of transactions.
With 85 percent growth in volume at LocalBitcoins last year, it appears bitcoin’s role in helping those who need an alternative to the traditional financial system is only growing.
The Old, Tired Pyramid Scheme Argument
Near the end of his piece, McCrum travels back to 2011 to find his final argument, which is that bitcoin is a pyramid scheme that will crash to zero. He writes:
“As a phenomenon bitcoin has all the attributes of a pyramid scheme, requiring a constant influx of converts to push up the price, based on the promise of its use by future converts. So the ultimate value for bitcoin will be the same as all pyramid schemes: zero.”
The accusation that bitcoin is a pyramid scheme or Ponzi scheme is one that has popped up plenty of times over the years. It’s actually not that wild of a claim, but the issue is when it is not applied equally to all assets. For example, if bitcoin is a pyramid scheme, then gold must also be considered a pyramid scheme because its price acts in a similar manner.
The prices of both bitcoin and gold are much higher than their underlying utility outside of the store of value use case, but that doesn’t make either a pyramid scheme by default. If bitcoin and gold are pyramid schemes, then the US dollar must also be a pyramid scheme because it was bootstrapped by gold.
One of the key differences between an outright pyramid scheme and bitcoin, gold, or the US dollar is the underlying utility offered by the asset. Much like US citizens need US dollars to pay their taxes, drug users need bitcoin to do their shopping on the darknet markets.
Now that we’ve established bitcoin has utility as a censorship-resistant medium of exchange and store of value, perhaps it will be easy to see why some view bitcoin’s relatively low liquidity and market cap as an opportunity rather than a sign it isn’t anything worth watching.