International Forecaster Weekly

The Four Million Dollar Pizza

...before the Bitcoin evangelists get bent out of shape, I am not saying that Bitcoin does not have the potential to be a currency... But a currency that you can't use in your day to day life is not much of a currency at all... I encourage you to look for a place within 10 blocks of wherever you are sitting that accepts Bitcoin.

James Corbett | November 16, 2013

            We've all heard the story of Weimar hyperinflation by now. How people had to carry wheelbarrows full of money just to buy the groceries. How it was cheaper to burn money for kindling than to buy actual kindling with the money. How people dining out would pay before they ate because the currency would have depreciated by the time they finished their meal. This image of hyperinflation and its attendant ills are by now burned into the consciousness of many who are expecting a similar collapse to happen in the dollar or other major currencies sometime soon.

            As I say, we all know about hyperinflation. But what does its opposite look like? “Hyperdeflation,” or a rapidly appreciating currency, is not a concept we're used to thinking about, but it's exactly what we're looking at with Bitcoin.

            For those who don't know, Bitcoin, the digital cryptocurrency, has been skyrocketing in recent weeks. As of press time, Bitcoin are trading at $455 USD, up from $150 just a month ago At the beginning of the year it was trading around $13.50. Three years ago it was at a quarter of a penny. This is a currency in hyperdeflation.

            So what does this mean? A standard piece of Bitcoin lore is the story of the multi-million dollar pizza. It started back in May 2010 when one early Bitcoin adopter managed to persuade another Bitcoin user to buy him a pizza from a local restaurant and deliver it to his home for 10,000 Bitcoin. In effect he ordered delivery pizza for an amount of Bitcoins that at the time was equivalent to $25. He was proud enough to post a message announcing his success on a Bitcoin user forum and was congratulated heartily on his accomplishment. He had put his BTC to use!...

            ...But the joke's on him. Soon people were linking to his post and noting that the pizza in current BTC would be equivalent to $750,000. Then it was the $2.3 million dollar pizza. As of today it would be the $4.5 million dollar pizza. If that user had hung onto his Bitcoin instead of trading them for a pizza, he would literally be a millionaire by now.

            The story is instructive because it shows that the strategy in a hyperdeflationary currency is to hold on to it. Whatever you buy with your Bitcoin today, there's a good chance you could buy 10 of them in a month with the same amount of coin. Or a hundred. Or a thousand. The sky is the limit.

            So what causes a currency to triple in value in a month? Or rise 34-fold in a year, as it has so far year-to-date? Or rise in three years to the point that spending $25 on a pizza is equivalent to spending $4.5 million today? Good question. Unfortunately for the Bitcoin enthusiasts, it's also the same thing that causes the value to fall by 300% in a week, as we saw this past April with the price plummeting from $230 to $70 in a matter of days. Bitcoin investing, perhaps even more so than any other market right now, is not for the faint of heart.

            So what's happening? Well it boils down to the fact that Bitcoin is not yet a currency. Not really, anyway. Oh, sure, there are the “proof of concept” people who have taken on various challenges (Bitcoin roadtrips, only buying with Bitcoin, etc.) demonstrating that just about anything you need can be bought with Bitcoin one way or another...but those stories are usually filled with examples of how Bitcoin enthusiasts will go out of their way to help out other Bitcoin enthusiasts (usually by using a regular currency to buy needed items for their Bitcoin-dependent friends). In a way, all this shows is that Bitcoin is still very, very far from being a currency that your average Joe Sixpack has even heard of, let alone knows (or cares) how to use.

            Now before the Bitcoin evangelists get bent out of shape, I am not saying that Bitcoin does not have the potential to be a currency, and a useful one at that. Who wouldn't prefer to use a currency that can't just be printed off by decree of a central bank, after all? And what's not to like about the ability to send money instantaneously across borders without the possibility of capital control or government oversight?...But having said that, a currency that you can't use in your day to day life is not much of a currency at all, and if you don't believe me about the lack of ability to use this money, I encourage you to look for a place within 10 blocks of wherever you are sitting that accepts Bitcoin.

            So the spikes and troughs we've seen in Bitcoin's (mostly) stratospheric rise this year, to the extent that one can make sense of them at all, can be traced back to events that impact the potential future utility of the currency. Take the recent Silk Road shutdown, for example. The Silk Road was an online exchange on a secretive cranny of the internet called the Dark Web where people traded Bitcoin for all manner of illicit goods, from illegal drugs to murderers-for-hire. It was, perhaps unsurprisingly, “raided” early last month when the site's founder and proprieter, Ross Ulbricht, was arrested in San Francisco, and the site's assets, including its domain, its servers, and its 26,000 Bitcoin fortune (then valued at $3.6 million, now worth ) were seized by the FBI. Bitcoin proponents tend to downplay the significance of the site, but it has been estimated that the Silk Road accounted for 4.5% of all Bitcoin transactions. Thus it was no surprise when the currency started to plummet on the news, falling as much as 33% before immediately starting to recover.

            So far, so logical. But here's where it gets weird: since that event, which brought out the Bitcoin doomsayers in droves (as expected), the currency has not just recovered but positively boomed. It ran up to $230 before pulling back, then early this month began it's nearly straight-up curve, bashing through the previous high of $255, now scraping $450 and continuing to climb. So if news of the largest currency seizure and the shutdown of a major exchange barely phase the currency and ultimately start an amazing run-up in the price, and if the news last week that the largest theft of the currency has taken place ($1 million worth stolen from an Australian Bitcoin bank) similarly had no effect in derailing the rise of the currency, then what on earth is it responding to?

            At this point, there's only one answer: speculation. Some will give various accounts of moves, from heavy volume trading days to increasing adoption of the currency to the fact that China is now operating the world's biggest bitcoin exchange. But such non-answers are precisely that: non-answers. They don't explain the dramatic rise. Why now? As the bandwagon investor would reply: Why not?

            So is this all Tulipmania 2.0? Well, yes and no. It certainly is an hysterical price rise, and one that can't be justified by any fundamentals to do with the currency itself. And now that Bitcoin is more and more on the lips of people you'd least expect to hear it from, it has the air of the last stage of a bubble, where everyone starts to pile on to the next sure thing.

            But having said that, Bitcoin does have some fundamentals on its side. There will only ever be 21 million Bitcoins in the world, and 12 million have been digitally “mined” so far. As long as people continue to use them (or at least want them), there is really nowhere for the value of Bitcoin to go but up...when measured against Federal Reserve toilet paper, that is.

            So is Bitcoin an investment? Is it a buy, hold or sell? Can it, as its most fervent acolytes claim, be the answer we are seeking to our monetary problems, a limited supply, anonymous, highly liquid currency that can destroy the ages-old bankster paradigm of fiat paper? Well, that depends on how optimistic you are. Those who are not so optimistic fret about the increasing attention that the currency is receiving from lawmakers, and some of the moves that have already been made to clamp down on Bitcoin banks and exchanges. Mt.Gox, for example, formerly the largest Bitcoin exchange, ran into problems with US regulatory authorities earlier this year when the feds seized $5 million worth of funds from the exchange's American bank accounts because the company failed to disclose its “money transfer” activities. The seizure put an end to Mt. Gox's plan to open a Bitcoin brokerage in North America to help facilitate the currency's exchange into and out of dollars, and similar worries are putting large question marks over whether or not the regulators will ever allow the currency to be widely adopted.

            On the other side of the coin (pun intended), are breakthroughs big and small. On the small side, Vancouver recently became host to the world's first Bitcoin ATM, allowing users to deposit and withdraw Bitcoins with dollars. It reportedly handled $100,000 of exchanges in its first day.

            On the much, much bigger side, is something that was announced at last May's Bitcoin 2013 conference in San Francisco. There, Edan Yago, CEO of Epiphyte, made the bold claim that a group of concerned citizens are going to be bringing an autonomous region into existence somewhere in the Americas by the end of the year that will honor and enforce cryptocurrency contracts and exchanges, as well as adhering to a number of other ideals of freedom and openness. In other words, if Yago is to be believed there may soon be a political region whose “national currency” is Bitcoin.

            All of this seems too fast, too much, and too soon for a currency that was only born a handful of years ago. And it is. But this is the internet age, and whatever else Ray Kurzweil and the transhumanists may be wrong about, they are demonstrably right about pointing out the accelerating pace of technological change. Which leaves us back at the question: is Bitcoin a good investment? Your answer to this question is likely contingent on your answer to a further question: could you ever imagine yourself buying a pizza with BTC? If not, you might want to hold off on getting some Bitcoin.

            As for me, I have a grand total of 2 Bitcoin in my donation wallet on my website, mostly donated to me when Bitcoin's price was a tenth of what it is now. I've never spent any of it (all too wary of the $4 million dollar pizza scenario), and don't plan on spending it any time soon. Welcome to hyperdeflation.