I would think apple is smarter than that. The dollar has intrinsic value because you need dollars to pay taxes in the United States. The government accepts no other currency. So if you’re going to engage in any kind of commerce whatsoever, you need to use dollars. This creates real value for the currency. Gold has real value because it’s shiny and can be used for jewelry. Other commodities get their value from industrial purposes. But what about Bitcoin? If you ask Bitcoin believers why a bitcoin is worth anything at all, they will tell you about how amazing the technology is, and how it’s “programmable” and how cryptography and pseudo anonymity are so great. But none of these are very satisfying answers. Why Litecoin believes its superior.
For one thing, these features mainly explain why Bitcoin as a payment platform is so intriguing. They don’t explain price. Most of the techie Bitcoin bulls usually talk about Bitcoin as a platform (something that’s easy to defend), rather than Bitcoin as an asset that will go up or down.
Furthermore, if Bitcoin’s value were simply a function of all of the technological aspects, then there’s no reason that Bitcoin wouldn’t easily be supplanted by another crypto-currency that has better features (even the Bitcoin bulls will acknowledge that the technology could be better, particularly on the mining side and the confirmation time).
For example Litecoin, the second-biggest player in the game, advertises that if you transact in Litecoin you get faster confirmation times and that the whole system can handle more volume than Bitcoin.
So the usual arguments aren’t that compelling.
Now in the Bitcoin-sphere, there’s a lot of debate about what Bitcoin is. People go ’round and ’round in circles about whether Bitcoin is a currency or a commodity or a platform or a protocol or an equity or whatever. These squabbles frequently get semantic (What is a currency? Must it be a stable store of value?) and usually they suffer from an inclination to plug Bitcoin into a category where it never quite fits.
I think Bitcoin is a hybrid of three things with which we’re all pretty familiar: a currency, an equity, and a social network.
The currency part is pretty easy to understand. Someone is offering something for sale like a bike or a month’s rent, and they might give you a quote in dollars, yen and bitcoins. Bitcoin basically acts like a currency then.
Bitcoin also has equity-like characteristics in that the value seems to grow as the whole Bitcoin ecosystem grows. The value of a bitcoin is up about 50x this year, which is an insane swing for a currency, but if you think about it as equity in a hot startup, it’s not that preposterous when coming off of a low base. Bitcoins also have market cap .
And most crucially, there’s a social networking element to it . Bitcoin is something that’s valued because lots of people use it. It’s not that different from Napster. Napster was game-changing technology in terms of how people get music, but it only had value once it was used by a lot of people. Same with Facebook. The technology may not have been better than its predecessors, but it got a lot of people using it, and suddenly the platform became tremendously valuable.
Strong, robust network effects are crucial for making the whole thing work.
Let’s go through why …
Let’s say you’re a Chinese millionaire, and you’re looking to take a big hunk of your fortune out of the country. This is not a trivial problem. The Chinese government has strict controls about wiring money out of the banking system. One way to get money out is to give your money to something called a “junket operator.” That junket operator will give you a bunch of chips to go gamble with in Macau. Then after you’re done gambling you take your remaining chips, cash them out for the local Macau currency (the Pataca) and then deposit those Pataca in a bank in Macau where that money is not burdened by capital controls. But that’s difficult in part because you’re dealing with a shady junket operator who might have ties to the criminal underworld. Then you have to gamble and play a huge cut to the casino. And then there’s all the travel.
Another way you can get money out of the country is by buying a bunch of Rolex watches and putting them on all your wrists and ankles, and then flying out of the country and selling them to someone outside of China and then depositing that cash in a foreign bank. But like all luxury goods, the Rolexes are likely to lose a lot of value the second you take them out of the store. And do you really feel safe traveling with all those watches on you? It’s a dicey enterprise.
The hot new way to evade capital controls is to buy bitcoins, and then slip them to another wallet connected to a bank account in some other country. Then sell the bitcoins to a buyer and deposit that money in a bank somewhere. The government would have an extremely hard time tracking this down (which is why lately the governments of China and India) have grown more negative on Bitcoin. This is a low-cost solution, but it’s not risk-free. As we’ve seen, Bitcoin is volatile, so you could experience a big price swing. But even if you can stomach the price swing, you have to be certain that there will be buyers for millions in Bitcoin on the other end of the transaction. This is only assured with big network effects.
Despite the technological similarity, our Chinese millionaire could not conduct the same transaction with Dogecoin. The value of all the Dogecoins in the world is just $7 million, so if you wanted to move $1 million, you’d need to suck up one-seventh of all the money in Dogecoin. It would be way too big a gamble.
Other crypto currencies have total “market caps” much less than $1 million. So then you literally could not execute the transaction despite equivalent — or in some cases superior — technology associated with other coins.
Without the network effects, the technology is nothing. It’s just a theoretical amusement.
The question then becomes: Can the social network last? If it can, then the value can be maintained, or might grow by even a lot. But history is not on Bitcoin’s side on this question. For one thing, no social network seems to have much lasting power … especially not the first in a given category (Napster, MySpace, ICQ, etc).
This also doesn’t satisfy what gives Bitcoin a “floor” in value — but then an equity never has a floor. Equity can go to zero, but that doesn’t mean that in the meantime it’s not worth something.
Bringing it all back home: A lot of Bitcoin skeptics are willing to accept that there’s something technologically interesting going on here . But the economics of it are more tenuous. But if the network of people remains, Bitcoin may keep solving problems, like the problem of getting money out of a restrictive country.
But does it make sense to invest in bitcoin?
It sure does make sense! This time last year Bitcoin was at around £300-£400 mark, and of course today at the time of writing this it’s valued at around £1,026 per Bitcoin. So the growth within the year has been incredible.
Of course, as with any investment (if you intend to use Bitcoin as an investment vehicle) you need to go in with your eyes open. So what I mean by that is actually understand the technology at more than just surface level. Understand what you’re buying into! By doing that it’ll help you make up your own decision as to whether you believe in the technology, and whether you should invest or not.
It sure does make sense! This time last year Bitcoin was at around £300-£400 mark, and of course today at the time of writing this it’s valued at around £1,026 per Bitcoin. So the growth within the year has been incredible.
Of course, as with any investment (if you intend to use Bitcoin as an investment vehicle) you need to go in with your eyes open. So what I mean by that is actually understand the technology at more than just surface level. Understand what you’re buying into! By doing that it’ll help you make up your own decision as to whether you believe in the technology, and whether you should invest or not.
The recent Winklevoss ETF decision, which was a rejection, showed how Bitcoin is maturing from a value stand point. A decision such as that a few years ago could’ve crashed the value a lot more, however many were pretty surprised as to the effect it had. The value didn’t drop as much as people were expecting. Just so you’re aware there has been discussions of a potential Bitcoin Hard Fork, which will almost certainly effect Bitcoins value, but we don’t know which way that’ll go yet. As I mentioned, Bitcoin is constantly maturing!
If you look at any negative global political event, it generally has increased Bitcoins value. A recent event that comes to mind is where citizens in India were limited to the amount they could withdraw from banks, that helped increase Bitcoin value as well as user numbers in India.
As a technology it’s important to know that Bitcoin is constantly evolving, and new users are getting turned onto Bitcoin all the time. I actually just read a piece today that Bitcoin users are generally doubling every 12 months which is only good news for the ecosystem.
But back to investing, if you’re investing for the long-term which is what I’m doing, I feel it’s a good move. You could even spread your investments over a period of time, should you not feel comfortable in investing a large amount up front at least that way you have skin in the game, and continue to involve yourself more in the ecosystem.
Some notable guys to check out when it comes to Bitcoin value predictions are the following: Vinny Lingham, Trace Mayer, and Max Keiser. There are quiet a few people out there who have made pretty accurate Bitcoin value forecasts over time.
By Ravinder Deol, Glen Walters
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Here's Why you shouldn't invest in bitcoin
