I consider myself a pretty bright guy, but I really don’t get Bitcoin. There are a lot of other pretty bright folks who agree with me and, another group who really don’t. To me, Bitcoin is more of a commodity (like gold, silver or tulips—more on tulips later) than either a currency or payment method. I say this because I believe that one of the primary requirements for either a currency or payment method is that it be stable. And, whatever you say about Bitcoin, its value has always been quite volatile.
I don’t want the token (whether it be a dollar bill or fraction of a Bitcoin) to be worth less in 10 minutes (when I want to buy something with it) than it is now (when I receive it as payment for something I am selling). And, it seems to me no one else should either. At the same time, we don’t mind if it is worth more 10 minutes from now if we are going to buy something with it, and I think that many of the people who use it as a payment method are currently counting on that upward path. But, the dynamics that are driving that upward mobility has a (very real) downside—it is called volatility and that means it might just as well go down as up.
I would argue there is a group of people who are “investing” in (i.e. buying it) Bitcoin who are speculators. They are either holding on to it with the expectation that it will continue to rise in value, or are trading on the volatility of the product. It reminds me of the tulips. Tulip-mania that is and it occurred in the 1630s. And, it was what is commonly referred to as the first recorded speculative bubble. At its peak, a rare tulip bulb cost as much as a luxury house in Amsterdam. That bubble burst in 1637. There was no reason for tulips to spike in price, they didn’t take on any new value—no new use was found for them. So, eventually speculators couldn’t maintain the pricing level and it crashed. I would say the same thing is going to happen with Bitcoin.
There are other reasons that Bitcoin doesn’t seem to me to be a good candidate as a currency or payent method. For one, there are limits on the number of Bitcoins that can be minted. This means that if it were to become popular as a currency/method of payment, really popular, the relative scarcity of Bitcoins would continually drive up its value making fewer Bitcoins necessary to purchase an item at a given price and as I pointed out earlier, therefore a very bad candidate to be a currency or method of payment. The continually rising value of a Bitcoin would make the prices of items being bought and sold in Bitcoin denominations very hard to calculate and compare, i.e. did the price of an item change or was it the value of the currency that changed.
Further, the cost of running the Bitcoin ecosystem is substantial. The mining process produces new Bitcoins (in a process called “minting”) as payment to “miners” for authenticating and recording transactions. This process is, by construction, computationally difficult so as to ensure the integrity of the underlying ledger and takes (also by design) incrementally more resources as the system reaches to built-in limits (and the limit is very real, as noted above) the cost to process a transaction (in terms of computing power) is very large. And, once the last coin has been generated, there is no way to compensate the miners who will no longer have an incentive to validate transactions.
And finally, Bitcoin is not unique. So, competitors are sure to (and already have) emerge(d). This leads me to argue that its value as a currency or method of payment has not suddenly become more valuable, on the contrary its volatility and relatively low barriers to entry into the market for blockchain driven products makes it less valuable in those roles.
I have said my piece. I did so to lay out a clear statement of skepticism about the long-term value of Bitcoin. My purpose in all of this: I would really like someone “in the know” to set me straight about where my logic fails, because if I am wrong, I would really like to know it.
Next week I take on the underlying technology of Bitcoin, which is blockchain.
Copyright 2017 Howard Niden
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