I saw this piece last week on the soaring price of baseball cards and naturally started thinking about Bitcoin. The article begins with a story about how a rare LeBron James trading card (it’s all sports cards, not just baseball cards) would now sell for over $3 million, more than ten times its price in 2016. It then reports on how the prices for rare cards of other famous players have also gone through the roof, with even cards of less great players selling for several million dollars.

The reason this got me thinking about Bitcoin is that the price of Bitcoin has also been soaring. In fact, it has risen considerably faster than the price of baseball cards, increasing more than a hundredfold over the last five years.

Bitcoin as a Currency

Bitcoin proponents see this soaring price as vindication. After all, if the price of a Bitcoin has risen more than a hundred times in just five years, then this digital currency must be extremely valuable.

There is no doubt that Bitcoin investors could have become rich through their investment. A $10,000 Bitcoin investment in 2016 would be worth more than $1.4 million today. If they had made their Bitcoin investment earlier, they would be even richer today. In that sense, at least for now, we can say that someone would have been right to buy Bitcoin as an investment.

But does this mean Bitcoin is establishing itself as a currency? In fact, Bitcoin’s soaring price argues the opposite.

One of the main features that we value in a currency is stability. This is the basis for the obsession of the Federal Reserve Board and other central banks with inflation. While they have often carried their concerns about inflation too far, needlessly slowing the economy and throwing people out of work at the first vague hint of accelerating inflation, there is a real logic to their concern.

Inflation can be a seriously disrupting force in the economy. In the most extreme cases, such as the German hyperinflation after World War I or the more recent episode of hyperinflation in Zimbabwe, the currency becomes worthless as a medium of exchange. There are famous stories in Weimar Germany of people taking wheelbarrows full of money to the bakery to buy a loaf of bread. An economy cannot function with a currency whose value plunges by the minute.

Even less serious rates of inflation can be a problem. Certainly, the inflation the United States saw in the 1970s was a problem. It peaked at just over 10 percent at the end of the decade. This inflation did not cause the economy to collapse or even stop growth altogether, but it definitely made planning more difficult, and perhaps more importantly, led people to believe they were being cheated as their pay increases were quickly offset by rapid rises in prices.

The story with Bitcoin is the exact opposite. The value of Bitcoin has been soaring, not plummeting. But if we think of Bitcoin as a currency, this means that we are seeing massive deflation. The price of items measured in Bitcoin is going through the floor.

To make this concrete, suppose someone signed a five-year lease in Bitcoin, where they agreed to pay two Bitcoins a month for office space. (Five-year leases are common for commercial properties.) At the start of their lease in 2016, they would be paying an amount equal to less than $800 a month. Today, they would be paying over $100,000 a month for the same space. Anyone who committed to this rent would either have been forced into bankruptcy or renegotiated the lease.

Imagine the same story with a wage contract. Suppose a union had negotiated a contract where its members were paid two Bitcoins a week in 2016 with an inflation clause that provided for 2 percent raises a year. If this had been a five-year contract, these workers would now be earning well over $100,000 a week.

Suppose someone had arranged loan terms where they borrowed in Bitcoin and agreed to pay 3.0 percent interest annually. If they had taken out a thousand Bitcoin loans in 2016 (just under $400,000), their annual interest payment would be almost $1.7 million today. Again, any business that had signed a contract like this would have been forced to either renegotiate or face bankruptcy.

If this sounds like I’m making up irrelevant stories, think more closely. If Bitcoin is supposed to be a currency then it has to be possible to use it as a currency. That means being able to sign contracts that work for the parties involved. A currency that soars in value is no more useful for conducting normal economic activity than a currency that plunges in values.

The Elon Musk Embrace

But Elon Musk announced that he will start allowing people to buy a Tesla with Bitcoin. The Bitcoin celebrants may see this as a big deal, but there is much less here than meets the eye.

First, it’s not clear what Musk’s motive would be in accepting Bitcoin rather than standard currencies for his cars. Perhaps he thinks that Bitcoin is a good investment for his company.

That may be the case, but if he thinks buying Bitcoin is a better investment than expanding Tesla’s production capacities, he has the option to do this whether or not he sells his cars for Bitcoins. It should be little problem for Tesla to buy a few hundred million dollars of Bitcoin any day of the week if Musk thinks this is a good use of Tesla’s funds.

In short, the Bitcoin as investment story really doesn’t make any sense. The decision for Tesla to invest in Bitcoin has nothing to do with whether it sells its cars for Bitcoin.

It is certainly possible that Musk wants to accept Bitcoin just because he thinks it is a cool thing to do. I would never get in the business of trying to read Musk’s mind, but he clearly says many things off the cuff, and it is certainly possible that he has no well-thought-out motive in accepting Bitcoin.

Of course, there is one obvious, less flattering, motive for selling Teslas for Bitcoin. One of the main attractions of Bitcoin is that it allows people to make untraceable transactions. Unlike transfers through bank accounts or credit cards, there is no traceable record of Bitcoin transactions. For this reason, Bitcoin has become very popular among drug dealers and others engaged in illegal activities.

By selling Teslas for Bitcoins, Musk will be allowing these criminals to buy his cars without going through the intermediate step of trading their Bitcoins for traditional currencies. This should make Teslas especially attractive for successful criminals around the world.

Again, I would not try to read Musk’s mind, but an unavoidable implication of his decision to accept Bitcoin is that it makes Tesla far more attractive to criminals than other high-end cars. Assuming that Musk carries through with this move, it may lead to an interesting scenario.

If Tesla becomes a popular car with drug dealers and other criminals, driving a Tesla could become grounds for suspecting someone of criminal activity. It probably wouldn’t be sufficient grounds for police to get a search warrant, but it would be a big red flag for law enforcement agencies. (I suppose the government can require that Tesla turn over information on anyone who buys a car with Bitcoin in the same way that it requires banks to report large cash deposits.)

The Future of Bitcoin

I am not going to try to make a price projection for Bitcoin. I personally wouldn’t make a bet on it, but that was true ten years ago also when it sold for less than one percent of its current price. Of course. I also wouldn’t put a lot of money in baseball cards, but who knows, the LeBron James card may sell for $30 million in a decade.

It’s still hard to not see these prices as the result of bubbles, since it is difficult to see anything like this much intrinsic value in other a sports trading card or Bitcoin. The sports trading card has the advantage in this area, since at least it is something, whereas Bitcoin is quite literally nothing.

A lesson I learned from the stock bubble of the 1990s and the housing bubble of the next decade, is that bubbles can go on much longer than seems plausible. When the stock market was hitting record levels in 1998, I felt pretty confident that it was in a bubble and that it would likely burst within six months or so. It kept going another two years.

I first wrote about the housing bubble in the summer of 2002. I again thought it was likely to burst within six months or so, but I was smart enough not to say this at the time. It didn’t finally start to deflate until 2006, with the decline first gaining serious momentum in 2007. (In fairness, I never imagined banks issuing and securitizing some of the crazy loans that propelled the later stages of the housing bubble.)

Anyhow, I have no idea how high the Bitcoin enthusiasts will push up its price. The one prediction in which I feel very confident is that it is not about to become a currency that will replace traditional currencies.