Tuesday, November 19, 2013

DEBUNKING BITCOIN - IT'S JUST A CRYPTO FIAT CURRENCY WITH NO INTRINSIC VALUE OR STORE OF WEALTH

The Bitcoin bug is biting… And HOW.. The bug is infecting the globe with this clouded and misrepresented notion that it is a currency that can be trusted. The Bitcoin currency is decentralised therefore not controlled by any one person and so offers protection from the endless rounds of Central Bank money printing. This assists the promoters of Bitcoin in peddling the fallacy that it offers a safe haven away from invasive government spying, and of course, those evil parasites they refer to as the "banksters" (banker/gangsters).

The pitch is a good one, aimed at ushering in the new "zeitgeist" in exploring a world on the edge of a revolution. Bitcoin is marketed as a way to liberate oneself from the shackles of government and central bank policy, a revolutionary new currency that erodes the power of the government and banking sector oppressors.

For those of you that are new to my blog, I wrote a piece on the 28th of October titled "Bitcoin , The Canary in the Gold mine". Within it I explored where I felt the world was headed with regards to the perception of money. I asked my readers to assist me in answering the question, what is money? The aim of the blog was to establish or determine whether the world stood ready to perhaps embrace a new monetary paradigm.

The money question I posed to my readers was aimed at stirring up analysis, thought and evaluation, heck I wanted to try and guage if the world was transforming. Was it evolving and unearthing a new spirit of the age, a revolutionary spirit much like the "free love" Woodstock era of peace and harmony. Was the growth of Bitcoin just the start of the revolution?

Not long after my blog Russell Brand confirmed my thesis about a new revolutionary spirit and uprising. It got huge media coverage due to Brand’s impassioned debate and call for change. According to Brand “profit is a filthy word” and he appears clearly agitated at the current system which is promoting an ever increasing disparity between the wealthy and the poor.

For those that missed the interview I have added the YouTube clip below.

http://www.youtube.com/watch?v=BHDcOBgWZqc

This interview was pounced upon by one of my favourite economic commentators Mad Max Keiser. I really enjoy the way he thinks, bright, insightful, with entertainment value. For those of you that do not follow him, Max heads up the "Keiser Report", a brutal, honest and factual program that educates you at the same time as entertaining you.

Setting the big plug for Max Keiser and his partner in crime Stacy Herbert aside I want to point out the fact that both are huge supporters of this "Bitcoin Revolution". In response to Russell Brands interview Max and Stacy linked Bitcoin to the upcoming revolution, mocking Russell Brand for not seeing it as an opportunity to "stick it to the establishment".

With typical Keiser flair, Max states that there is a revolution in motion, there is a solution to take the power away from the banks and put it in the hands of the people. The answer is "bitcoin mate" as Keiser puts it.

Below is the introductory clip of the Keiser report I refer to above.

http://www.youtube.com/watch?v=GZNW3LUszjg

Max is a huge supporter of Bitcoin and has been calling it a great investment from the outset. He called it at $5 a coin, from my memory, again at $30 a coin, and they are now trading in the range of $650 and $850 a coin, up from around $250 a coin when the "canary in the gold mine" blog was posted.

Before anyone thinks that I am going all the way with Maxy K, I am not. Do I see more potential in Bitcoin? Yes, Is it possible it could go much higher? You bet it could. Where is the limit? Who knows, I don’t know, no one knows.

The title of this blog expresses how I feel about Bitcoin, perhaps not in the short term, but definitely long term. Bitcoin IS another form of a fiat currency, albeit a digital one that is decentralized.

A bitcoin has no store of wealth, no intrinsic value, just like the paper dollars printed by Central Banks around the world. Many of the Bitcoin Illuminati are peddling the fallacy that it does have a store of wealth as physical gold does. That is FALSE and MISLEADING in my opinion.

Gold has a store of value because it can be used as a method for payment, it can be used to make jewelry and in the manufacturing of consumer products like electronics. Gold has a precious nature, a finite supply that will eventually run out along with an increasing difficulty to mine.

Many supporters of Bitcoin have been sold the story of Bitcoin having a "finite" number of coins. The idea is that the bitcoin is like gold in the sense that one day all the coins will be mined and there will be none left. Whilst this has some substance on face value when you delve deeper into bitcoin you will see the truth.

Yes there are only ever 21 million coins that can be mined. Yes each time a new block of coins are mined, the next block are more difficult to unlock, much the same as depleting the gold supply.

Still you cannot melt a Bitcoin down to make Jewelry, use it in commercial products, and so it has no intrinsic value. This means it carries the same flaws the current Fiat Monetary system has.

Before the Bitcoin maniacs start screaming to loudly at me about me missing the fact that there will only ever be 21 million coins I wish to dull that noise before it becomes to loud.

FACT

YES there will only ever be 21 million "Bitcoins" BUT these 21 million coins can be broken down in "bits" through 8 decimal points. One "Satoshi" named after the Bitcoin mastermind is the smallest denomination of a Bitcoin that can be traded. This denomination is 0.00000001 of 1 Bitcoin.

Dragging this through a simple multiplication process, though there may be 21,000,000 total Bitcoins, there are, however, a massive 2,100,000,000,000,000 or 2.1 quintillion tradable bits that will be available when all the coins are mined. This figure also needs to be multiplied by the dollar value assigned to each 0.00000001 or "satoshi" highlighting the fact that its finite status is at best one hell of a stretch.

In addition to the above point of limited supply I wish to point out that "Bitcoin" does not own the monopoly on digital currency. In fact Bitcoin was not even the first digital currency developed and used. A digital currency called "QQ" was developed in China and gained a big following in much the same way Bitcoin has captured the minds of many a speculator.

Below is an article I found on China's fascination with Bitcoin. Within it the virtual currency "QQ" is discussed, how it grew, and how it was eventually controlled.

http://money.cnn.com/2013/11/18/investing/bitcoin-china/

The undeniable fact is, that although Bitcoin has a finite supply of 2.1 quintillion bits, it is not alone in trying to capture the markets attention and exploring the virtual crypto currency space. There is a new crypto currency entering the fray now to offer investors in this phenomenon another option. This new crypto is called "litecoin".

Below is a website dedicated to informing potential investors about its platform.

https://litecoin.org/

Right now, with limited competition in the virtual currency space, the answer to the Bitcoin success maybe as simple as answering a question I was asked on twitter by one of my economics Idols, Jim Rickards.

Upon posing the question is Bitcoin the canary in the goldmine? And posting my blog. Rickards responded by tweeting, is it about Bitcoin? Or about the dollar?

Jim Rickards had answered the question, and in doing so highlighted the issue of the Crypto Currency phenomenon going forward.

Rickards' answer highlights the endemic problems the Virtual Crypto currencies have. They are identical to the problems being faced in the current monetary system. Put simply, as time evolves, as more crypto currencies enter the virtual currency space, the Bitcoin phenomenon and hysteria may be eroded. Whilst it has dominated the virtual currency space, Bitcoins 2.1 quintillion bit supply may be finite to Bitcoin itself, the space for new virtual crypto currencies is growing.

I would argue, just like central banks printed dollars, the virtual crypto currencies are doomed for the same extinction. As Litecoin along with the other new Crypto currencies are developed and marketed it will become abundantly obvious that Bitcoin is not special or unique. Bitcoin will be to the virtual Crypto world what the Euro, the Yen or The US Dollar are to the central bank world… FIAT MONEY WITH NO STORE OF WEALTH.

9 comments:

  1. Your argument does not make any sense. 1 GRAM of gold has APPROXIMATELY 3.057e21 Ag atoms in it. That is for 1 gram not 1 ounce. You can divide the gold supply FAR FAR FAR more than you can divide a Bitcoin. Dividing the pizza into smaller pieces does not change the size of the pizza. Fiat money continues to make the pizza larger and larger and larger.

    ReplyDelete
  2. To add to that, I'd say...
    Gold = Best storage of value over time ie. "Money".
    Bitcoin = Best and fastest medium of exchange worldwide ie. "Currency".
    Trade with currency, save with gold.

    ReplyDelete
  3. I say you can save with bitcoins to. I have and my money goes so much further today. When I use it. I had more value than it typical it did before the last allowing me I do more with my money. I can't be convinced otherwise, because I'm a living example how storing your exchanging you currency to Bitcoin for savings can make you so much more wealthier.

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  4. I've heard this argument that metals have uses such as in Jewellery and electronics but I think it is a bogus one, clutching at straws in order to make a (very vague) differentiation from crypto currencies. In fact gold is probably one of the most redundant industrial materials in existence and there's hardly anything in the manufacturing world that depends on it in any significant quantity.

    The truth is that most of gold's "intrinsic value" originates in exactly the same "tulip mania" phenomenon as does bitcoin's - i.e. people want(ed) it because others do, and because it's difficult to come by.

    Meanwhile, Bitcoin has:

    a) at least as much industrial usefulness as gold (in it's role as a token of exchange)

    b) all of the scarcity and resistance to counterfeiting properties of gold

    My own opinion is that crypto currencies could (already have) rendered precious metals obsolete as a store of value because the bulk of the world's trade now takes place within a worldwide electronic network where more mobile equivalents for 'base money' assets have to be found.

    Cryptocurrencies are far superior in this regard. The fact that they've demonstrated an ability to be the subject of "tulip mania" far from detracts from their suitability in this role - actually it's a necessary requirement just as it was with metals in the past - as long as they are durable enough in the long term.

    Finally, one failure of comprehension that off-the-cuff commentaries like this usually exhibit is subtle but profound. That is that cyrpto currencies are fundamentally a "mathematical" phenomenon rather than an electronic one. The distinction is important because it means that Bitcoins have to be "discovered" as opposed to "created". They are basically extremely rare, naturally occurring "nuggets" in number space.

    The electronic protocol only serves to regulate their discovery rate, while that protocol's decentralised nature makes it almost impossible to subvert. (At least harder than breaking into Fort Knox).

    Altogether, these properties are what make a crypto currency into a relevant, versatile and altogether more elegant store of value than a hunk of metal that's rapidly approaching it's sell by date in my opinion.

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    Replies
    1. The analogy of nuggets in number space is great, I will steal that! Hope you agree with my comment below.

      Delete
  5. You seem to see the value of using a cryptocurrency. The economic benefits for society as a whole can be enormous. A large chunk of GDP is paid to soon-to-be obsolete bank employees, we can save on that. And there are many innovations around the corner that will bring access to money to every corner of the economy. Stockmarkets can run from a single computer for example. A rental car car run its own affairs, as a running program.

    But then why Bitcoin and not some other cryptocurrency? There is no set-in-stone reason why it has to be Bitcoin. But then again, why Facebook and not the much more innovative Google+. It is called the Network Effect. People use Facebook because other people use Facebook. Money has an even bigger network effect, you want to hold what others value. Bitcoin has a head start and with every day the cost of switching becomes higher, until the point where it will be prohibitive. Even if other cryptocurrencies seem to have useful innovations. (Much of these can and will be implemented by the Bitcoin protocol, which isn't even in it's 1.0 version.)

    ReplyDelete
    Replies
    1. Hi

      I agree with you - it doesn't have to be Bitcoin. The Bitcoin protocol will be improved, while at the same time, other "crypto's" will and are appearing. Anyone who's done the least bit of trading in cryptocurrencies knows that when one moves substantially, they all benefit. It's not a problem. Over time, as they evolve, value will migrate with them and there will be time for those who are already invested in one "crypto" to migrate their investments so they don't loose out.

      IBM didn't loose out to the "PC" revolution that was Apple and Microsoft - they invested in it to buy themselves time to "re-tool".

      Another thing. Remember that the comparison many people are making at the moment is between crypto and "credit money". This is a false comparison. Cryptocurrencies are "base money". From base money comes credit money which is what we use when we're paying with credit cards, so arguments about "ease of payment" etc are moot because there is no 'credit layer' around cryptocurrencies yet. In the future that is probably where the bulk of trading will get done. (i.e. instead of actually transferring bitcoins themselves, we'll just be shuffling number's in VISA's ledger like we do today).

      Delete
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