Supercalifragilisticexpialidocious Part 3: Bitcoins
A previous blog talked about the importance of understanding your investments and how they can generate a profit. My last blog talked about my not understanding 100+ PE stocks especially since I believe that earnings drive value. Today I will discuss Bitcoins and explain why I do not understand the rush to own them.
Bitcoins are “hot.” They are part of a generic category of cybercurrencies of which there are many “brands” and variations. However Bitcoins seem to be the most popular, so they will be specifically mentioned here. However, my comments would apply to most cybercurrencies.
Bitcoins started out as a currency and has been performing as such until this year, when it started to trade as a investment security with huge daily market swings, excessive volatility and now an organized futures market and with investment bankers facilitating active markets.
Let me be clear, I do not fully understand how Bitcoins are “mined,” created, regulated, registered, transferred, kept secure and doubt that there is transparency in the process or that it is immune to many forms of cybercrime. However, I do not want to talk about the validity of Bitcoins, but rather their use as a currency which was their raison d’être. I believe that cybercurrencies will, one day, become a valid cross border medium of exchange, i.e. a currency. However I do not believe that that time is now.
Currencies are a medium of exchange readily accepted in commercial, government and other transactions. Currencies are usually backed by some sort of credible body such as a government or NGO (nongovernment organization), backed by commodities such as gold, specie or oil, and the stability of the currency is an important element in it widespread acceptance. Things change, governments change, speculation and demand affects value, availability and individual tastes and feelings toward risk also change. Also currencies fluctuate between themselves. The dollar as measured against the Euro, Pound, Yen or Yuan changes continually, but always within a realm of what can be reasonably expected. The world has evidenced a self-correcting mechanism bring fluctuating currencies back to an equilibrium. In some cases, a country’s greatly rising currency will result in egregious inflation usually wiping out currency values and then there is a flight to “safe currencies,” commodities, or even things such as rare stamps, coins, books, maps and art. However, we haven’t seen unchecked inflation in Western society in generations. The worse here in the United States was on the waning days of the Carter presidency, and we survived that.
I no longer see Bitcoins as a currency. Rather, I see it as an investment “security.” As such it is being subjected to a current frenzy of buyers wanting to receive “free money” by buying them, no matter what the price, since they seem to feel there will always be a buyer to unload it at a profit. And there will be a buyer, until there isn’t, and then the Bitcoins will plummet and, with luck might revert to the value as the currency it started out as, or if not, then the value would almost completely disappear. Because of the reasons stated above I cannot understand or justify owning Bitcoins.
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