April 17, 2013 by Liberty
I began the last part of this series by pointing out how irritating I found both sides of the bitcoin debate. Both sides have a reasonable opinion and generally, both sides are right until they start making silly predictions. If you haven’t read the previous article then be sure it check it out. Is Bitcoin Dead?
It’s one of the most interesting parts of many debates that people have. More times than not, both sides are right. The supporters are right to be excited. This is a massively creative decentralized currency idea. That’s awesome but they go a bit excessive on the promises of the world changing.
The detractors of bitcoins are also right. This is an unproven technology. It’s very possible that some people will be benefiting disproportionally from these coins. They’re also not very practical in the classic transactions people do. Then they go into predicting it won’t work. That’s just as crazy as saying it will work.
Both sides make a lot of sense. They both have reasonable arguments based on the information we have available.
Where the Supporters Have It Right
Bitcoins have an in-built scarcity to them. They were designed with a system that makes them more and more difficult to create over time. That means that they have scarcity. Mining them requires computer work. That requires an investment. That means there will always be a scarcity to the currency.
Scarcity is what makes precious metals, food, and just about everything in the world valuable. No one person can take over the system without an unnatural amount of resources. That means there is value, even if it’s not able to fit in our hands.
It’s decentralized to the point of being safe from government intervention. There is not that much that can be done to control the currency. Unlike the dollar, there is no coercive force that can control the price. The fed may be able to drain the value of the dollar but the bitcoin should have the opposite habit of raising in value over time because it’s so tightly limited.
Many of the detractors consider public support an odd negative. They say that it’s value only comes from the fact that people use them but that argument is true for every currency. Just like every other currency in the world, the value is dependent on faith. If people stop believing the bitcoin is worth anything then the value will collapse. The same goes for dollars, euros, gold, and frog sperm.
That is just a characteristic of an economy.
Detractors Aren’t Completely Off Base
One of the first major concerns that people have is that the currency provides an unfair advantage to the early adopters. That’s because the value of bitcoins tends to increase over time. That is the opposite of most currencies. That makes it seem a little like a scam. Someday, the value may begin to lower. There are some odd problems that this can lead to. There is no government “protecting” the value of this money. That means one day can make it worth nothing (and no one will die to protect it.)
The next major concern that people have is the complexity of the price of bitcoins. One second the coin value can change wildly. It can be difficult to buy a candy bar when the value of your money goes up and down by the second. That makes in person transactions rather complicated.
This can be recovered when working through computerized systems though. Prices can adjust. This adds a cost to the price of goods. A constantly adjusting price can make it a pain to keep up with. That makes the complexity unappealing for most people.
(The funny thing is that every currency does this. We just don’t normally have to worry about it.)
One hope of the supporters in the bitcoin debate is that the fluctuations will settle when more people are using it on a regular basis. This idea is a bit of a long shot. People like to think that a million people are more predictable than a thousand but reality often proves this theory wrong.
Should You Use Bitcoins?
I feel that any prediction without disclosure is bull. So I’ll start with my disclosure. I’m not invested in bitcoins. That means, for every good thing I say, know that my money isn’t on the idea. If I say negative things then you know I won’t be being disingenuous about my opinion saying it.
There is one major problem with bitcoins that every detractor should be using. Most of the arguments against bitcoin can be used against every other currency in the world but this is one that should be a major concern of every person planning to put there money on the line.
People often make the assumption that new technology is better than old technology. They assume that the cell phone is better than the radio transmitters but when an emergency kicks in, the old radio systems are able to handle it.
New technologies should be assumed to be more fragile than old technologies. Old technologies have proven that they can handle more going wrong from sheer experience. Paper money in America has a few hundred years supporting it. Electronic crypto-currency has barely any history.
You don’t need to be able to predict what will damage bitcoins. If prediction were possible then no one would be invested in them by now. I’ll go over the stupidity of prediction in a future post. You only have to see that they’re more recent and less tested by the unpredictable markets.
This might be the “old fart” argument. Old people always assume what they used was better. It actually has a lot of credence in history. Ninety percent of new technologies are forgotten in no time at all. They’re more like fashion statements than breakthroughs. Is bitcoin going away? I don’t know but I do know that it doesn’t have a history backing it up. Gold will have a leg up on bitcoins for a few thousand years.
Am I completely
I actually am still considering adding it to my portfolio. Notice how I’m adding it to my portfolio, not putting all my money in it. A diversified bitcoin investment may turn out to be very profitable. You need to understand a few things about it though.
The interest in bitcoins has exploded once and the next time it bubbles up, it’s probably going to get even bigger. That means it’s a great option to pull in a profit. What didn’t kill bitcoin just made it stronger. The people that watched their investment bounce wildly and stuck through it are that more trusting in the currency system.
That means everyone is going to be putting more and more faith in it next time around.
This is an odd contrast to the bitcoin debates biggest looming behemoth. The number one thing leading to the success of bitcoins is currency distrust in governments. As long as governments continue their path of ridiculous spending, people will be trusting bitcoins more. People know what debt does. They will continue to crawl towards every alternative.
Bitcoins will be a very risky investment but I could completely understand why someone would put a little bit of money on the line. The world may not be completely prepared for dealing with bitcoins but the value is still there and will only increase if people adopt them as a natural second currency.
Stupidity in Bitcoins
I hear a lot of people insulting the libertarians that rushed into supporting bitcoins. People like to make those libertarians into whack jobs. They even go as far as insulting their intelligence. I just think that’s insane.
I have a theory that you can predict the success of any person based on how many people call them stupid. People that are called stupid the least usually do okay in life. They make a little retirement for themselves. People that are called stupid a lot are usually either wild failures or wild successes. Stupidity is often one of the greatest catalysts for innovation. Check out my article, Key To Innovation to learn a little bit more about this.
Don’t bet the farm on bitcoins and you’ll be fine.
No one will ever be able to predict the success of failure of this currency. It’s a new technology. If you adopt it early then you’ll either benefit immensely or lose completely. I personally choose to wait but both sides have a chance.
If you do invest then diversify it. I recommend holding much less than you hold in gold. That leaves you safe enough to survive and, ideally, risky enough to benefit.
The Best Part
Bitcoins are certainly the beginnings of something amazing. Are bitcoins the final frontier in currency? Probably not but they’re a currency that’s truly based on trust. You cannot manipulate the system very easily. In fact, it’s virtually impossible. People are working towards creating a currency that can’t be manipulated. That means that people get all the benefits of currency without the risks of printing it.
Bitcoins are not necessarily the solution. Honestly, it could even turn out to be litecoins, or virtually any future technological creation but it’s still fun to dream about.
Whether you take the chance of investing in bitcoins or not, this is definitely a worthwhile story to watch. It’s even possible that this could lead to more accountability in classic currencies as they try to compete. (A boy can dream.)