It's Not Official Yet But, Yes, The World Has Gone Mad
The bitcoin mania is confirming what astute observers of the financial world and of the new digital society have known for some time. It's a mad mad world : investors lending at low single digit interest rates to near-bankrupt governments, out-of-control central bank printing presses, financial markets taken over by machines, and inflating bubbles everywhere. And then, ultimate example of the current madness and misallocation of resources, there is ... bitcoin ! I won't elaborate much on how the digital age is accelerating the sharing of seemingly ever more uniform information in mainstream media which coupled with epidemic ADHD (blame your iPhone) and ever less time left for thinking among younger generations is creating self sustaining, snowballing social phenomena and exacerbating the human herd instinct. Suffice it to say that today's bitcoin phenomenon is very much a result of such a snowball effect : the subject of bitcoin sells, and as more people are buying into the craze, the number of promoters -bitcoin promoters who come in all forms and shapes are well organized and very vocal - is increasing as well.
Back in April of this year I commented on the rise then crash of the bitcoin exchange rate http://buy-point.blogspot.ch/2013/04/lor-largent-seffondrent.html, and I compared the bitcoin chart to the price action of an internet stock in the year 2000. Well, just like internet stocks in those days, after that April crash the bitcoin price formed a base and just recently soared to new stupendous heights in a very very short period of time . Traders would love to trade a market like bitcoin, but the bitcoin market is too thin, and not very active, transactions take several days to complete. In short, while many would love to trade bitcoins like internet stocks, it's just not practical, you cannot go short bitcoin either (note to those who believe shorting is some evil anglo-saxon speculator's practice : the ridiculous price increase is partly due to the fact that there are no short-sellers in this market, this will lead to more violent declines than otherwise) . And at current prices, it's probably wise to stay away.
From the look of that chart, bitcoin gamblers could see even more upside before the final collapse
Bitcoin is not a currency, its main attraction (limited supply) will likely be its undoing
I am bringing up that aspect because rather than being a currency, bitcoin is today at least, just an object of speculation. As of today, bitcoin serves little purpose other than enabling criminal activities and enriching current owners of bitcoin and its adopters remain overwhelmingly "investors" rather than businesses accepting it as payment (this should be a screaming warning of a bubble). In fact who would want to pay or get paid in bitcoins knowing that the price could be cut in half from one day to the next ? The only people willing to get paid in bitcoins today are those banking on a greater fool buying those very bitcoins from them at even higher prices. The volatility of bitcoin which has recently been nothing short of insane is the fatal flaw of bitcoin and is directly linked to what is supposed to be its unique advantage. While most bitcoin owners/promoters defend its currency characteristics and its potential as a mainstream medium of exchange, all have seen bitcoins as an investment. Because the bitcoin money supply unlike with real currencies will be limited to 21 million bitcoins, as bitcoin gains popularity its price in dollar, euro, etc. rises. Bitcoin owners are convinced that this characteristic makes bitcoin a no brainer investment. Bitcoin promoters have bandied about price forecasts in the tens, hundreds of thousands, according to many of them, there is no limit to where the bitcoin price could go. But the very fact that bitcoin is perceived as an investment makes it a very inconvenient currency subject to sharp rises and falls and hoarding .
There are many reasons why bitcoin cannot be a mainstream currency and at these prices should be a poor "investment"
1) A currency is backed by its central bank, even fiat currencies are backed by a central bank's assets, for all practical purposes a fiat currency is backed by the trust in the central bank, the country's political institutions and the country's economy. If a currency lost too much of its value or rose excessively, the central bank, sometimes in conjunction with other central banks will intervene to prevent excessive fluctuations. In contrast, bitcoin is backed by nothing other than the greater fool theory. In fact since bitcoin is traded on unregulated and rudimentary virtual exchanges (at least one of them turned out to be a fly-by- night outfit) the risk of the bitcoin price being manipulated is very high. Recent price action would tend to indicate that bitcoin trading is very thin and that large price moves occur on light volume, the bitcoin price is probably already being manipulated.
2) Bitcoin promoters like to compare the value of bitcoins in circulation to the value and market capitalization of financial companies such as Western Union or Paypal. The logic being that bitcoin should reach a comparable "market cap" . Surprisingly the term is widely used in articles on the subject particularly in the financial media. Yet the value of the above mentioned companies is only the reflection of their revenues and earnings. These companies create value for their shareholders/owners, they generate earnings. To investors, their value is therefore -in theory- the present value of those future cash flows. Bitcoin is an exchange medium and generates no cash flows (and unlike gold you can't even wear your bitcoins). Talking about a bitcoin "market cap" is nonsense. This should be obvious to everyone but apparently it's not.
3) If the price of bitcoin were to rise to the unfathomable heights its promoters envision, that would mean people would transact in fractions of bitcoin. The book you will buy online will be priced at for ex. 0.000099 bitcoin. One would agree that this too, would make bitcoin a rather inconvenient currency . One of the appeal of bitcoin is "protection against inflation", however it's noteworthy that as bitcoin is rising, traditional gauges and indicators of future inflation are actually pointing downward(gold is in an extended downtrend as is silver) . Bitcoin therefore cannot be rising because of inflation fears or distrust of central banks, it is rising due to speculation. The reality is that just like gold, bitcoin will make an inconvenient medium of exchange in case of high inflation. In times of hyperinflation people transact by bartering goods such as cigarettes, alcohol or other essential items that can be used as currency.
4) Remember, bitcoin is a "digital" currency . That means, it cannot live without the internet. Are you really willing to switch to a currency that can not be used in case of an internet breakdown ? In case of war, the internet will be targeted by the enemy in order to cause havoc within the target country. But let's just put aside that admittedly remote possibility, what if your internet connection goes down ? What if your computer breaks down ? But that's not the worst case scenario, in such cases you may just have some difficulty purchasing anything with bitcoins. There are far more potent threats to bitcoin users : hackers and simple technical failures or loss of the devices holding the bitcoins. Indeed your bitcoins are stored in a virtual "wallet", if you lose that wallet, if it's erased from your device, you lose your bitcoins. That's already happened to some early adopters of bitcoin. Hackers are a growing threat, bitcoin websites and exchanges don't always come with the best security features, hacking for bitcoins is fast becoming a lucrative criminal career. And good luck to catch these criminals to get your bitcoins back !
5) One of the appeals of bitcoin was anonymity. In fact transacting in bitcoins is not anonymous and all transactions are recorded. That's in my book another hit to the reliability of bitcoin as an alternative currency.
5) One of the appeals of bitcoin was anonymity. In fact transacting in bitcoins is not anonymous and all transactions are recorded. That's in my book another hit to the reliability of bitcoin as an alternative currency.
There are good reasons to make bitcoin illegal or to curtail speculation in bitcoin
In conclusion, the bitcoin phenomenon is just another out-of-control mania of the current times.It has potentially far reaching implications because bitcoin speculation is easily accessible, unlike stock speculation. Bitcoin is fairly easy to understand, and the simple message of its promoters is relayed among the media creating a positive feedback loop for prices. Sometimes those who write articles on bitcoin have themselves invested in it so they are sold to the scheme. Indeed, bitcoin looks very much like an elaborate Ponzi scheme in which everybody is for now happy to take part, hoping to cash in on this New New Thing. Interestingly, nobody really knows who is behind bitcoin, its inventor has so far preferred to stay anonymous. Of course that individual, and his early followers are now very rich, with the prospect of becoming even richer, if new adopters are found and willing to buy bitcoins from them at insane prices.
Because bitcoin is promoted as an investment, it should have drawn alarm a long time ago from financial regulators and law enforcement agencies. In the meantime, the unashamed promotion and media hype go unchecked. High profile individuals such as the Winklevoss brothers (of Facebook fame) have invested heavily in bitcoin and then used their media visibility to promote bitcoin investments (a bitcoin ETF !) in effect drawing new "investors", which of course is driving prices higher. There are therefore good reasons to outlaw bitcoin or to regulate its promotion in the same way speculative or risky investments are regulated.
I understand making bitcoin illegal is currently being considered by the Swiss government .The least the authorities should do is warning about the pitfalls of bitcoin investing. For now bitcoin 's economic impact is still insignificant, but a Tulip mania bust will not be without consequences for a lot of people and perhaps some parts of the economy. It's interesting to put the bitcoin rise in perspective with the stockmarket rally, the two seem to be somewhat correlated and it's not surprising. For the astute observer of markets, the price of bitcoin could give an indication of risk appetite and early warnings of where things are headed.
