The King Has No Clothes Currency
“Bitcoin mania reached new highs as the price of the digital currency jumped about 40% in about 40 hours, surging past the $16,000 mark.”
—The Wall Street Journal (Dec. 8, 2017).
Why is gold valuable?
Mostly, because you can buy things with it, and only (very) secondarily, because you can wear it (or at least, women and some men can, in many cultures).
Significantly, you can’t eat it, make anything out of it (it’s a much poorer conductor than other metals), cure a disease with it, or otherwise derive any benefit from it.**
In economists’ jargon, gold has little intrinsic value.
So, how much is it worth?
Precisely how much Sellers of goods and services will part with for a prescribed amount.
See the circular nature of the problem??
Gold vs. Bitcoin
At least gold’s value is buoyed by one, very real-world constraint: there’s a limited amount of it — or, at least, a limited amount that can be economically recovered.
As a result, the “supply” side of the “supply-demand” equation is tethered to some kind of reality check.
By contrast, as a truly virtual currency, neither the supply of, nor demand for Bitcoin has any enduring, tangible anchor.
Yeah, yeah, supply is supposed to be limited by supposed “block chain” computing or some other technological barrier.
But, honestly ask yourself these two questions:
One. Exactly what is the technology undergirding Bitcoin?
Do you understand it? Does your investment advisor? Or anyone who doesn’t have a financial interest in selling you on Bitcoin?
If not . . .
Two. How realistic is it to think Bitcoin will never be rendered technologically obsolete?
If we know anything about modern technology, it’s that it advances exponentially, leaving in its wake superseded and discarded has-been’s.
In case anyone doubts that, here’s a very partial roll call of former tech darlings (software and hardware): Wang, CompuServe, AOL, Netscape, Palm, Blackberry, McCaw Cellular, Sun Microsystems, Webvan, MySpace, and Lotus 1-2-3.
“The Perfect Bubble” & Greater Fools
In the meantime, clearly, it’s a party — a party increasingly dominated by retail (read, small and unsophisticated) investors.
For now, everyone wants to buy . . . because everyone wants to buy.
That’s why it’s going up.
But, when that psychology inevitably reverses, ponder two more questions: 1) who will step in to stop the carnage (buy into a falling market)?; and 2) what will burned, so-called “investors” be left holding onto?
Answers: “no one” and “nothing” (I’d say “the bag” . . . except there isn’t one).
P.S.: And no, as ridiculously valued as Bitcoin is or becomes, I don’t recommend shorting (betting against) it: with no real-world checks, there’s no way to predict how big the bubble becomes before it bursts.
In fact, the total lack of real-world (“analog?”) constraints may be the definition of a “perfect bubble.”
**I suppose you could also gaze at it: gold is very aesthetic.
Or, if you’re really enthralled by gold (as some foolish ancients were), make it into objects and worship them.
See also, “The Bitcoin Bubble”: Why I’m Rooting for Bitcoin to Go to $10,000, $20,000 or Even +$100,000(!!)“; “Jeremy Grantham on How Much Gold to Own”; and “The Stock Market & “The Shoeshine Boy Indicator” (Or is that “Uber Driver?”).“