At this point, poking holes in Bitcoin seems a bit unfair. After Mt. Gox (the largest online Bitcoin exchange) declared bankruptcy, it might be a little unsporting.
For the record, Mt. Gox went under because it allegedly lost a huge amount of Bitcoins and was going broke trying to make up the difference.
But regardless, Bitcoin was doomed from the beginning.
Before you assume I’m just “jealous” of all the money people have made from mining Bitcoins, you should know I actually installed the Bitcoin client about four years ago, and started “mining” my own.
After realizing even then that it would take my laptop’s meager processor weeks or months to mine a coin, I shut it down. At the time, coins were selling for a few dollars. It didn’t seem like a good use of bandwidth or electricity to run my laptop full tilt for days on end for a few dollars.
But it seemed like an interesting idea – and the client itself almost like one of the “idle” games like Cookie Clicker or Candy Box you might casually play today. It was just something to run in the background of my computer. Anyone who has ever waited intently while watching a file load or youtube video complete uploading knows the simple joy you get from this sort of thing.
But besides the interesting idea of Bitcoin, as a currency it was never going to work. Whatever happens with Mt. Gox, or any of the other Bitcoin exchanges – or even any of the other “crypto-currencies” out there now – NONE of them are going to end well.
Which is ironic. A recent story from Zerohedge says the average Bitcoin user is male, 32, employed, libertarian and in a relationship.
You would think the average libertarian would be at least somewhat acquainted with the pitfalls of fiat currency – (many of which are shared by Bitcoin) and if they weren’t you’d think people who are at least interested enough in money, currency, etc. to even consider an alternative currency might do a little bit of research into the history of money, what makes a currency “work” and why, and the characteristics of a successful money-like asset.
A good primer is Aristotle’s framework:
1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.
2.) It must be portable. Money hold a high amount of ‘worth’ relative to its weight and size.
3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:
“(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”
4.) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.
But contrary to what many Bitcoiners might think or profess, Bitcoins actually satisfy NONE of these characteristics very well at all.
1) Bitcoin advocates would argue that Bitcoins are extremely durable – but as we’ve seen with Mt. Gox, it seems incredibly easy for bitcoins to completely disappear. That’s an inherent quality of anything digital: it can be EASILY erased or lost forever. For regular fiat currencies, it’s no big deal because the central bank can easily “print” more.
If Bank of America “lost” millions of dollars from a computer glitch, it’s likely that the Federal Reserve could and would easily re-deposit that amount back into their accounts.
But one of the big “features” of Bitcoin is that there’s no central authority. No one can print more Bitcoins. They must be mined, which today is so ridiculously difficult and time consuming, that you’d have to spend hundreds of thousands of dollars on computers and electricity to mine just one coin successfully.
So Bitcoin isn’t even as durable as the dollar.
2) Bitcoins are very portable, no doubt. But they don’t have an especially high relative worth over any other digital currency (which is all of them…)
At best, you would call this a wash.
3) Divisible, yes, in theory, but it doesn’t seem like you can mine 1/10 of a coin and use it. You have to have a fully mined coin in order divide in the first place. That makes it inferior to digital currencies as well as “real” assets like gold, silver, oil, etc.
Imagine if you had to mine $100,000 worth of gold at a time. You couldn’t mine $90,000 or $50,000. If you mined $99,999 worth of gold, it would be worth nothing. That would make gold much more expensive to mine – and it undermines (pardon the pun) the divisibility of the currency.
4) Intrinsic value: here’s where bitcoin has absolutely nothing going for it. The biggest slam against “fiat” is that it has no intrinsic value – but that’s not practically true in the case of dollars, Euros, yen, etc.
Americans have to pay taxes. That means there’s a value to every dollar. It gives you entree to working, living, doing business in the world’s single largest economy. It’s also the only unit of account you can use to buy US Treasuries: the world’s single largest financial asset. You can figure out what the value of a dollar is by looking at the benefits of owning them confers to people who wish to participate in the American economy.
If living in America is a condition of your existence for all practical purposes, then for all practical purposes, dollars have an intrinsic value for you.
Now, that obviously is a derivation of another “object” – the American economy – and there are certainly risks to that linkage… But unless you believe the American economy is somehow doomed in the near term, there’s no real issue. Because Bitcoins have no value, implicit or explicit – no practical utility – they fail abysmally even compared to the fiat currencies they seek to displace.
Of course, both of these currencies don’t measure up to gold and silver. From an intrinsic value standpoint (the part of the equation that helps bolster the “store of value” aspect of a money) dollars have no true value in and of themselves. That means that even their relative usefulness in satisfying taxes and buying bonds could disappear – and then dollars would have no real value.
I know that’s essentially a very long explanation of why this particular group of ones and zeroes is worthless – and it can be summed up in a statement:
In order go be an effective money system, a unit of currency has to be good as a medium of exchange and a store of value.
Having one but not the other makes it a very unstable money system. Having neither makes it especially useless as a money system, but probably a very good way to rip off people who don’t understand these simple rules.
When in doubt: if you can’t hold it in your hand, you don’t own it.