After the Bust, Are Bitcoins More

Like Tulip Mania or the Internet?

When you talk to tech industry insiders about where Bitcoin is heading, two vastly
different comparisons are inevitable: the tulip bulb and the internet.

Bitcoin’s critics say the digital tokens are like the tulip bulbs of 17th-century
Holland. They generated a wild, speculative rush that quickly disappeared, leaving
behind nothing but pretty flowers and wrecked bank accounts.

Bitcoin believers, on the other hand, want us to think about cryptocurrencies as if

they were the internet: a broad technology category that took some time to reach
its potential, even though expectations got ahead of reality in the early years. If
that’s true, last year’s crash in Bitcoin prices was like the dot-com bust; a
temporary setback before the big ideas come to fruition.

After following Bitcoin for several years, I think neither of these comparisons quite
works. Bitcoin is neither an irredeemable flop nor an economic miracle.

So what is it? We are still a few years from any sort of clarity about where this
technology will fit in the world. If we want to imagine where it might be going, we
need to look beneath the gyrating price to understand how it is being used today
and who is using it.

Speculators, drug dealers and the oppressed:

How cryptocurrencies are used right now
At the most basic level, Bitcoin has introduced a new way to hold and send around
value online. Anyone can open a Bitcoin wallet and receive money from a friend or
a stranger. The system works without any central authority, thanks to a network of
computers that is not unlike the network of computers supporting the internet.

Even after last year’s bust, Bitcoin users are generally sending somewhere
between $400 million and $800 million worth of Bitcoin across the network every
day, according to data from the blockchain, the public ledger on which all Bitcoin
transactions are recorded.

That daily volume is less than half the daily average of the payment service
PayPal. But it is much more activity than the network handled before the price
spiked in 2017.
As the proponents of the tulip bulb version of Bitcoin will tell you, most of the
transactions today are speculative: people buying and selling Bitcoin in the hope
that it will be worth more in the future. A more generous viewpoint would compare
Bitcoin to gold, a scarce commodity that goes up and down in value and provides
an alternative to national currencies.

Speculative transactions accounted for roughly 60 to 80 percent of all transactions

on the blockchain, according to Chainalysis, a start-up that does analysis of the
blockchain for big companies and governments. Most of those transactions are
Bitcoins moving between cryptocurrency exchanges around the world.

here is still quite a bit of mystery about what accounts for the other 20 to 40
percent of the transactions. No one can force Bitcoin users to register their
identity, so Chainalysis and other firms are in the dark about many transactions.
But they have identified some useful chunks.

When Bitcoin was introduced in 2009, it was described as a new way to make
payments online, without the fees that credit card companies charge. Chainalysis
estimates that last year, companies handling Bitcoin payments accounted for 0.3
percent of all Bitcoin transactions, or $2.4 billion.

This is a healthy dose of apparently legal commerce, but it was not a good sign for
Bitcoin that it was shrinking for most of last year when the price of Bitcoin was
going down, according to Chainalysis data.

Many if not most Bitcoin advocates I’ve encountered will admit it doesn’t offer
much of an improvement over traditional electronic methods of payment. In
several ways, it’s worse. Paying with Bitcoin requires you to become a speculator
on its volatile price for the time you are holding on to tokens and waiting to pay.

The payment data leads to the question of where this technology might gain
momentum, beyond speculation. The most compelling use that Bitcoin fanatics talk
about is its value to people in repressive countries that have currencies that are
even more volatile than Bitcoin.

In Venezuela, for example, Bitcoin can offer a way to move savings out of the
inflating bolívar. Because of the open nature of Bitcoin, Venezuelans can buy it
without the government stopping them.

There are stories of Venezuelans using Bitcoin to rescue their savings. Venezuelans
bought over $230 million in Bitcoin last year on the most popular platform for
sales, LocalBitcoins, according to the data analyst Matt Ahlborg. Those purchases
were growing even as the price of Bitcoin was falling.
But it caught on with only a tiny sliver of Venezuelans. And there are reasons to
wonder how many of these transactions were really just corrupt government
officials or wealthy Venezuelans who had other means of getting their money out
of the country.

People who have traveled to Venezuela have told me that most ordinary people
they spoke to would prefer to have their money in dollars instead of Bitcoin.

The bigger problem facing Bitcoin is that the practical and legal uses have
struggled to outpace illegal or clearly unethical activity.

The list of ways that Bitcoin has proved useful to criminals keeps growing, from
the ransom payments on locked-up computer files — or even hostages — to illegal
drug sales.

Many of these misdeeds are hard to quantify, but Chainalysis has managed to put
numbers on Bitcoins used to buy drugs on the so-called dark net. Chainalysis
numbers show that drug purchases rose last year, even when the price of Bitcoin
was falling.

The total dark net transactions in 2018, around $620 million, were more than twice
the amount that Venezuelans bought on LocalBitcoins.

Bitcoin fans will tell you that this is a drop in the bucket compared with how much
the dollar is used to buy drugs. But all the data I’ve seen suggests that drug
purchases account for a much larger proportion of the Bitcoin economy than their
proportion of the dollar economy. And Bitcoin has enabled new kinds of deadly
drug traffic, like the synthetic opioids that have flowed from China to small towns
in the United States.

Illegal activity, and especially pornography, played an important role in the early
internet, but nothing like what we’ve seen from Bitcoin in its early days.

Bitcoin is accessible to anyone — not so different from the internet. The problem is
that, other than speculation, none of its legitimate uses have taken hold at
anything like the pace of the illegal activity.