Every few years the world is introduced to the perfect new asset: XYZ.
It's quiet at first and no one knows about XYZ except for a few insiders. The value goes up a bit and the first murmurings start on some opaque websites or newsletters.
Then, out of the blue, an XYZ success story hits a major media network. Someone made $1 million investing in XYZ, or someone retired at 21 years old thanks to XYZ. A little buzz starts! After all, an easy mill or "retirement" at 21 sounds quite nice.
Soon, more stories pop up and the price of XYZ pops with it. You hear about a friend of a friend that made a couple hundred grand on XYZ doing nothing! That's pretty amazing, I mean you only make $70,000 a year slaving 40 hours a week at your job and this nobody made more than you simply buying XYZ!
Hell, you won't stand for that, so you buy some XYZ to get in on the action. You make an easy couple grand on paper and tell your friends. By this time it's all over the media. Everywhere there are stories of new XYZ millionaires and deca-thousandaires.
If you didn't buy XYZ a year or two ago, you are a certified moron and missed out on the biggest investment since... the last XYZ.
Bitcoin: A Good Pump?
Welcome to Bitcoin – the apparent currency. I'm no programmer who understands the ins and outs of blockchain software, nor am I a doomsday anarchist arguing for the end of government-controlled fiat currency.
To me the Bitcoin story is eerily similar to Dot-Com companies in 1999-2000, junior gold miners in 2006-2008, rare-earth miners in 2010, or junior gas stocks in 2006-2008. Bubbles and scams, whether mini or widespread, go back to the foundations of trade.
Bitcoin, in my opinion, is especially nefarious. It's like the "perfect" Dot-Com company that had no revenue, no real assets, nothing but a weird name and some "eyeballs". Or the junior rare-earth miner pumped by some semi-anonymous, come and go greasy suits out of stinky Vancouver with a distant mineral lease that hasn't even been visited by management or anyone else legitimate.
Why is Bitcoin ugly? Because it's nothing. It's simply a string of binary code – bits – 0's and 1's strung together by an unknown developer on a cloud software program that's sort-of open source.
It's all quite genius really. There's a limited supply (21 million Bitcoin) to be "mined". "Mining" Bitcoin becomes progressively more difficult and expensive, demanding insane amounts of computer power and electricity. This makes it rare and gives the illusion of increasing fundamental value. Of course scarcity creates a sense of urgency – a key ingredient to any good price bubble.
Its anonymous developers have also created a rabid community of supporters who have fallen hook, line, and sinker for this software program. Not unlike TY Beanie Babies fans, or hockey card collectors, they will stop at nothing to justify the legitimacy of their perfect product. Free viral mass marketing!
As in many good scams, the anonymity of the creators/benefactors should also be seriously questioned. Satoshi Nakamoto, the fictional name for a real person or group responsible for Bitcoin creation, apparently holds one million Bitcoin. It's the easiest and fastest $7,000,000,000 anyone has made in the history of mankind.
Bitcoin: A Currency?
The reality is that Bitcoin is not a real currency and probably never will be. It's actually the worst kind of fiat currency because it doesn't have any hard assets behind it, it isn't legitimized for daily use by a recognized authority, and it's unstable which renders it nearly useless for transactions.
The hard assets thing is important for longevity. Durable currencies have historically been made from a precious metal, typically gold or silver, minted and standardized. Anyone could hold these currencies forever and be assured of their long-term value for trade and tangible worth.
At different points in the past even the U.S. dollar was backed by 24 grams of pure silver, or 1.5 grams of pure gold, or some other combination of these precious metals. It was a tangible hard asset and the only way to get more was to pan, hack, or dig it out of the earth. This embedded growth limitation preserved it's value over time and provided confidence and stability.
Now we have a system of fiat currency, or currency backed by no hard assets with no fundamental value. We use the dollar, or yen, or Euro simply because the government deems it legal tender and because we can see the total supply of each currency which is issued and managed by a central authority. This lends these currencies use for transactional value only. (Unlike the former asset backed currencies, fiat currencies should not be kept in large quantities for long periods of time.)
Stability in a currency is important. Regardless of its true value or whether or not it is backed by some hard asset to control supply, the major currencies in use around the world today are very stable even though they are fiat currencies. Generally the Canadian dollar will change in value a fraction of one percent each day as its value moves up and down in public currency markets.
Anyone with CAD$1,000 today can be pretty certain they will be able to buy an equal amount of stuff with that CAD$1,000 a month from now. The movement in value is small, so we don't need to have an army of price changers running around Canadian Tire every day changing prices on products as the value of the Canadian dollar changes.
This isn't always the case. Fiat currencies are sometimes very unstable. For example, right now in Venezuela the bolivar is having huge problems. Shopkeepers in Caracas are literally changing the prices several times throughout the day because the bolivar is losing value so fast. This instability makes the bolivar useless for exchange purposes and people are doing everything they can to get rid of bolivars in favour of more stable assets.
Bitcoin has the opposite problem of the bolivar. While the bolivar does not have willing recipients, Bitcoin doesn't have willing spenders. Either way its transactional value is impaired. Currency only has value as currency if people actually use it.
These factors raise important questions about Bitcoin. What is the fundamental value of a Bitcoin? Why should a Bitcoin be worth $10,000? Should it even be worth $0.10? If no one is seriously using Bitcoin for daily transactions, can it even be called a currency? If it's not a currency, does it have any monetary value beyond the incredible ledger architecture that lies behind it? If the ledger architecture is easily copied, as it essentially has been, does the entire Bitcoin project even have any true value?
Bitcoin: An Investment?
If you want to trade Bitcoin in some speculative manner, feel free. Do it right and you might make gobs of money. But have a plan to get out and cross your fingers that it all works. It's really gambling at this point.
Chances are I will be wrong about my feelings on Bitcoin for weeks, months, or even years. Bitcoin could easily go to $10,000 or even $100,000. The madness of crowds knows few bounds.
But I'm 99% sure that one day Bitcoin as a currency will be forgotten and a lot of people will have lost of lot of money. Don't be a Bitcoin fool.
What are rare-earths again?