A lot of people have been asking me what I think about this whole ‘bitcoin’ thing.
In case you’ve missed it, bitcoin is a new digital or cypto-currency (in that it only lives in encrypted data.) Its origins are shrouded in myth but was probably invented by a tech head in Japan. Astroboy I think his name was…
And that’s the key thing. There’s no central body standing behind it. The currency lives on peer-to-peer networks, free of government oversight and intervention. People argue that this is one of the biggest things bitcoin has going for it.
For three years bitcoin did very little. Most people thought it was just another way for computer geeks to fill in time. That was before this year. Bitcoins were trading around US$10 each at the beginning of the year. Last time I looked, they were up around $1200 each!
And all of a sudden people are talking about a bitcoin revolution – that bitcoin is set to become the world’s next reserve currency. (There are rumours that even China has started buying up bitcoins.) Bitcoin will do to commerce what the internet did to life.
And so where do I stand on it?
Well, if you’re looking for some firm conclusions, you’re out of luck (though I’ll still offer up a few modestly-informed opinions.) It’s entirely new, and so I’m interested to hear what my readers make of it all. You’re a more educated lot than I am.
But at the end of the day, the future of bitcoin will be determined by what where the consensus on what it’s worth settles. It could go either way. As every investor knows, predicting the herd is a tricky business.
But let’s just say that I retain a healthy scepticism. At the moment, it doesn’t appear to me that bitcoin has the fundamentals to do what it proponents claim it will do. That’s not to say that it won’t. Stranger things have happened. But for the time being, I’m a bitcoin sceptic.
So let’s look at the case bitcoin is making. This is a reasonable place to start. When the internet or the telephone came along, they were offering something radically new. However, in bitcoin’s case, we already have money. We already have mechanism of commerce. If bitcoin wants to take its place, then it needs to show that it is a better way of doing things. And for bitcoin to fly, it needs to convince the world.
So where do we start?
1. The draw of digital
One of the key arguments is that bitcoin is a digital currency. It can be traded here there and everywhere in the blink of an eye. It’s also infinitely divisible. You can have a tenth of a bitcoin, or a gozillionth of a bitcoin. It has a lot of utility.
I think this is true, but it doesn’t impress me all that much. I regularly buy things from overseas. Sure, there are transaction costs involved, fees and charges. But they’re a relatively small percent of the cost. It hasn’t got me hungering for a costless alternative. And in part, I’m kina happy to pay for the security and convenience.
2. Non-reversible
That brings us to another purported benefit – that once a transaction is made it can’t be reversed. I guess that’s in contrast to credit card transactions that can be disputed?
I really don’t get this at all. Sure this might be good if you’re selling something on line. Once someone pays you, you’re paid. But what about buyers? What happens if I refuse to send you your stuff?
Commerce depends on trust. So we would construct trust mechanisms – verification systems, insurance etc. But this just takes you back towards the system (and extra costs) we already have.
3. Limited Supply
This is the biggy. Bitcoins are mined by solving complex mathematical algorithms. By design, only 21 million exist. So far, only 11 million have been mined.
This means that there is a limited supply. This differentiates bitcoins from most currencies in the world that, since they left the gold standard, have a supply that is arbitrarily determined by central banks.
It is true that a money system based on limited supply might unwind some of the funny money stuff we’ve seen in recent years (though how you would do that without hollowing out the foundations of our financial architecture would be a very, very tricky business.)
But ‘limited supply’ in and of itself isn’t of much value. There are many things that have a limited supply. I could bottle farts for example, and since I only expect to be on earth for a limited time, Uncle Jon’s bottled farts will have a limited supply.
But that doesn’t then mean that people will start using my bottled farts as currency.
Some people have said that bitcoins are Gold 2.0, since in times past, gold (which has a limited supply), made for a solid monetary base. But gold has, at least to some degree, intrinsic value. It’s worth something to somebody. Bticoins don’t even exist in the material world.
Modern fiat monies (separated from the gold standard), aren’t backed by anything real either. But they do have some un-real substitutes. The first is a government (with a monopoly only legitimate violence) backing the currency up and saying it is what it is. Governments also only make welfare payments and accept taxes in their own currency, guaranteeing at least a certain level of demand. They also have inflation targeting central banks, who will use interest rates to preserve the value of the currency within particular limits.
This is why fiat money works.
Bitcoin doesn’t have any of this. And without it, being ‘of limited supply’ isn’t all that much use.
So what am I missing here?
What does bitcoin have that I’m not seeing?
Because the truth of it is that all I see right now is a speculation frenzy. And it certainly could go a lot higher yet. But I just can’t see what’s holding it up.
It looks like a total gamble. And I haven’t made my fortune by playing risks like that. That’s not to say I might not have a flutter, but I certainly wouldn’t be betting the house on it.
Greg says
Tulips… Posiden…. Tech Boom….. Bitcoins……
Andrew Charlton says
Spot on Greg.
Karan says
Bitcoin is another breakthrough like Google or Microsoft. Think about it before Google became a “blue chip” most speculators believed it to a false overvalued stock. This is not to say Bitcoin may not crash but it can certainly be a worthy bet because the current economic system is failing (US economy hint hint) and so a new economy system may be needed to fulfil the role. Gold > Fiat money > Cryptocurency. Reply Jon Giaan and others
gus says
I like fairyfloss too, but it costs money which could all blow away, and most likely will.
Philip Parsons says
Does it have a future if governments can’t control it and tax it. It is here to stay if it can be taxed!
gr says
Gold, fiat money, bit coin are all oversimplified mechanisms for tracking and exchanging what (goods and services , resources) we value.
Everybody knows that any “thing” is only “worth” what somebody is prepared to “pay” for it ( whatever the currency).
The problem is that our increasingly western culture has overvalued the services of the exchange facilitators . Bitcoin has the potential to reverse this societal trend
Peter Hannigan says
Bitcoin – A great means of laundering the proceeds of crime. The new racket where people have to pay a ransom to get back access to their computer data involves payment in bitcoins.
Bitcoin short says
I would like to short bitcoins…
Sam Jerome says
The concept of using real money to buy pretend things is not new in gaming, a lot of gamers will spend their hard earned cash to buy new armour, better weapons etc…. This has always fascinated me, once the game finishes it´s life, all the real money goes with the developers and the character, that in some cases has cost a fortune becomes nothing more than a ghost in cyberspace, a very well equipped ghost but a ghost nonetheless, I just can`t seem to get the concept of bitcoin any further in my head than in game money….
John. says
I think that Bitcion will be the final straw to collapse the derivatives market, and when it collapses it will bring down every bank in the world with it .There is more money invested in derivatives than the total GDP of the world it is in the trillions and the banks are exposed as they do not has the assets in reserve to pay for a collapse when it happens. The banks may be worth Billions but they are exposed to trillions.
Muzza says
I remember the Posieden bubble! The biggest problem that I see with bitcoin is that I could start my own virtual currency; let’s call it say muzzacoin, this will be issued in limited numbers, say 1 million at a ipo price of say ten dollars. It might work, but I think pigs will fly first.
Peter says
If the Bitcoin thing caught on, there would be the danger of a ‘central bank’ type of institution emerging for them. Would they keep the Bitcoin population capped at 21 million ? No, they’d probably start circulating more if the demand was there and create just another monetary cycle doomed to the high’s and low’s of the current and previous systems. Maybe Bitcoins are necessary for the evolution of money – the eternal quest for something different. Does this mean they’re a worthy gamble ?
rosalie says
Aren’t we using ‘virtual’ money now? If you went to your bank and wanted to withdraw your money in cash (eg $100,000.00) , do you really think you would get it?
Think to USA, and the presidents who were assassinated and why? Also, the Boston Tea party…
Who (really – who?) started the bitcoin – also , it is a very strange name…it must have a meaning behind it. How would you ‘save’ money? or save bitcoin?
Look beyond the surface stuff….I’m not particularly great with computers, but I am sure some brave person could research the underlying and necessary information.