Bitcoin Is the Segway of Currency

Silicon Valley thinks it's the future, but Bitcoin is more ridiculous than motorized scooters for adults.
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Can we get these half off if we pay with bitcoins? (Reuters)

We were promised jetpacks. We got Segways instead.

Well, we didn't get Segways. Nobody did. At least nobody other than mall cops, tour groups, and techies. Okay, and ironic polo players. But in any case, it's fair to say that Segway hasn't exactly been "to the car what the car was to the horse and buggy," like its founder Dean Kamen said it would. It hasn't even been to the moped what the moped was to the horse and buggy. Or what the bicycle was. It's just been a (sometimes morbid) punchline. And one that's almost too impossible to believe. Did you know that Kamen thought he'd need an around-the-clock factory churning out 10,000 Segways a week to meet initial demand? It's true. It's also true that he only needed to make 10 a week to do so.

This wasn't just self-delusion. It was mass delusion. Back in 2001, Steve Jobs thought Segway could be as big as personal computers. The venture capitalist behind Amazon thought it could be bigger than the internet. The entire internet. The only reasonable explanation for all this hype was that neither of them had actually seen someone ride a Segway. Because, as Y Combinator's Paul Graham puts it, you can't ride a Segway without looking like a "smug dork." And people generally try to avoid looking like that. They won't use something so inherently ridiculous, no matter how technically impressive it might be.

Like Bitcoin. 

Now, for those of you who aren't techno-libertarians, Bitcoin is supposed to be a virtual currency you can use to buy things online. Except it's not really a currency, and you can't really buy that much with it. It's more like a dotcom stock—circa 1999. See, in just the last month, one bitcoin has gone from closing at a then-record $192 to reaching $788 on Monday. It then opened at $502 on Tuesday, before briefly rocketing up to $900, and ultimately falling to $646. Just your average 80 percent price swing. That's totally normal for currencies ... if you multiply their biggest swings by 80.

You can kind of see these absurd price moves in the chart below. But only kind of, because the vertical up-and-downs have come so fast that they've blurred into each other. It's almost as if Bitcoin doesn't have a single price at any one time, but rather a range of possible prices that depend on the observer. (Note: the red dots show each day's closing price, and the black lines show each day's high and low).

We can see this a little better if we zoom in on just the last two months. Bitcoin prices were pretty flat from the end of September through early October, but then (relatively at least) doubled slowly. Then they doubled quickly. And then even quicker—before falling fast. Not exactly a stable store of value.

So why has Bitcoin gone parabolic? And what does this have to do with Segway? Well, the short answer is we don't know why the virtual currency has exploded. Part of it might be demand from China (which you can see in this realtime chart of who's buying Bitcoins). Part of it might be the reduced supply after the FBI shut down and seized the drug website Silk Road's substantial Bitcoin holdings. And part of it might be pure mania. But all of these are just another way of saying that Bitcoin's design makes it prone to these boom-bust cycles.

Segway certainly knows something about design problems. Though in its case, its product worked fine, if zipping around on a glorified scooter was your kind of thing. The problem was you couldn't use the product without looking insufferably pretentious. Bitcoin, though, has deeper problems. Its product doesn't work, and its early adopters are still incredibly self-satisfied—because it's making them rich. But the product really doesn't work.

See, the idea behind Bitcoin is to create a decentralized currency that central banks can't inflate and governments can't tax. Basically, digital gold. And like actual gold, the only way to get new bitcoins is to "mine" for them. That involves running a computationally-taxing program on your computer that mostly generates gibberish, but maybe, just maybe, some bitcoins too. The key, though, is that mining for more of the virtual currency doesn't create more of it. That's because there's a predetermined number of bitcoins. Specifically, there are around 12 million today, and there will be 21 million in 2040—and no more after that. Of course, this limited supply means Bitcoin should tend to increase in value against the dollar. But only tend to. See, its deflationary bias means Bitcoin prices will go up and down quite violently. Think about it this way. The supply of bitcoins can't increase much to meet increased demand, so increased demand will make prices soar. And soaring prices will make early adopters try to cash out their winnings—which will send prices crashing back down.

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Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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