Last week, Vox writer and Bitcoin evangelist Timothy B. Lee wrote a piece entitled “Why I’m Investing in Bitcoins.” By the end of the day, he wasn’t.
Lee, a former Washington Post reporter, has long been a Bitcoin believer, and he acknowledged that he had bought Bitcoins in early 2012 for about $7 apiece. He sold them in May 2013, for $120 each, when he joined the Post, in accordance with the paper’s ethics policy.
When he followed the Post’s Web wunderkind Ezra Klein to Vox, Klein allowed Lee to buy the virtual currency again. In his piece, Lee extols the virtues of Bitcoins. He discusses how they are probably undervalued at the current price of about $500 and how they are likely to become the foundation for payment systems in the future:
Right now, many bitcoins are held by speculators, but if it became used routinely then we might expect each bitcoin to be spent about once per month, which is a typical rate for conventional currencies. Based on the value and number of bitcoins today, that would correspond to $72 billion in Bitcoin transactions per year.
That would be about as large as the Western Union network, which transmitted $79 billion in 2012. It would be a third the volume of the Paypal network, which transmitted $7000 per second in the second quarter of 2014 — or around $220 billion per year. It’s 50 times smaller than MasterCard, which processed $3.6 trillion in payments in 2012.
The column sparked a backlash on Twitter, where some readers thought it represented a conflict of interest for Lee to invest in Bitcoins while also touting the potential for their growth. Ultimately, Klein, who’s Lee’s editor at Vox, agreed.
In an editor’s note, Klein said initially he didn’t see any problem with the investment:
I ended up saying yes for a few reasons, and with a few conditions. First, Bitcoin is a large and liquid market that struck me as less like an individual stock and more like, well, a market unto itself. Second, the strange process of buying, holding and selling Bitcoins is, itself, part of the Bitcoin story — and it seemed to me there was value in understanding it, and even writing about it, firsthand. Third, we agreed that the value of the holdings would be capped around $2,000, so I didn’t see this as an investment meant to generate personal financial gain. Fourth, we agreed that the holdings would always be clearly disclosed.
I wrote about Bitcoins for Texas Monthly several months ago, and I agree with a number of Klein’s points, especially the part about understanding the buying process. (I set up a virtual wallet and studied the process but never actually purchased a Bitcoin.)
I also agree with the reasoning that Bitcoins have characteristics that are more like a market than a stock. But I disagree with Klein’s statement that Bitcoins are “a large and liquid market.” As Lee points out, the current value of all Bitcoins in circulation is about $6 billion, and many are held by speculators. In other words, for a global system of currency, it isn’t that big, and it isn’t very liquid.
In fact, that’s the reason for Bitcoins’ volatility. By going on to tout what he sees as the future value of Bitcoin, Lee actually could have pumped up the entire market. That doesn’t seem to have happened. In fact, Bitcoin prices fell after the story came out, although they did have a big jump the day before.
It’s unlikely that Lee’s story, which also raised cautions about Bitcoin investing, had any impact on price. But like penny stocks, Bitcoins value can be more easily influenced by speculators, and that puts Lee — and more importantly, Vox — in an uncomfortable position.
As Klein ultimately concluded, it’s better to err on the side of caution.