Joe Nocera in the New York Times points out that the internet needs a digital currency but that the key trait behind bitcoin could be why it doesn’t fulfill that need:
Whenever I read a story about bitcoin, the virtual currency that has been so much in the news these days, I think about a man named Dee Hock. In the early 1970s, Hock created the credit card system that we now know as Visa. Hock was a man who liked to think grandiose thoughts. When it came to Visa, and credit cards in general, Hock used to describe them not just as a way to get a short-term loan but as a new kind of payment system, an exchange of value that was on par with, and that competed with, cash.
As it turns out — and the bitcoin experience is helping to illustrate this — Hock’s description of credit cards was more than a little hyperbolic. Yes, you could now use a small plastic card instead of cash to buy something, but that card had value because it connected both the buyer and the seller to a fiat currency. People trusted it because they believed in their country’s currency and financial institutions. The exchange of value was never the credit card itself; it was still the dollar, the pound, the yen.
Bitcoin, on the other hand, is truly a new form of payment system, unconnected to any currency or any government. Its libertarian proponents in Silicon Valley love that about it; they talk about it as a potential disrupter of traditional financial institutions. It has value not because a government has decreed and backed its value — the classic definition of a fiat currency — but because a community of users has decided to give it value. Its current travails, however, suggest that may also be its inherent flaw: that however much we say we mistrust governments and banks, when it comes to our money, we trust them a lot more than we trust some clever lines of computer code.
Venture capitalist Ezra Galston writes in the Wall Street Journal, “without a regulatory framework, credible payment processors — such as PayPal, Dwolla or Square — cannot service bitcoin exchanges. And because payment processors are vital for converting fiat currencies into virtual deposits, bitcoin operators will be forced to move downstream into the black market.” Mr. Galston concludes by asserting that “the bitcoin community must embrace external regulation to ensure that credible vendors may participate in payment processing.”
Hundreds of bitcoin supporters have tweeted attacks at me for arguing that bitcoin is not real money. But historically, money must be a reliable medium of exchange, and a reliable store of value. Bitcoin meets neither of these definitions.
How can you transact using so-called digital money when prices fluctuate by hundreds of dollars in the space of an hour, or less? You might think you bought something for $500. But by the time the retailer processes payment, the so-called digital-currency price drops to $100.
Both buyers and sellers lose big because bitcoin is not a reliable medium of exchange with a dependable store of value. It is backed by nothing but pure speculation. You can’t even hedge it, because there’s no interest rate. You can barely even get a price quote — not for the value of the product being bought or sold, but for the value of the monetary medium of exchange.