We are not a Bitcoin user.
We are quite certain that are analysis will contain errors of fact, use and execution.
However as we have studied money and people we will share some thoughts on Bitcoin, and its recent notoriety in the news with the seeming collapse of one of its significant exchanges.
The Definition of 'Currency' is that it is a generally accepted form of money, including coins and paper notes. Generally it is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade. (Source Investopedia)
So the above definition shows us that currency allows for effective use for an exchange of goods – buying and selling of items from groceries, fuel to cars and housing.
How does currency retain its value?
Items other than currency can act as a store of value – stocks, bonds, commodities, land and a host of other items, from tools to sea shells can have this function. It is retention of value over a period of time that is critical. As long as a currency is relatively stable in its value, money – such as the US Dollar - is the most common and efficient store of value found in an economy.
The financial crisis of 2008 caused many to lose faith in the paper based currencies that caused the booms and busts of the recent economic cycles. Some predicted massive inflation and turned to commodities, in particular gold and its poorer cousin silver. But for many these stores of value were passé and more in tune in the past and not the future.
Academics and techno geeks came up with theoretical models for the creation of virtual currencies that would have economic basis that were not subject to the whims of governments or their central bankers.
They currencies would have the benefit of funds being transferred directly between users, without middlemen. This potential for anonymous transfers, upper limits on the number as there is no way a central bank can debase their value away by issuing more (thus causing inflation). Instead the limited units of these currencies, and Bitcoin in particular, would cause an increasing demand for Bitcoin, and therefore an increase in their value.
The attached chart shows the growth and swings in the value of Bitcoin.
Proponents argue that it is the ‘value’ of Bitcoin. They advocate that they are building a new currency for a new tomorrow. That the value is fully justified.
Others, including The Economist in an article written last November, wonder if a bubble has been forming.
Again, we are not a Bitcoin user. We have listened to the arguments. Have read some of the technical issues – which are beyond us, and most of the non-geek community and wonder why?
Why should this new currency have such value? Is it not overreached itself based on hype? Can Paypal or a plethora of alternatives allow for low cost, low friction transactions?
Anonymity? It seems that significant amounts and users, leave a trail like everyone else, that can be monitored and tracked – you just have to know what you are looking for.
It seems that people also forget “emptor cavete” or ‘buyer beware.’ This warning is not about doing commerce, so much of being aware of with whom one is doing business.
Scoundrels, cheats and outright criminals will flock to the ‘benefits’ and ‘abuses’ that these cyber currencies bring. They will be followed by well meaning politicos and regulators and then the party will be over.
Understanding what one is doing is very important - following into a ‘mania’ because your neighbor, or his cousin, or his hairdressers brother-in-law made money with Bitcoin, is a poor reason.