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Bitcoin: Fool’s gold or people’s money

I totally wrote off bitcoins when I first heard of them a couple of years ago. Who would use a virtual token which has no intrinsic value? Why would any merchant accept them instead of US dollars? To me, it was a pure speculation and a bubble waiting to burst just like so many penny stocks in the past.

But bitcoins are still here after 8 years, and their value has octupled since the beginning of this year. What is going on? Are they all cool-aid drinkers? Or they understand something which I apparently didn’t?

Warren Buffet was absolutely right when he said bitcoins have no intrinsic value. But all currencies in the world, including our might dollars, have no intrinsic value either. As a matter of fact, the production cost of a $100 bill is 12.5 cents. It is only worthy of $100 because the US government said so and we took its word for it.

Whether or not a currency, virtual or real, has value entirely depends on people’s faith in its worthiness. If there are enough people out there who have faith in bitcoins, then they have value.

Why should some people trust bitcoins? It is hard to understand for us Americans. But for people living in countries like Venezuela or Zimbabwe, bitcoins are life savers.

Venezuela used to be a wealthy country in South America. After years of bad economic policies, it is facing bankruptcy. Its currency, Bolivar, has lost 96% of its value this year. At the start of the year, 3,100 bolivars could buy 1 US dollar. Now it takes 84,000 bolivars.

Zimbabwe was a wealthy country in Africa. When its currency, the Zimbabwe dollar, was introduced in 1980, it was 1:1 to US dollar. In 2008, 24 million Zimbabwe dollar could exchange for 1 US dollar. 10 million Zimbabwe dollar could buy you a loaf of bread. The currency was eventually abandoned in 2009.

There are many countries like those in the world. Not to these extremes described above. But their currencies can easily lose 10%, 20%, 30%, etc of their values in a year. For people living in those countries, Bitcoin is a real and a lot more trustworthy alternative. All they need are Internet access and mobile phones.

So, is Bitcoin a fool’s gold or people’s money? After a couple of months carefully studying it and understanding its enabling blockchain technology, I am convinced it is the latter.

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