Bitcoin has become the currency that's hard to spend: Don Pittis

As a store of value, bitcoins have fulfilled their currency-like function in spades. But trying to price your goods or services in bitcoins is a fool's errand.

Its astronomical value may seem like a success until you try to price your goods or services in bitcoins

In May 2010, the first person to buy physical goods with bitcoins bought two pizzas for 10,000 bitcoins, which today would be worth $82 million Cdn. (Sergei Karpukhin/Reuters)

You'd have to be crazy to spend $82 million for two pizzas. 

But according to bitcoin lore, on May 22, 2010, Laszlo Hanyecz became the first person to buy real physical goods with the sparkling new cryptocurrency when he paid 10,000 bitcoins for two Domino's pizzas.

When Hanyecz bought his pizzas, a bitcoin was worth a fraction of a cent. As bitcoin crashes through new highs this week — a single bitcoin is worth just over $8,200 Cdn — that would make the pizzas cost $82 million. 

If you're like most people, right now you're probably thinking about how rich you would be if only you had bought a few pizzas' worth of bitcoins a mere seven years ago and held onto them.

But while the cryptocurrency may seem like a success, that crazy multiplication in the value of the bitcoin has almost completely derailed its initial purpose. For all intents and purposes, a bitcoin has become the currency that's hard to spend.

In a wage economy, the purpose and value of money is twofold. One is as a store of value. In other words, if you do a day's work today you want to be able to save up the value of that work and spend it on weekend beer, a winter holiday or keep it for when you're old.

As a store of value, so far, bitcoins have fulfilled their currency-like function in spades. 

But the other essential value of money is as a measure of pricing and exchange. This is where the bitcoin has fallen down.

The bitcoin and its virtual wallet was intended to replace currencies, but no one wants to be modern day Laszlo Hanyecz. Even more important, trying to price your goods or services in bitcoins is a fool's errand.

Stable pricing needed

The only way to do it would be to have a parallel running tally of the value of bitcoin in "fiat money" so despised by bitcoin enthusiasts.

Some argue that cryptocurrencies are too fiat money, but the big advantage of loonies, or U.S. dollars or even gold is that they remain relatively stable compared to other prices in the economy.

If you have to convert from bitcoins to U.S. dollars to pizzas to know how much your money is worth, it is the U.S. dollar, not the bitcoin that is the measure of exchange. The bitcoins are merely a speculative investment.

With some economically inclined friends, I was puzzling over a historical equivalent of the bitcoin phenomenon where a currency rises exponentially in value.
A functioning economy needs stable prices but in times of hyperinflation when a currency changes in value hour by hour, businesses often can't cope. (Andres Stapff/Reuters)

One comparison that works is created by its opposite, hyperinflation — that extraordinary collapse in the value of money usually caused by mismanagement by a country's treasury.

The classic case was prewar Germany where ultimately people required wheelbarrows of paper currency to transact everyday business.

It is well known that stable pricing is essential to a healthy economy. 

The destabilizing effect of changing prices will be familiar to Canadians who have lived in places like Brazil or Zimbabwe where merchants used chalk boards to update on an hourly basis.

In those places, the U.S.dollar appeared to people trading the local currency similar to the way bitcoin has appeared this year, soaring higher and higher with no prospect of decline.

If that is the correct model for what we are seeing now, then all the world's fiat currencies are collapsing while bitcoins retain their true value.

The tulip mania

But there is another time when we have seen exponential curves like the bitcoin graph above.

That has been during periods of speculative madness, such as the famous tulip mania in the Netherlands where people who hardly knew their tulip from their onion were buying up bulbs in the certainty they would become rich. Of course, that ended badly.

A fortune in tulips is blooming on Parliament, but only if you price them at 1637 prices during the Dutch tulip mania when a single bulb was worth the price of a house. (Jim Young/Reuters)

Earlier this week, a colleague popped over to my desk and asked me if I knew anything about the cyrptocurrency.

"Are bitcoins used for anything other than criminal activity?" she asked. 

The question had arisen because a friend's husband had recently bought some to take advantage of the soaring prices and the friend wanted to be reassured that he wasn't participating in something crooked. 

Of course bitcoins are used for legal trade, but when she asked, it struck me that one of the places where cryptocurrencies retain their worth despite a soaring or uncertain value is where anonymity is paramount.

In such uses as smuggling money out of a country with currency controls, moving cash under the radar of tax collectors or police, the inconvenience of changing price levels may be well worth the cost, thus contributing to bitcoin's astronomical value.

That may change as bitcoin alternatives, such as Canada's Ethereum, become more universally traded. 

As traders watch bitcoin values soar, it's hard not to think of each new cryptocurrency launch as a path to speculative riches. 

But if one of the new electronic currencies really wants to replace the fiat money that we use every day, becoming a true universal unit of exchange, the one they invent cannot act like a rocket ship heading for space.

Instead, the winning computer whizzes whose names will go down in history are those who invent a cryptocurrency where we will all know the value not only now and next year but decades into the future.

Follow Don on Twitter @don_pittis

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