Bitcoin. It’s now ‘worth’ $2,800 per unit. That may seem like a lot of real currency to part with for a fictitious share of cyberspace, but what if it goes up to $5,000, $10,000, $20,000 or more? You’ll be kicking yourself for not getting in on the action when it was so cheap! The reality is that Bitcoin can and probably will go up over $5,000 at some point, perhaps even higher. The important thing to remember is that this isn’t so much a measure of it’s value as it is a measure of the collective ignorance of those that ‘invest’ in it.
Cryptocurrencies are not investments, they are currencies. That’s why they are called cryptocurrencies and not cryptoinvestments. Bitcoin, along with the growing number of other electronic payment systems, enable peer-to-peer transactions without the need for a central repository or administrator (such as a bank) as they can be verified on a public ledger known as the blockchain.
The only reason bitcoin has skyrocketed in ‘value’ is because more and more people want to buy it and hardly anyone is selling it, or using it for it’s intended purpose – to buy stuff. When demand exceeds supply, prices go up: economics 101. But at the end of the day, you can’t eat your $2,800 Bitcoin. You can’t drink it or wear it. It won’t protect you from bad weather, nor will it cure you from illness. Currency itself isn’t valuable, it’s simply a unit of account that can be used as a medium of exchange to buy stuff that is valuable.
What can you buy with Bitcoin? Not much. Try going to your local pub and order a beer offering to pay for it with Bitcoins and chances are you’ll be shown the door unless you’re also carrying cash or a credit card. You’ll likely get the same response at most restaurants, pharmacies, gas stations, supermarkets, department stores and don’t even think about trying to pay your taxes using Bitcoin. Therein lies the irony of cryptocurrencies; the authority they circumvent is the same authority that ultimately determines their legitimacy.
Acceptance aside, the other problem with cryptocurrencies is scarcity, or rather a lack thereof. Bitcoin dominates the headlines as it was the pioneering cryptocurrency, but new versions are new popping up like mushrooms. There’s Ethereum, Ripple, Litecoin, Dascoin and over 700 others, many of which have superior security and other features. What separates Bitcoin, or any of the others, from the rest? Marketing. The more people you can convince to buy something that can’t easily be resold, the higher it’s price will rise.
This doesn’t make it intrinsically more valuable, it just means more gamblers are the casino trying to make a quick buck. Here’s the problem: at some point, Bitcoin will be seen as expensive and people will switch to other crypto’s. This will drive prices up until they too are expensive, and people move on to whatever’s next in the popularity stakes. Meanwhile, none of them will buy you a beer, and when people finally realize this and try to sell, no one will want them as they’re too expensive, and the ensuing selling frenzy will cause their prices to crash.
That being said, the underlying blockchain technology that supports Bitcoin and other cryptocurrencies is genuinely revolutionary, and when governments and their advisors finally get their heads around it, we will likely see the emergence of government-sanctioned cryptocurrencies. This would be a real game changer. Not only would it largely invalidate Bitcoin and others, more importantly, it would go a long way toward solving some of the fundamental issues plaguing the financial system and the economy.
These issues are described in my book, The Economics of the Economy, so to avoid going too far off piste, I won’t elaborate any further here. As far as cryptocurrencies are concerned, they’re ultimately doomed when the government steps in, but a lot of money can be made from the irrational greed and ignorance of the masses in the meantime!