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So act that you use humanity, whether in your own person or in the person of any other, always at the same time as an end, never merely as a means - Immanuel Kant's Formula of Humanity

Monday, August 21, 2017

The biggest con - Bitcoin

As I write this post, its Aug 16th, 2017 the US market is open and trading mid-day and one bitcoin is trading around $4300. What a run it has had so far. The market share of bitcoin is around $70 billion USD. With the Dow and S&P hitting all time highs - giving handsome returns, wonder why investors would ride the bitcoin speculative wave, as everyone knows - it might be very risky. So far - the investor have been handsomely rewarded. How long could this last? Frankly no one knows!

There was a time long long ago - carts were pulled by horses or bulls. Some people contemplated the idea of operating a cart without an animal tied to it. The idea was stupid, it was thought then. The common sense was the cart wouldn't run without an animal in front of it, given what was reality at that time. History turned a new page, with the invention of mechanical motors that would operate a wheel rolling over again and again to cause forward motion. The automobile replaced carts/animals. Even though it was considered dumb at one point of time - humans then conceived that it could happen.

Is Bitcoin such a revolutionary idea that would change the world we live in on how people use money as medium of exchange?

Before we get into what it is going to be, lets see what it is now. Bitcoin as they say it is a "Digital currency". There are thousands of digital currencies on the internet.Not sure if bitcoin is any superior or inferior compared to others. There is also no guarantee this bitcoin is the best digital currency for next few years. They are being traded actively though. Bitcoin stands-out from the rest as most popular of the crypto-currencies. Even after you read multiple articles on digital currencies - it is very hard to get your head around it. Lot of things are more confusing. It is complex to the core. Something like currency should be lot simpler than that.

The biggest characteristics of bitcoin (or any digital currency for that matter) is its finite availability. It could rival to any fiat currency - that the government can print at will.

If there is an unlimited supply of bitcoin - there wouldn't be a market for it. Even though it sounds promising with respect to that fact - there is infinite number of digital currencies available over the same medium. With market forces determining the value or worth of each of them, its quite unstable.

Bitcoin is not used in day-to-day trade. Smart people would call it a financial asset rather than a currency. For now even people who own bitcoin do not consider/think them as as store of value that they plan to keep for their retirement. They think it just like any stock. They want to hold it until they think its a right price to sell. Unlike companies that have factories and machinery- bitcoin has nothing to back itself except the confidence of the bitcoin buyer. It is really a risky speculative trade. People are speculating the price of bitcoin and pushing it higher as more buyers step in than sellers.

Digital currencies would go down in history as the most successful marketing campaign that created lot of hype that would only result in an eventual and complete collapse.

In the 2000 dotcom bubble - many companies that were valued very heavily went to zero. In my opinion - bitcoin and other digital currency are no different. They will and have to go to zero. Investors would lose every bit in this speculative bubble. Of course some would make money. But the concept of digital money is fundamentally flawed.

The bitcoin endorsers use the word "Mining" that is intentionally distracting. I just checked the dictionary meaning of mining. It is digging up the earth for coal or other minerals like gold. Mining of minerals has always been an occupation since human beings first arrived on this earth. Some people took the effort to get some thing out the ground that was rare and attractive, sold it to someone who is willing to pay the price of it. This has happened generations after generations for centuries. Since the bitcoin community wants to equate the process of creating a new bitcoin - they smartly enough, borrowed a word from the real money - gold. Put in a word mining - to get the feeling to the public as though this is being "mined". They apparently "mine" bitcoins from multiple computers and by solving difficult mathematical problems - that is what they say. This is no replacement for mining something that is tangible like precious metals. Using the word mining is completely illogical for crypto assets.

The mere fact that its not being accepted to buy any significant purchase of merchandise like grocery, furniture or a hair-cut proves that its not a currency - at least yet. People exchange the bitcoins for dollar or Euro. Rather than the bitcoin itself - the dollar value behind the currency is what makes it attractive. There might be some one who is selling drugs online and would want to accept bitcoin for the convenience of being anonymous - that would at this stage be an exception and not an example. So far, the universal acceptance is not there. None of the central bankers have really backed this so far. With a large population in Africa, Asia and Latin America completely unaware of technology - a platform that offers digital currency is no where in the picture.

Gold has been a commodity all along human history. It has been elevated to money for centuries for its unique properties unlike any other metal on the periodic table. During the last bull run - it touched a high of $ 1900 for an ounce. If bitcoin can go until $4300 and possibly even more - When this bubble finally burst spectacularly- this money would flow back to the ultimate safe haven asset which is gold. It bitcoin can hit the numbers what it is now - there isn't an upper limit for gold. It could go up multiple times with ease from its current level of $1300/ounce.