Bitcoin after the bust — tulip mania or the internet?

To understand where cryptocurrencies are going, it helps to look beneath the price gyrations to see how people are actually using the technology. The data provides reason for both hope and concern. (Woody Harrington/The New York Times) -- NO SALES; FOR EDITORIAL USE ONLY WITH NYT STORY CRYPTOCURRENCIES OUTLOOK BY NATHANIEL POPPER FOR MAY, 2019. ALL OTHER USE PROHIBITED. -- less To understand where cryptocurrencies are going, it helps to look beneath the price gyrations to see how people are actually using the technology. The data provides reason for both hope and concern. (Woody ... more Photo: WOODY HARRINGTON;Woody Harrington / New York Times Photo: WOODY HARRINGTON;Woody Harrington / New York Times Image 1 of / 1 Caption Close Bitcoin after the bust — tulip mania or the internet? 1 / 1 Back to Gallery

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.

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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.

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 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.

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% 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 will admit that 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 source, LocalBitcoins, according to data analyst Matt Ahlborg. Those purchases were growing even as the price of bitcoin was falling.

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 darknet. Chainalysis numbers show that drug purchases rose last year, even when the price of bitcoin was falling.

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

That the technology hasn’t gained traction with ordinary people does not mean it won’t someday. There are still plenty of areas where, smart entrepreneurs think, the open nature of cryptocurrencies could be useful.

Many venture capitalists have made bets on ethereum and EOS, cryptocurrency networks that can be programmed for more sophisticated applications, like financial contracts, than bitcoin’s software allows.

Perhaps the biggest thing that cryptocurrencies have going for them is that serious people still want to fix the flaws. The value of digital tokens — however volatile they may be — has created incentives for people to work on them.

The latest big cryptocurrency entrant is Facebook, which is said to be working on its own digital tokens. So are several other big messaging companies.

I can’t predict the future of cybercurrencies any more than the holdout dreamers and the naysayers. But with the serious money still finding its way into the market, it is far too early to write the whole thing off.

Nathaniel Popper is a New York Times writer.