By: Selim Cevikel

There is a lot of talk about cryptocurrencies and particularly Bitcoin to evolve into an alternative currency: That they are likely to become a form of payment and store of value.  Recent developments tend to give support to these claims.  Tesla and Square recently announced investments in Bitcoin.  Tesla said that it would start accepting bitcoin as a form of payment ”sometime in the future.”  

Even Mohamed El-Arian, ex co-head of Pimco and a respected commentator in Bloomberg News, wrote about “the possibility that bitcoin is evolving into a more widely used form of payment and store of value, two characteristics of money.”  I wrote to him expressing my doubts.  He did not immediately respond to my request for comment, and he does not need to.   So I decided to share my doubts with a broader audience.  

I argue that Bitcoin is unlikely to be a form of payment, not even for criminals, for two simple reasons: 

1) Its price is too volatile, even minute to minute.  As I am writing this article (3.13.21, 11:45), the price increased from 57K to a record of 60K in less than 12 hours.  In the past 12 months, it increased by 10X.  The pullbacks have been even faster.  You simply cannot price anything with something this volatile. 

2) It is too costly and insecure to transfer between accounts and, in and out of, fiat currency. In other words, transaction costs are high.  Only in the first nine months of 2020, 75 crypto exchanges disappeared, and together with them, Bitcoins.  

When considering a job offer, would you accept Bitcoin as a currency of choice for salary?  Would you accept Bitcoin as a form of payment for your services, whatever they may be, or for your products?  Would you borrow in Bitcoin?  Would you lend in Bitcoin?  I did not think so either.  Not a single person I posed these questions responded positively.  

There is a belief that Bitcoin serves as a form of payment for criminal activities because it is supposedly not traceable.  I am not so sure. I think this is convenient government propaganda in preparation for a crackdown. I argue that a criminal, for instance, a drug dealer, is no more likely to accept it as a form of payment than an ordinary person.  When was the last time your favorite dealer asked you to pay him in Bitcoin.  Did it ever occur to you to offer to pay him or her in Bitcoin?  

Likewise, it would be very surprising, if a drug kingpin accepted Bitcoin. After all, drug cartels, too, have a supply chain, and no one in the supply chain would accept Bitcoin as a form of payment. Would the coca growers in Peru or Bolivia accept it?  Would the corrupt government officials or US Customs take Bitcoin as a bribe?  Would the lorry drivers or submarine operators accept it?  Would the wholesaler in NYC accept it?  I think the answer to all these questions is a reassuring no.  

These businesses existed long before bitcoin was invented, and they have been doing just fine.  They use cash and then launder the money.  That’s why we have a banking system with banks like HSBC, Danske or Deutche, not to single them out but to name a few, to provide valuable laundry service.  They get caught once in a while, settle or get fined, and continue doing the same thing.  Sometimes they even do it while on probation—lather, rinse, repeat. I can only think of bitcoin as an effective detergent in the last cycle.  Even then, why would anyone need a risky instrument like Bitcoin when you have a more reliable laundromat. 

I believe Tesla’s claims are for publicity reasons.  No agent can price anything in Bitcoin for more than a second.  Even if Tesla starts accepting Bitcoin as a form of payment, almost nobody will actually use it.  It would be surprising if the share of Bitcoin transactions in total will exceed one in a million. In practice, that means nil because Tesla is a dwarf as an auto manufacturer and will not be able to sell one million cars in 2021 or, for that matter, in 2022, by its own account.  

I think Tesla’s investment in Bitcoin is irresponsible. There is a possibility, even a probability, that it may constitute a breach of fiduciary duty to shareholders, when in my opinion, inevitably, Bitcoin price will crash below its purchase price range of an estimated 35k to 40K.