My latest Everyman article went up last week (I was on vacation visiting relatives so missed sharing it ‘out of the box’). This one delves into the topic of Bitcoin and cryptocurrency in general.
The short version is that I think paying actual money for meaningless bits of data that only have value because people expect it to rise in value in the future and which is constantly run back-and-forth across the internet is a really, really bad idea.
Apart from the security and centralization issues (of which admittedly I’ve only scratched the surface), and assuming the points I mentioned were or have been corrected or accounted for, it really wouldn’t matter. For in my estimation there is a much more important problem I see with cryptocurrencies, and that is that it is simply a meaningless strings of data that has no value apart from the fact that people expect it to rise in value. In short, it is a 100% speculation market, the bubble of all bubbles.
Now, the answer may come back “well paper money doesn’t have value either.” But, in fact, it does. The value of fiat currency lies in the fact that it is backed by the State. If I acquire a genuine five-dollar bill, the State guarantees and legally enforces that it will always and everywhere be worth five dollars. The value of the five dollars comes from the fact that any seller under the authority of the issuing government is legally required to accept it as five dollars (things get a lot more complicated when you ask “and what is five dollars worth?” but that’s a tale for another day).
However, the entire point of cryptocurrency is that no one is backing it. It is worth only what someone is willing to pay for it. Thus, something like bitcoin only exists relative to actual currency; its value is expressed in terms of being worth so many dollars only because there is someone who is willing to trade that many dollars of backed currency for that many bits of un-backed crypto (or pseudo) currency.
Say I sell a portion of bitcoin to someone for a hundred dollars. If he has any sense, he will only buy it if he expects that it will either be worth more than a hundred dollars in the future or that he can trade it for something that is worth at least a hundred dollars. In short, he expects at least that much value from bitcoin, and the only reason anyone would trade him something for that bitcoin is if they think they can get at least that value in backed currency. In either case, the backed currency is still the standard by which bitcoin is judged.
This means that bitcoin will never be a viable currency in its own right, but will always exist relative to backed currency because the backed currency has a guaranteed value and bitcoin or other cryptocurrencies does not. This also means that bitcoin doesn’t work as a hedge against inflation, which are usually things like bonds or works of art that always retain roughly the same level of inherent or guaranteed value regardless of the state of the currency.
However, when it comes to bitcoin or other cryptocurrencies, its value keeps changing based on speculation and based on how much backed currency someone thinks he can get for it. If the backed currency loses its value, then so will the amount of bitcoin you expect to be able to get it with, even assuming the bitcoin market doesn’t crash in the meantime. Thus a Monet’s monetary value rises and falls with inflation because people will always want the Monet to roughly the same degree. Nobody wants the bitcoin except for the chance to exchange it for a certain amount of backed currency.
Read the rest here. Then go pick up some tulip bulbs.