Bitcoin Is Doomed to Fail

28 November 2013FinanceTechnology

Edward Hadas, writing for the New York Times:

Bitcoin exemplifies some of the problems of private money: Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith. Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system. The authorities might be motivated by a genuine concern about the stability of a shadow monetary system or they might act out of self-preservation. Tax evasion would be too easy in a right-money parallel economy.

The debate over Bitcoin’s long-term viability rages on. It will be interesting to see how high the virtual-currency goes and if it ultimately collapses. If I had to bet, I would put my money on the it’s a bubble that will ultimately pop theory, and here’s why:

Bitcoin isn’t an asset, it’s a currency. Like gold and other commodities it has no innate value. It doesn’t earn interest, nor can you use it for anything other than trade. There is a technologically-imposed cap on its supply, which helps the price skyrocket as demand increases. But today’s demand is premised on the idea that one will be able to sell tomorrow at a higher price – relying on a greater fool to enter the market. The historical precedent (tulips and houses for example) isn’t promising for speculators. While there is definitely money to be made, the trick is selling before the bottom falls out – a financial hot potato.

UPDATE

François Velde, senior economist at the Chicago Fed, published a very helpful (and fairly concise) Bitcoin primer, for those wondering how the system actually works.