The Case Against Bitcoin
1) IT SMELLS LIKE A BUBBLE!!!
Bitcoin has exploded in value over the last year. It has gone from a single bitcoin making news when the value of one coin surpassed the U.S. dollar to now a single bitcoin costing more than $1,000. The biggest fear facing bitcoins is that they are starting to look an awful lot like Dutch tulips.
2) Bitcoin has some technical problems. The mechanism for verifying transactions is a little convoluted and so is the corresponding "mining" / built in growth feature. Bitcoin may survive these "features" as it has a major head start in becoming the dominate digital currency. However, MySpace once had a major head start in social media but was overtaken by Facebook. Similarly, Google overtook Yahoo.
3) Bitcoin could get crushed before they really take off.
a) The Chinese have not tried to stop investment in bitcoins, but that could change tomorrow. Bitcoin is nearly anonymous easily abused on the blackmarket. The Chinese could easily decide that supporting bitcoin is no longer in their best interest. Currently, the biggest bitcoin exchange, where people exchange dollars and Chinese yaun for bitcoins, is located in China (the 2nd biggest exchange is in Japan). The Chinese government could easily shut this exchange down tomorrow, and the price of bitcoins would plummet.
b) The U.S. government could also put an end to bitcoins for U.S. citizens. All they have to do is declare bitcoins illegal as currency and make it illegal for U.S. financial institutions to transacts business with bitcoin exchanges (this is how they shutdown internet poker sites to U.S. citizens). Yes, you could meet up with someone on craigslist to buy bitcoins with cash, but the reality is that if the U.S. government shutdown access to bitcoin exchanges then the U.S. market in bitcoins would collapse. One again, the price of bitcoins would plummet.
4) If bitcoins ever do takeoff and become a dominate currency then people may soon realize that there was reason the world moved from the gold standard to fiat currencies.
a) Currencies like gold, and presumably bitcoin, may not be inflationary, but they have the other problems. Their biggest problems are that they are deflationary and also very volatile.
i) If you have a gold coin that is worth $100 today, but will be worth $200 next month, and worth $300 the month, and maybe more even later then you would be a fool to spend your money today. This is what often happened with gold. It often appreciated in value, so people stopped spending it and saved it (or hoarded it). This forced companies that were making widgets to lower their prices to entice someone to spend their money. This was deflation. It may sound good at first, because as your gold appreciates it can buy more and more stuff (widgets). However, it isn't so great when the company for whom you work closes down because it can't sell the widgets you are making.
ii) Eventually, people need to buy stuff, so at some point they will reluctantly part with their gold. Goods start selling again, and people start getting employed again, and then people start hoarding again, and it is a vicious cycle. Booms and busts and volatile gold prices with big swings in unemployment rates. But the predominate trend is deflationary.
iii) People who borrow gold coins, and presumably bitcoins, also get screwed (yeah, it's a technical financial term invented by Keynes -- go look it up). Suppose you borrow $100,000 in gold to buy a home and you have to pay back the load in 10 years. Well, because of deflation, your $100,000 in gold today has the purchasing power of $500,000 in gold 10 years from now. This means that 10 years from now you are obligated to payoff a house that is now only worth $20,000 in gold. Or another way to look at it is your $100,000 in gold would buy a $500,000 home in 10 years. Lenders get screwed under inflation, and borrowers get screwed under deflation.
b) World governments could create their own digital currency (spoiler: my biased opinion follows). It is possible to create a digital currency that is beyond government manipulation and that is neither inflationary or deflationary. It is a form of money that holds its own value based on a "basket of goods." For example, suppose there is a basket of goods that reflects the world's output of goods in terms of GDP. So, oil and natural gas might make up 12% of this basket, and housing 10%, and healthcare 5%, and so on. Then the value of a U.N. coin (a bitcoin alternative) would be set to float on the value of this basket of goods. In other words, you would have more or fewer U.N. coins as the price of goods fluctuated. However, this would probably not apply to the vast majority of people, because you would have to have a massive net worth to be affected by price fluctuations. The benefit of this U.N. coin is that it would be neither inflationary or deflationary as it is fixed to the value of the goods it can purchase. However, over time, as the world becomes more productive, our purchasing power would increase.
(An exercise for the reader. How would this effect poor countries? Would they be better off or worse off? In other words, the buying power of the U.N. coin would likely be different in various countries. How would that effect them? What about currency manipulation of a country's currency that doesn't switch to the U.N. coin but floats or pegs their currency to the U.N. coin?)
c) Item b is just one possible world currency that could displace the bitcoin. There are lots of other possibilities that aren't so rosy and involve government mandates. Governments don't like money that they can't control, can be used on black markets, and can't be traced for income tax evasion and fraud. I have a hard time believing that something like bitcoin would be allowed to exist long term.
Bottom Line: I think the bitcoin could see a short term growth in popularity and has the possibility of being the next biggest thing on the internet. It could result in early adopters making lots of money. However, there are no guarantees. I also think early adopters need to be very careful as it is VERY likely that bitcoin will not last long term. I have to believe governments will step in at some point. That's my take anyway.
1) IT SMELLS LIKE A BUBBLE!!!
Bitcoin has exploded in value over the last year. It has gone from a single bitcoin making news when the value of one coin surpassed the U.S. dollar to now a single bitcoin costing more than $1,000. The biggest fear facing bitcoins is that they are starting to look an awful lot like Dutch tulips.
2) Bitcoin has some technical problems. The mechanism for verifying transactions is a little convoluted and so is the corresponding "mining" / built in growth feature. Bitcoin may survive these "features" as it has a major head start in becoming the dominate digital currency. However, MySpace once had a major head start in social media but was overtaken by Facebook. Similarly, Google overtook Yahoo.
3) Bitcoin could get crushed before they really take off.
a) The Chinese have not tried to stop investment in bitcoins, but that could change tomorrow. Bitcoin is nearly anonymous easily abused on the blackmarket. The Chinese could easily decide that supporting bitcoin is no longer in their best interest. Currently, the biggest bitcoin exchange, where people exchange dollars and Chinese yaun for bitcoins, is located in China (the 2nd biggest exchange is in Japan). The Chinese government could easily shut this exchange down tomorrow, and the price of bitcoins would plummet.
b) The U.S. government could also put an end to bitcoins for U.S. citizens. All they have to do is declare bitcoins illegal as currency and make it illegal for U.S. financial institutions to transacts business with bitcoin exchanges (this is how they shutdown internet poker sites to U.S. citizens). Yes, you could meet up with someone on craigslist to buy bitcoins with cash, but the reality is that if the U.S. government shutdown access to bitcoin exchanges then the U.S. market in bitcoins would collapse. One again, the price of bitcoins would plummet.
4) If bitcoins ever do takeoff and become a dominate currency then people may soon realize that there was reason the world moved from the gold standard to fiat currencies.
a) Currencies like gold, and presumably bitcoin, may not be inflationary, but they have the other problems. Their biggest problems are that they are deflationary and also very volatile.
i) If you have a gold coin that is worth $100 today, but will be worth $200 next month, and worth $300 the month, and maybe more even later then you would be a fool to spend your money today. This is what often happened with gold. It often appreciated in value, so people stopped spending it and saved it (or hoarded it). This forced companies that were making widgets to lower their prices to entice someone to spend their money. This was deflation. It may sound good at first, because as your gold appreciates it can buy more and more stuff (widgets). However, it isn't so great when the company for whom you work closes down because it can't sell the widgets you are making.
ii) Eventually, people need to buy stuff, so at some point they will reluctantly part with their gold. Goods start selling again, and people start getting employed again, and then people start hoarding again, and it is a vicious cycle. Booms and busts and volatile gold prices with big swings in unemployment rates. But the predominate trend is deflationary.
iii) People who borrow gold coins, and presumably bitcoins, also get screwed (yeah, it's a technical financial term invented by Keynes -- go look it up). Suppose you borrow $100,000 in gold to buy a home and you have to pay back the load in 10 years. Well, because of deflation, your $100,000 in gold today has the purchasing power of $500,000 in gold 10 years from now. This means that 10 years from now you are obligated to payoff a house that is now only worth $20,000 in gold. Or another way to look at it is your $100,000 in gold would buy a $500,000 home in 10 years. Lenders get screwed under inflation, and borrowers get screwed under deflation.
b) World governments could create their own digital currency (spoiler: my biased opinion follows). It is possible to create a digital currency that is beyond government manipulation and that is neither inflationary or deflationary. It is a form of money that holds its own value based on a "basket of goods." For example, suppose there is a basket of goods that reflects the world's output of goods in terms of GDP. So, oil and natural gas might make up 12% of this basket, and housing 10%, and healthcare 5%, and so on. Then the value of a U.N. coin (a bitcoin alternative) would be set to float on the value of this basket of goods. In other words, you would have more or fewer U.N. coins as the price of goods fluctuated. However, this would probably not apply to the vast majority of people, because you would have to have a massive net worth to be affected by price fluctuations. The benefit of this U.N. coin is that it would be neither inflationary or deflationary as it is fixed to the value of the goods it can purchase. However, over time, as the world becomes more productive, our purchasing power would increase.
(An exercise for the reader. How would this effect poor countries? Would they be better off or worse off? In other words, the buying power of the U.N. coin would likely be different in various countries. How would that effect them? What about currency manipulation of a country's currency that doesn't switch to the U.N. coin but floats or pegs their currency to the U.N. coin?)
c) Item b is just one possible world currency that could displace the bitcoin. There are lots of other possibilities that aren't so rosy and involve government mandates. Governments don't like money that they can't control, can be used on black markets, and can't be traced for income tax evasion and fraud. I have a hard time believing that something like bitcoin would be allowed to exist long term.
Bottom Line: I think the bitcoin could see a short term growth in popularity and has the possibility of being the next biggest thing on the internet. It could result in early adopters making lots of money. However, there are no guarantees. I also think early adopters need to be very careful as it is VERY likely that bitcoin will not last long term. I have to believe governments will step in at some point. That's my take anyway.
BA Liberal Studies from Thomas Edison State University
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