Monday, January 5, 2015

BitCoin, Round Three



What ever happened to Bitcoins?  Well, what ever happened to M.C. Hammer?


Some minor news, 2015 started off with a bang for Bitcoin.   Sad thing, though, it was an implosion.  The value of the Bitcoin dropped from $310 to about $263 per "coin".

What is going on?  Is Bitcoin dead?   Well, like Radio Shack, it will likely soldier on for many years.   But as a realistic "replacement" for actual currencies, it doesn't seem like it has it for the long haul.

Why is this?  A number of reasons.

1.  No One is Using It:   How many bitcoins do you have?   Would you even know how to go about getting one?   Would you know how to spend one?   If you are one of the "Bitcoin Faithful" who troll the Internet looking to shout down any Bitcoin heretics, you could probably answer "YES" to all of those questions.  (And you are the reason comments are disabled in this blog).

To the millions - no Billions of the rest of us, the answer is "No."  Stuck in the past, we keep stupidly using things like Credit Cards, Dollars, Euros, or whatever local currency is available.  We pay online with PayPal or some other stupid old-fashioned payment system that incurs a lot of fees.

You see, that is all Bitcoin is - or ever was - is an online payment system.   You don't really pay for things in Bitcoins, but rather exchange local currency for them, and then pay someone who in turn exchanges them for local currency.   And for most people - about 99.9999999% - using Bitcoin just seems like an unnecessary pain in the ass.  So most folks just don't use it.

Bitcoin has been marked by extreme volatility.

2.  Bitcoin is Too Volatile:  Remember when I said that Bitcoin is nothing more than an online payment system?  The reason for this is volatility of Bitcoin.   Even Bitcoin faithful (and it is a religion, not a currency) will argue that the best way to deal with Bitcoins is not to hold them but rather to use them as a means of transferring money.   You buy a Bitcoin, pay someone (or get paid) and then redeem the Bitcoin into local currency before its value changes too much.

If you hold bitcoins you could end up losing a lot of your money, as they have shown to be volatile.   Yes, Bitcoins shot up in value in 2014.   Since then, they have been on a downhill slide.  Holding Bitcoins at this point makes about as much sense as holding Russian Rubles.   Which illustrates my next point.

3.  No One Trades in Bitcoins:   Right now in Russia, many importers (and there are many, as Russia's only real industries are oil and gas) have stopped selling products completely simply because by the time a person pays for the product (such as a car) the Ruble has dropped in value to the point where the seller is losing money.   For this reason, most sellers who "accept Bitcoins" do not price their products in Bitcoins.   Which means they really don't accept Bitcoins.

Sure, there have been some "stunt buys" of products using Bitcoins, such as the fellow who bought a Tesla with Bitcoins.   But you scratch the surface and you realize the Tesla was not priced in Bitcoins, but in dollars, and the dealer merely worked with the buyer to convert those Bitcoins to dollars, to buy the car.   They did not "accept Bitcoins" and then pay their employees and suppliers with them.  The conversion was instantaneous - to dollars.  Thus...

4.  There is no Bitcoin Economy:  In order for a currency to be useful, it has to be used in commerce.  In Europe, people buy and sell things with Euros.  People are paid in Euros.  They invest in Euros.  They have Euros in the bank.  Conversion to other currencies only occurs when they import or export products.   But no country or region of the world operates in a Bitcoin economy - where everyone in the chain uses and trades Bitcoins, without constantly converting them to local currency first.

5. Not a Safe Harbor:  In other parts of the world, some countries with weaker economies trade in dual currencies - their local currency and the American Dollar.  When inflation takes off, people look for "safe harbors" for their money, and the U.S. Dollar - like it or not (more on that later) is that safe harbor.  Maybe the Euro or the Yuan will be those safe harbors in the future.   Perhaps not.

Some folks though that the Bitcoin - like gold - would be a "safe harbor" currency that could act as a second currency for countries that have weak money.   But the volatility of Bitcoin has demonstrated otherwise.   Keeping Bitcoins is a risky business - their value could go up or down.  And lately, it has been down, down, down.   Some sort of stability is needed if the currency is to succeed.

6.  Hatred of the Dollar:  One of the aspects of Bitcoin - that the Bitcoin Faithful expound upon a lot - is that the American Dollar is a "Fiat Currency" and is going to collapse any day now.  The problem is, of course, that the dollar stubbornly refuses to collapse, at least just yet.  A lot of what drives the Bitcoin Faithful is a hatred of America, or, if they are Americans, hatred of Obama and current fiscal policies.   You scratch the surface and these are the same folks who believe in 9/11 "truthers" or that the Federal Reserve is some giant conspiracy.   In other words, these are nutballs.

The value of any currency is based on its perceived value - which like any other value, can be skewed by the warped perceptions of human beings.   In the case of Bitcoin, the people perceiving its value are basically nutjobs - like misogynist college boys who post on a "Return of Kings" website.  These are the sort of folks who thought Ayn Rand was a deep thinker.

* * *

So it is no surprise to me that Bitcoin shot way up in value and then  tanked.   A few people made a lot of money on this, and the folks who bought at the peak, well, they got hammered.  Investing in Bitcoins is just like investing in Gold - you are investing in the idea of something being worth something, not on the inherent ability of the something to generate income.  You have to hope that other people's ideas of what that something is worth keeps going up.   But gold, at least, has some industrial uses and uses as jewelry.  Bitcoins, well, they basically exist only in your mind.

3 comments:

  1. Compare the volatility of the bitcoin to the value of the dollar versus the Euro:

    https://encrypted.google.com/finance/chart?&q=CURRENCY:USDEUR&tkr=1&p=5Y&chst=vkc&chs=229x94&chsc=1&ei=5PqqVNSEBIabgwSP8IDwBQ

    The dollar is locked to 07. to 0.8 Euro and rising.

    People love to hate America. They love to hate our Yankee Dollar. But they love having it in their hands even more.

    ReplyDelete
  2. Another article on Bitcoin:

    http://www.cnbc.com/id/102410095#.

    The problem in this instance isn't Bitcoin itself, but the "exchange" that was offering to exchange Bitcoins for local currency (and vice-versa). In order to function, Bitcoin has to be converted to local currency as so few people accept it directly.

    The exchanges are not regulated and that is one area where problems emerge, such as the Mt. Gox fiasco.

    Without a closed-loop Bitcoin economy, there will always be a need for exchanges, and these unregulated exchanges will always be problematic.

    ReplyDelete
  3. This article doesn't seem to offer much hope:

    https://www.cryptocoinsnews.com/cryptocurrency-transactions-including-bitcoin-will-halve-value-year/

    Bitcoin is down to $217 as of this posting.

    ReplyDelete

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