Thursday, April 11, 2013

Bitcoins - today's tulip bulbs

There has been plenty written about the Bitcoin craze. Quite frankly, anyone who thinks Bitcoins are a genuine substitute for currencies needs counselling. Consider that:

1. it is not known who creates/issues Bitcoins - do you really want to trust your wealth to what amounts to an anonymous stranger somewhere in cyberspace?

2. Bitcoins are not the only so-called virtual currency. What's to stop more being created?

3. while it is stated that there are limits on the number of Bitcoins that can be created, how can holders be assured that the announced limits will be respected (or are being respected now for that matter)?

4. Bitcoins exist in the hacker-populated world of the Internet. What happens if hackers make another successful attempt at the system?

Bitcoins are only worth what someone else will pay for them. No different from any other real or virtual goods. Like tulip bulbs, cowie shells, Beanie Babies, McSnoopies and a host of other fads, they are worth what people will pay for them and nothing more. Unlike a genuine currency they do not have a universal exchange value and are not widely accepted (not even close).

Sure, fiat currencies have serious issues - most significantly they fail the long term store of value test due to excessive printing by governments and central banks - but Bitcoins suffer from the same issues as fiat currencies and a whole lot of additional issues.


Anonymous said...

Its like a mini bubble waiting to pop, ironically fuelled by what happened in Cyprus!


traineeinvestor said...

Hi Beancounter

Agree completely - that said, I think Cyprus was one of several things that could have triggered the pop.


Anonymous said...

Better than Tulips - since they have a real function (transferring money, and keeping wealth private) which tulips did not have.

Check out:

- DrBubb

Anonymous said...

Most of these complaints about bitcoin come to a lack of undestanding of the way the code functions. You can go to github and read the entire code if you want, it is open source.

1. It is known who creates bitcoins, they are called miners. The reason it is trustworthy is because the calculations are distributed amongst multiple miners to create a block.

2. Yes other virtual currencies can be created, but there are plenty of fiat currencies too... and new ones all the time.

3. The announced limits are in the code mentioned above. The network functions on a majority rules basis. So, if one or even a group of people change the max that divergent 'branch' will be rejected by the rest of the network and cease to mine blocks.

4. No hacker has made a successful attempt at the system. The level of encryption on the core "block chain" which supports the network is very high due to the massive processing power behind it (more than any single supercomputer).

What you may be referring to is the lack of security on an individual person/exchange's wallet. This would be similar to leaving a pile of cash on the street and having it stolen.

traineeinvestor said...

@ Anonymous #3

Thanks for the details.

I'm afraid it will take a lot before I start using any digital currency. When I can use them to buy my groceries or pay my taxes, I may reconsider. There are just too many more issues with digital currencies than with fiat money.

@ Dr Bubb - actually tulips are very nice flowers so they do have a real function - keeping Mrs Traineeinvestor happy.