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Bitcoin was originally promoted as an alternative to money, but it is inferior to established currencies as a store of value and a medium of exchange. (It is highly volatile in price, isn’t widely accepted for payments, and is far more expensive to transact in than ordinary currency.)
Now people say, well, if it isn’t good as money, at least you can use it as an investment. As an investment, however, it looks sort of like a Ponzi scheme – people who cash out are paid with the money from newcomers who invest in response to price increases (with no revenues or earnings to fund the payouts).
But unlike a Ponzi scheme, there is a fundamental driver of demand for Bitcoin – it is supposed to be usable by criminals and state actors to make payments that cannot be traced by law enforcement. This feature of Bitcoin makes it genuinely valuable to criminals and underpins demand. It might be sufficient to turn Bitcoin into an investment asset, if governments continue to allow Bitcoin and similar products to perform their function of facilitating illegal commerce,
This week’s news that the FBI was able to recover most of the Bitcoin from the Colonial Pipeline ransomeware attack should give pause to those who rely on Bitcoin to make untraceable payments. In today’s world, where banks and other financial institutions are under heavy and growing government pressure to fight money laundering, it is hard to believe that Bitcoin and similar schemes that faciltate untraceable payments will be allowed to continue unrestricted.
So, I would have to say that Bitcoin is a speculation, and not an investment.
Excellent article. Thanks
Bitcoin has no physical manifestation, has no intrinsic or industrial value, pays no dividends, and is only worth what someone else is willing to pay for it at a given time. How can it be an investment?
There is an excellent write-up regarding the potential threat that Quantum computers poise to making Bitcoin signatures insecure from Deloitte here:
I’d also point out there is a great book (for the mathematically inclined) titled Mathematics of Quantum Computing by Wolfgang Scherer (ISBN: 978-3030123604) which explains on page 323 exactly how discrete logarithms can potentially be broken by quantum computing (rendering the bitcoin signature insecure).
IBM promised last year that they would have a 1000 qubit Quantum computer available by 2023, so the quantum computational power is expanding an an exponential pace.
A team at Xanadu in Canada has announced a room temperature quantum computer based on light photons that has the potentially to become widely available.
Given all these potential threats to Bitcoin security, there is a small but not negligible risk that someday Bitcoin may be rendered insecure without an
institution like the Federal Reserve maintaining the value of the digital currency. It’s just waiting for bad things to happen in my humble opinion.
QCs promise the power to break all of the cryptographic algorithms which underpin internet security, not just cryptocurrency ones. Fortunately, sufficiently capable quantum computers are still like exotic new battery technologies: always on the horizon. Until I can drive it, am deeply skeptical.
I’m fine calling it an investment. The market has gone through huge booms and busts but remains with a respectable market cap near $1 trillion. To me, that’s beyond just some random speculative non-sense bubble. I don’t know what the future holds nor am I smart enough to know if it’s legit, but allocating 2-3% to it in a portfolio is probably fine. It’s not worse than gold, in my opinion.
It has no intrinsic value, so it’s not an investment. And it’s too volatile to be a (useful) currency. It’s speculation.
Everyone who doesn’t own it (like me) says “speculation” and every owner says investment. Hindsight being what it is, I’m sure we all wished we had bought it years ago. Ordinarily I would put it in the speculative category, but I think it has the potential to be gold-like and serve as a hedge against central bank’s rampant monetary profligacy. What I find most interesting about Bitcoin is that there can only be 21,000,000 coins ever in existence and no more.
I own some alt coin that I received a few years ago from an online promotion, yet I still say it is speculation. I see it in the same light as my Pokemon cards, stamps, and HD-DVD collection. And best of all, it takes up much less room.
On the other hand, buying individual stocks “for the long run” might not be any more sensible though. Fred Schwed (Where are the Customers’ Yachts?) wrote anecdotally of “a great and sagacious financier.” When he dies, “the executors go through the strongbox [and find], tucked well away in the back, bundles of the most hopeless securities whose very names have been long since forgotten. Although these executors will never leave an estate worth a tenth as much as this one, they gaze at the bundles with wonder and amusement. ‘Golly,’ they say, ‘whatever could the old man have been thinking of to get stuck with these cats and dogs?’”
Maybe one day my executors will go through my hard drive and find tucked away a cryptocurrency wallet and say “what could the old man have been thinking?” If not, they will surely say it of my HD-DVD collection!