BITCOIN IS FLAWED, BUT IT WILL STILL TAKE OVER THE WORLD

Bitcoiners chat over dinner at the Pink Cow, a Cal-Mex restaurant in Tokyo's financial district.PHOTO: ARIEL ZAMBELICH/WIRED
THE PINK COW is the first restaurant in Tokyo that lets you pay with Bitcoin, the world's most popular digital currency. In some ways, this California-Mexican cafe – a hangout run by an American expatriate who believes in new ideas – sits at the center of the Bitcoin universe. The digital currency was created by an anonymous computer programmer who many assume is Japanese, and the first big Bitcoin exchange – the web service where so many people bought their first bitcoins – is operated out of a Tokyo office not far from this wonderfully quirky bar and restaurant in the city's Roppongi district.
But when the Tokyo Bitcoin Meetup Group holds one of its weekly gatherings at the Pink Cow – bringing together Bitcoin enthusiasts from across the city and beyond – only about a third of them actually pay for dinner and drinks with bitcoins. People like Marco Crispini, an expatriate from Britain, and Aya Walraven, who moved to Tokyo from Canada, very much believe in the digital currency. And they own bitcoins. But they prefer not to spend them because their value just keeps going up.

In other words: What they would have spent on a $20 Cal-Mex meal is now worth about $90
You can see their point. In the month since Crispini and Walraven declined to spend their bitcoins on burritos at a mid-October meetup, the value of the currency rose from about $160 on the Tokyo-based Mt. Gox exchange to well above $700. In other words: What they would have spent on a $20 Cal-Mex meal is now worth at least $90.
The trouble is that this sort of bitcoin hoarding leaves many questioning the future of the currency. If economic incentives encourage people to hoard their bitcoins rather than spend them, the thinking goes, the currency will never fulfill the extravagant promises laid down by the biggest believers, who say it will streamline monetary transactions, free the world from the financial manipulation of big government and big banks, breakdown the financial walls between nations, and, well, remake the worldwide economy.
The concerns are justified. Even some of Bitcoin's most ardent supporters – like Fred Friis, one of the Tokyo Bitcoiners who regularly spends his digital currency at the Pink Cow – say that the consistent increase in the currency's value is a "legitimate issue."
But Friis also says – and rightly so – that the issue shouldn't be exaggerated. According to many economists who have closely followed the progress of the digital money, Bitcoin's recent ups – and downs – are to be expected from a currency so young, a currency that is just now attracting major attention from the mainstream population. The bottom could fall out of the market, but the currency could just as easily stabilize and reach a point where its value is consistent enough that people no longer hoard the stuff.
Yes, Bitcoin is what some call a deflationary currency. Because the system was designed to allow the creation of only a finite number of bitcoins (see our "Bitcoin Survival Guide"), there will come a point where, as demand rises, the value of the currency will only go up (making the price of goods and services fall, hence the term deflation). And that could lead to hoarding on an even larger scale.
But that moment is a long way off, and it won't necessarily prevent the currency from flourishing, says Peter Rodriguez, a professor of economics and senior associate dean at the University of Virginia's Darden School of Business. After all, many deflationary currencies have flourished in the past.
"The analogy is gold," says Simon Johnson, a professor of entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. "Gold is a finite resource, and until the big South African discoveries in the 1890s, there wasn't that much go