When I started writing this post last week, Bitcoin was hovering around $7,400. As of this writing a few days later it is now trading above $8,000. The rise furthers my belief that Bitcoin is being driven up purely by speculation and that if you look closer at Bitcoin it could be argued that it’s not even a currency. It could be that Bitcoin is one of the greatest hustles of 2009 to today. It’s a strong statement I’m aware, but hear me out, tell me what you think, and let’s have a constructive discussion.
Even though I’m not a believer in Bitcoin, I am a believer in the development of a real cryptocurrencies. I think they will help bring a lot of people into the global economy from around the world. I’ve found the arguments for deployment of viable cryptocurrencies to be very compelling and sound. So, you will need to separate the fact that I am a believer in cryptocurrencies and not a believer in Bitcoin.
There are several main points which make me question whether to classify Bitcoin as a currency:
- Bitcoin is hard to transact for technological and counterparty issues.
- Transactions take upwards of 10 minutes to clear.
- The Bitcoin Network tops out at 7 transactions per second. Compare that to VISA which can handle 56,000 transactions per second.
- There is no clear or transparent management of upgrades and technology.
- The Bitcoin Network is based on anonymity and decentralization. So no one knows who is in charge and this is a poison pill for government and mass market acceptance.
- Its rise is driven purely by speculation based on the fact that Bitcoin is capped at 21 million. Scarcity does not equal value. Not even in the digital economy.
- Extreme volatility in both rallies and pull backs.
- There isn't a captive user base in the Bitcoin Network. All other currencies are tied to local captive users bases (United States: USD, Japan: Yen, China: Yuan, the EU: Euro etc.)
- I'm aware a decentralized currency is the basis for Bitcoin, but, it doesn't change the fact that no one is required to use Bitcoin to do anything. Thus holding Bitcoin, which is essential for any currency to maintain value, is entirely by choice.
- Countries around the world would not accept Bitcoin to pay your taxes and they won't. Unless point 2 is resolved (which will eliminate the whole basis for Bitcoin in the first place), government would never accept it. Additionally, Bitcoin would need to be converted to the national currency to make payments to government employees, debt payments etc. I don't envision a government opening a new Online Cryptocurrency Wallet Account to store their Bitcoins.
- Bitcoin has to be converted to other fiat currencies to extract value and/or conduct business. This makes Bitcoin not viable as a currency.
- The small size of the Bitcoin Network and it's unregulated nature will always make the price per coin volatile.
- Any real currency you put into Bitcoin will always be at high risk.
- All it takes is for a few large Bitcoin users to dump their coins and the market will start to crash unless someone with authority stabilizes it.
- That someone doesn't exist in a decentralized and anonymous system. So you need everyone to work together to stabilize the price. What could go wrong? People never panic anyways.
These main points make me question why anyone would accept Bitcoin as a store of value? If Bitcoin had any other name, let’s say the Kazakhstani Tenge or Mexican Peso, with any of these characteristics (much less all them) no one in their right mind would invest and buy the currency. These currencies are at least in theory backed by the issuing governments/central banks and if anything were to happen we would have some sort of recourse and understanding as to what has or will happen. But still no one would invest.
Let’s take it one step further. If the Mexican Peso which currently trades at roughly $19 MXN to $1 USD were to suddenly strengthen against the dollar for no foreseeable reason except momentum, would you buy? What if, the Mexican Peso shot up by more than 10,000% making millionaires out of Mexican Peso holders. Would you start to believe in the Peso then? How about this, is there any circumstance where you would agree to pay $8,000 USD for one Mexican Peso? The chances are you will answer no. Why will you answer no? Because you understand the dynamics and economics of the Mexican Peso relative to the USD and there is nothing to support such an exchange of value.
Now take Bitcoin. Where buyers know absolutely nothing about the management, economics or dynamics of the currency and suddenly a piece of data (that’s all Bitcoin is after all) goes from $0.008 per Bitcoin to over $8,000 per Bitcoin. Not to mention you can’t even buy a soda in 99% of businesses or anywhere else. Can Bitcoin even be called a currency if holders cannot freely transact with it like any other currency? But somehow, knowing less about bitcoins fundamentals, the inability to easily buy things with them and extreme fluctuations in price somehow isn’t registering with Bitcoin buyers. How does this not raise a huge Quantum dot encrusted red flag for every single Bitcoin owner? I’ll talk about how Quantum Computing will impact Bitcoin in the future. But for now, enjoy the dots.
It goes without saying that with no risk there is no reward. At the same time there is a difference between taking a risk and gambling with your money and Bitcoin is a gamblers game. When entering any developing market segment it’s always important to match the audacity of the investment with the best practices of the field. If Bitcoin is supposed to be treated as a currency, it would appear Bitcoin doesn’t pass as an investible security from any standpoint. If you can’t buy much with it; when you do buy something it will take 10 minutes to clear; while it’s sitting in your wallet the price could rise or fall more than 30% over a weekend; why would you consider putting your hard-earned money into it?
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