Monday, December 28, 2020

The Price of Bitcoin

Bitcoin keeps making new highs. Currently priced at $27,000, it's up a staggering 50% since I predicted it's imminent decline a few weeks back, illustrating how difficult it is to time the peak of a bubble. However, there's no doubt that Bitcoin is a bubble that will one day collapse to zero. It can at best be used in transactions, but its price is so unstable that it's hard to use even for this. It can certainly not be used as a unit of account. No-one in their right mind would write a contract in Bitcoin, because there's no way to know where it may be priced in the future. It has been priced at $3,000 and $28,000 all within two years. Who knows what its price may be in a few years from now?

This level of price instability only exists in the ream of ideas. Tangible assets don't jump about in price like Bitcoin because the realm of things have a relatively stable hierarchy of value. We value things relative to each other. A silver coin is valued relative to bread, milk and eggs in a way that is much more stable than an idea can ever be relative to the same things. This is why money must be a commodity good, and why the current experiment in using an unbacked US dollar as a measure of value is doomed to failure.

The irony in this is that the current Bitcoin hype is based on the idea that the US dollar is doomed. But instead of pointing to the fundamental problem of tying ideas up to things, all attention is focused on monetary debasement through inflation. It's claimed that the limited number of Bitcoins in the world makes it valuable. However, there are all sorts of things in the world that are limited in number without having any value. Shares in bankrupt companies are limited, but that doesn't give these shares any value. Real world value requires real world utility. Assets must be useful in some way, either as goods in themselves or as things capable of generating goods, with goods being either things or services.

This is where the logic of Bitcoin breaks down. It's of very limited utility, and hence extremely volatile in price. This in turn makes it impossible to use Bitcoin as money. Contracts will have to be written against a more stable asset, with gold being the obvious alternative. Gold checks all the boxes as far as money is concerned, so it is gold that will be used once the current experiment in unbacked currencies comes to an end. Contracts will be written against gold, including future contracts for Bitcoin. But what's the point in buying Bitcoin with gold? Gold can be used in electronic transactions. There's no need for Bitcoin. If the current hype in Bitcoin is due to a belief that Bitcoin will replace the dollar, what happens to its price once it's clear that gold is the natural winner due to its history, utility, and stability?

Bitcoin is an energy consuming liability to the Bitcoin community as a whole. There are bills to be paid. Without newcomers, the holders will have to pay. If they don't pay, the network shuts down, and all is lost. There is therefore justification in the assertion that Bitcoin is a Ponzi scheme in constant need of newcomers.

Furthermore, the current price action in Bitcoin is not indicative of any increase in value. Price and value are not the same thing, and for something that aspires to be money, price volatility is the very opposite of value. The more it fluctuates in price, the less it's worth as money.

Casascius coin.jpg
Brass token currently priced at about $27,000

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