Bitcoin, a five year old decentralized crypto-currency, is quite possibly the best financial innovation the world has seen in the past 50 years. A leading trend in 2013’s popular culture, it seems like you couldn’t visit any financial news site without seeing bitcoin’s mention. As detailed on Forbes.com a mere $100 investment in bitcoin at the beginning of 2013 would have been worth $5,000 by year’s end. There are multiple stories of bitcoin millionaires being minted overnight. The masses are amused by dot-com-bubble-like stories of people who are able to purchase Lamborghinis with their newfound wealth, paying with bitcoins of course. Every time a retailer accepts the currency, a press release follows, implying that the general acceptance of bitcoin increases its value and credibility. However, a logical analysis reveals that bitcoin is worth about as much as the paper it isn’t printed on.

In its simplest form, currency is a medium of exchange. Basic economics dictate that the value of any currency is directly correlated to its supply. Because of its physical lack, gold has served as a currency for over 5,000 years. Although it does not produce any economic benefit for it owner, its lack of quantity allows it to serve as a store of value, whereby no man is able to create more gold. U.S. Dollars have a similar characteristic, albeit less appealing, in that their value is upheld by the limit of their quantity. Although its worth is eroded via inflation, two key characteristics preserve the Dollar’s value — its designation as official tender of The United States, and status as the world’s reserve currency. Without a monopoly as official tender, or a supply constriction based on convertibility for real value (the gold standard), the value of the U.S. Dollar would be worth little more than the heat it generates when set afire (Google “heating furnace with German Marks”).

Bitcoin has none of the aforementioned qualities. The central premise of bitcoin’s value is based on its perceived finite supply — 21 million units. As of today, approximately half have been mined. With a price of $818.00 today, the total market cap of the currency is roughly $9 billion. At first glance, it appears one should invest immediately, before all bitcoins have been mined. However, herein lies the bitcoin fallacy. While the total number of bitcoins that will ever exist is 21 million, the number of cryptocurrency units across the globe is infinite. There is nothing to stop another party from creating another bitcoin-like cryptocurrency. In fact, dozens already have. Therefore, the value of bitcoin, is an inverse of the supply of cryptocurrencies as a whole. Since there is no shortage of people willing or capable of creating such currencies the intrinsic value of bitcoin is zero — currently overvalued by $818.00. Bitcoin is not an investment. It is a speculation, and a very risky one at best — the modern day Tulipmania. The fact people are currently willing to pay $818.00 for one unit of a potentially infinite cyber financial creation warrants applause to its architect.

However, there is interminable genius behind the innovation that is bitcoin. Bitcoin serves as the framework for a modern day gold standard. However, one of the characteristics designed to give bitcoin its appeal is the very feature that inhibits its long-term viability. A decentralized currency lies outside of the control of any governing body. Although decentralization prevents any party from affecting the currency’s supply, a cryptocurrency outside of the control of any governing body enables others to replicate it, thus defeating its purpose. To create a cryptocurrency with actual value one would have to introduce it into a closed system, where replication is prohibited. Decentralization can exist to the extent that it disallows any governing body to affect the currency’s issuance. However, to maintain the currency’s value, a mechanism that prohibits the currency’s replication would have to exist. For example, bitcoin, or a similar currency, would have to be adopted by a country itself and designated as the country’s only official legal tender. A country who adopts a cryptocurrency as its official legal tender would function on nothing more than computer database entries, but with the additional “main street” benefit that the currency’s value would be unable to be affected by central bank profligacy. Until then, bitcoins are nothing more than arbitrary and extremely speculative cyber-numbers.

For those of you who disagree, I have a tulip you might be interested in.