Bitcoin are a good investment only if you can afford to lose them all, according to Bitcoin Foundation executive director Jon Matonis. This is no hyperbole. He was not kidding.
“Imagine going to make a bank deposit and being told by the teller not to make the deposit if you cannot afford to lose the money. Would you still make still make the deposit? Of course not, but that is exactly what the Bitcoin industry is telling its customers.”
That is about what New York Times Op-Ed columnist Joe Nocera has to say about the whole thing in a recent column on the subject. He does not like them very much.
Nocera, a veteran business commentator, points out the critical fallacy behind the Bitcoin movement: the coins are worth only what the people who want them think they are worth and that may not be the same as what the people who now own them think they are worth. Unlike fiat currencies, the stuff people used to call paper money, the only thing standing behind the Bitcoin is the belief that only a limited number of them will ever be produced and, therefore, the value of the Bitcoin that are in circulation can only increase in accordance with the laws of supply and demand.
Not so fast, Bitcoin hucksters. How does an investor know whether the Bitcoin limit is going to be adhered to?
Under Bitcoin theory the Bitcoin, unlike fiat currencies controlled by national governments, is not under any one person’s control….except for the Bitcoin Foundation, which is responsible for continually adjusting the difficulty of solving Bitcoin equations to regulate the flow of Bitcoin from the efforts of the Bitcoin miners…and keep them from depleting the Bitcoin reserves too quickly. The foundation is the invisible hand that controls the market.
There is a finite limit to the total number of coins that will ever be minted: 21 million Bitcoin. It is built into the system, theoretically. When that number of bitcoin have been minted, the system will stop issuing new ones…forever. When that happens, the Bitcoin miners who are currently maintaining the system will stop doing so because there will be no more rewards in the form of new Bitcoin. Also when that happens, the security system that is based upon the Bitcoin miners efforts may very well begin to unravel.
In the meantime, there are people who are making – and losing – huge fortunes on the Bitcoin market, as well as wannabees who are just losing their shirts.
That’s another problem. Like any other zero sum game, where there are winners, there have to be losers. Every time someone sells a stock or bond, someone makes out and someone loses out. However in the invisible world of the Bitcoin speculator, it is really hard to tell which is the side that is winning.
In reality, Bitcoin is rather like precious metals, precious gems, or even oil. Those commodities are really quite common. There are huge reserves of them all in the ground, but it is getting more and more expensive over time to get those valuable commodities out of the ground, which forces their value, and their prices, up.
Gold fluctuates in value, but that is not just because of the relative value of the metal to the various currencies of the world, the effects of inflation and monetary manipulation. The other reason in the price of gold is the extraction cost of the metal. There are dormant gold mines all over the world, sitting idle while their owners wait for the price of gold to go up to the point where it becomes profitable to re-open the mines and start pulling out gold again. Each individual mine has its own extraction cost and, when the price of gold falls below the extraction cost, plus the profit margin the owners of the mine want, they shut down again. This is what accounts for the fluctuation in gold prices that don’t seem to be related to governmental monetary manipulation.
One of the main selling points for bitcoins was that governments were not in charge of the currency, as they are with fiat currencies. The people are, but which people would that be? Right now, that looks like the Bitcoin Foundation itself. The fox is in the hen house.
Bitcoin prices fluctuate according to such variables as rumor, mismanagement, collapses like Mt. Gox,or the introduction of the next generation of Bitcoin mining hardware. The more powerful the hardware, the faster the Bitcoin equations get solved and that increases the number of the virtual coins in circulation, reducing the value the investment in the existing Bitcoin. Whenever that happens, the Bitcoin Foundation increases the difficulty of the equation the Bitcoin miners have to solve, and the price goes up again.
There are three ways that Bitcoin mining is not like panning for gold: Gold doesn’t evaporate, it stays wherever it is put, and its value is absolute, because the relative values of fiat currencies are really expressible in terms of the value of an ounce of gold in each currency.With Bitcoin, the equation is reversed. The value of a coin is always expressed in terms of the exchange value into one fiat currency or another. Also the only way to get your money – or the value in the coins -out again is by selling them to someone who is willing to buy them. Since knowledgeable investors all know that there’s an endpoint to the Bitcoin experiment, who is going to want to buy those coins as the experiment winds down?
No one cares about the value of their local currency in Bitcoin. Bitcoin holders are very interested in the value of their holdings in terms of their local currency. Like the man said, Bitcoin are a good investment only if you can afford to lose them all. Just don’t be holding any when the music stops.
By Alan M. Milner