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.
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.