Thursday, November 14, 2013

Is There A Bitcoin Bubble?

I write this post with the assumption that you know a thing or two about bitcoins. If you don't, stop reading.

A few months ago (see the below chart), people declared that the bitcoin bubble had popped because it had reached around $260 a bitcoin and then fell to less than $100 a bitcoin. Except, as of this writing, bitcoin's price exceeds that supposed bubble price. Writers would love to convince you that they know all about bitcoin and why it's bubble (or why it isn't a bubble), but the truth is that they have no idea. Neither do the media (who love to hire the most ignorant people they can find). And neither do I. Bitcoin offers an approach to money that, in its conceptual entirety, hasn't ever existed before now.

But let's first consider the major arguments against bitcoin, fostered by these "bitcoin is a bubble type" who only promote this idea (why don't they at least lend a voice to the other side?).

Why Bitcoin Is A Bubble

Bitcoin fluctuates too much. By far, this argument holds the most weight against bitcoin. Because its price fluctuates, it currently remains an unstable currency.

Few businesses accept bitcoin. This may seem like a problem now and it may be a problem in the future if business don't accept it, but bitcoin makes exchanging currencies cheaper than traditional methods. It costs less to travel with it, which, with Echo Boomers' love of travel creates a demand. That being written, it still needs more businesses to accept it.

Nothing backs up bitcoin - it is completely made up. This statement is completely true. Simply put: only a maximum of 21 million bitcoins can ever exist (in 2150, currently only around 12 million exist); whereas, as the Federal Reserve has demonstrated, the US Dollar limit might be infinite. Remember basic economics: the more of something exists, the less valuable it becomes. Of course, people like Schiff will argue that gold is limited too, to which I can respond, are you sure about that?

The government may try to block bitcoin. This is an excellent argument against bitcoin if and only if all other countries do this. If several countries decide to use bitcoins (like China and Japan), this arguments completely fails. In fact, and this is what is REALLY scary, if China decides to adopt bitcoin and refuses to accept US Dollars, expect the price to go through the roof.

Bitcoin could be a scam. This point carries a lot of weight as well. Another derivative of this argument is that the government is secretly behind bitcoin. To be fair to bitcoin here, I've heard people call the stock market a scam, so this is something that people tend to state when they don't understand or don't trust something.

Why Bitcoin Carries Value

Are banks necessary? With savings' accounts paying nothing in interest, bitcoin allows you to hold your money in an independent currency which can be turned into whatever local currency you need. Not only would this help with travel and keeping foreign exchange costs down, we would literally need no "local" currency whatsoever except for buying good in that amount. At the end of the day, it's much cheaper (no debit/credit card fees at merchants) than using the costly banking system. Oh, and yeah, the banking system costs consumers huge sums of money - bitcoin eliminates the middle man. Even Bernanke admitted this:

Vice Chairman Alan Blinder’s testimony at that time made the key point that while these types of innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.

Bitcoin doesn't need the United States. Bitcoin's growing popularity is happening in China and other Asian countries, not the United States. Simply put the Chinese see the value, not only in terms of efficiency, but also in terms of the lack of "control" (many Americans think bitcoin is too complex to understand because it involves mathematics).

Popular among young men. Men tend to lead innovation. Pretty much every early successful industry was dominated by men initially. The same applies to many trends. For instance, Echo Boomers love their tattoos, but if you go back about 30 years it was only men who had tattoos. We may see the same with bitcoin.

Wait until the Muslims hear about it. Some Americans don't know this, but Muslims are against earning interest (and paying it); in fact, it's one of the most wicked sins (part of the reason that Americans are left in the dark about this is because banking is behind Western culture and Islam doesn't fit in with banking - one of the reasons we are constantly encouraged to fight them as their existence threatens banks). Obviously, Islam isn't compatible with fractional reserve banking, and perhaps the world would be a better place if all of us weren't. But what's the alternative? Previously, nothing, outside of barter, which is painful.

Now, we have bitcoins and bitcoins don't use a fractional reserve banking concept, thus they may be in demand from over 1 billion Muslims (remember, bitcoin can only have a maximum number of 21 million). Luckily, most Muslims are unaware this currency exists, but when this changes, we could see bitcoin skyrocket.

As a note on these points, Americans like to think they own the world and know more than everyone. This and the previous point indicate that the power of the world is shifting and whether Americans "believe" in something or not won't mean that it will or won't succeed in the long run. In other words, it's irrelevant what some American thinks about a currency when it's in high demand in China, Hong Kong and Singapore and will later be popular in Middle Eastern countries.

Buying a bitcoin is like flipping the bird at the Federal Reserve. Admit it: this feels awesome.

Bitcoin is more evolved than gold. In a world where fiat currencies collapse (and in the long run, they will), many trumpet gold as the ultimate solution. But do you really want to barter with gold? Paper currencies make the bartering easier because you don't have to carry gold around with you, so in a sense, paper currencies - backed by gold - make sense. Even though nothing "backs up" bitcoin, it won't ever exceed 21 million. This means that it's final amount - 21 million relative to gold will be a price exchange similar to what a paper currency backed by gold would be (somehow the goofballs like Schiff never get this).

Bitcoin is global. And that's scary because basically, if it takes off, it will be a reserve currency in the world. For all the talk about "no country wants to have the reserve currency," well, they may all get their wish with a computer program displacing them.

Final Thoughts

I look at this list and am convinced I just don't know. Bitcoin may be the greatest invention that many of us are skeptical about ("Kids, if God wanted men to fly, he would have given them wings"), or it could be the next great bubble that pops. Either way, don't believe people who try to convince you that they know WITHOUT A DOUBT what bitcoin will be, because at best, we're all estimating and guessing. And based on the price of bitcoin today alone, I'd say this is normal human behavior.

Posted by Echo Boomer at 8:00 AM