Bitcoin, is it worth the risk?
Cryptocurrency, or Bitcoin as you may know it, is a marvelous idea for transferring funds. It is secure, private, decentralized, really fast and global. No government or individual has a full ownership, the means of creation and distribution are public, and really anyone can use it, even anonymously. The only problem right now — it is behaving like a ponzi scheme!
David Lee, one of the Coinbase investors, explains in this post that in order to be considered money, a currency needs to first and foremost ‘store value’. You need to be willing to buy some coins and to store them under your pillow. Given that there are about 12,000,000 bitcoins in circulation, and roughly 40k to 100k transactions are happening daily, we know that value hoarding is happening, but I am afraid it’s happening for the wrong reasons, and that’s a bad sign.
Value in itself is worthless. Whether you are storing gold, antique paintings, rare cars or postal stamps, that value is only worth something as long as someone else is willing to buy it from you. Currently worth more than $1,000 USD, Bitcoin is essentially perceived to be 1000x better as a means of storing value than one United States dollar. Is this truly the case? In order for you to get the value out of a Bitcoin, someone needs to exchange the coins with you, preferably for a higher or equal price to the one you paid. Are there merchants willing to acccept bitcoin?
Let’s take a look at what you can do with bitcoin today, on #BitcoinBlackFriday. You can buy Reddit gold, OkCupid premium membership, Namecheap domain names, and a bunch of other virtual goods. You can donate money to charities. You can even get a discount by paying with bitcoin. But, none of these transactions are for real, physical, tangible goods of value. Everything you see being sold could be given away for free. In order for Bitcoins to behave more like money, it needs to be exchangeable; gain and loss on both sides of the transaction should be of near equal value. Right now that is not the case.
There are outliers, like this Subway that’s accepting bitcoins for food, or BitDazzle, that is selling physical goods for the coins, but I bet you those things are not real. Subway is offering bitcoin purchases for nothing other than a marketing stunt, while BitDazzle, well, they may very well understand the point of my post better than me, and they are trying to make money before it all burns down in flames. How, you may ask? Well, as the owner of a marketplace that sells goods for Bitcoin, the current price of the coint is irrelevant as long as the magnitude of your loss is inversely proportional to your gain, based on the future value of the coin. It does not matter if you sell a $2,000 MacBook Pro for 2Bc today, as long as the value of those coins goes up to $3,000 tomorrow. As long as you sell all your coins before the market collapses, you will make money.
You see, the only way Bitcoin will become an acceptable currency if you started to buy real things with it. That means groceries, electronics, cars, houses. At a current price of $1,000+, you should be able to buy a used car with just 2-3 Bitcoins. That needs to happen, and not just once, that needs to be happening over and over again, in order for the currency to be widespread.
Imagine if there was war tomorrow. Are you really better off holding on to a Bitcoin or the United States dollars? Will anyone sell you a can of soup and a loaf of bread for this virtual coin, or will you be totally stranded with no means to buy anything? I bet on the latter.
In the long run, 3-5 years from now, I hope Bitcoin gains enough wide-spread adoption that we will indeed be willing to trade it for real goods. In order for that to happen, bit currency needs to reach a steady state value, where the price no longer fluctuates. That means the car, which you buy with 3 Bitcoins today should keep its value of 3 Bitcoins tomorrow, or no one will be brave enough to buy it from you. How and why this could happen is a topic for a whole other post.
In the short term, the only people who are benefiting from Bitcoin are the ones who stored enough of the coins while they were worth $0.6 or even $8 dollars a coin.
The explosive growth of the Bitcoin in the last 12 months is not fueled by value stored nor by the value that its network can deliver. The price today is purely speculative and benefits people who are going to make a ridiculous amount of cash by buying low and selling high. For everyone else who buys Bitcoint today, you will end up holding a bag full of money, and that money will be completely worthless once the price crashes, and it will crash, it’s just a matter of time.
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