The best aspect of Bitcoin is that it is a free currency, completely outside of the control of any government or central bank.
Funny thing is, the worst aspect of Bitcoin is that it is a free currency, completely outside of the control of any government or central bank.
I’m not the biggest fan of central bankers. Like the rest of us, they are human and will err. They are tasked with making critical decisions under conditions of murky uncertainty and face conflicting mandates and political agendas … not to mention the unimaginable stress and the emotional burden of knowing that the livelihood of 315 million Americans depend on them making the right policy decisions.
No one — not Ben Bernanke or Janet Yellen or the quants that Goldman Sachs (GS) keeps locked in the basement — is smart enough or has enough information to effectively manage a currency, which is why central bankers constantly get it wrong. It’s an impossible job.
But to adapt Winston Churchill’s quote about democracy — that it is the worst form of government except all those other forms that have been tried — I’ve reached the conclusion that the modern central banking system is the worst monetary system ever devised … except for all others that have ever been tried.
The classic gold standard encouraged punitively high interest rates during times of crisis — which is precisely the time when liquidity is most needed — and crucified the working classes on a cross of gold. It also encouraged mercantilist economics — the scourge that Adam Smith preached against in The Wealth of Nations — which was a leading cause of wars in the post-industrial era.
The gold standard is never coming back. But what about modern variants like Bitcoin?
At first blush, there is a lot to like. Bitcoin has the anonymity of cash. It can be transferred without the disclosure requirements of the world banking system. And the creation of new Bitcoins is preset according to an algorithm, making something like an Argentine-style devaluation impossible.
But let’s get serious here.
If your bank fails, you have FDIC insurance in place to protect your savings. But who do you call when a Bitcoin exchange is hacked or shut down due to a bug?
Federal Reserve chairmen are regularly asked to testify before Congress to explain their actions. And if things ever got bad enough, the Federal Reserve has a physical location that could be stormed Bastille-style with pitchforks. (I’m joking. Sort of.) Though imperfect, there is a level of accountability.
But who do you drag in front of Congress when Bitcoin breaks? Satoshi Nakamoto, the John Galt-like character (or characters) that created the virtual currency under an assumed name? Good luck with that.
Look, I don’t trust the government. I agree with the gold bugs, Bitcoin enthusiasts and other assorted malcontents on that count. But I do trust the government more than I trust a crypto-currency of murky origins backed by an algorithm that lives in the netherworld of the Internet.
I’m not going to wag my finger and tell you not to speculate in Bitcoins. If you like to trade, and you feel comfortable with the risks involved, go for it. Had you bought at the right time last year, you could have made more than 10 times your money.
So by all means, speculate. But don’t drink the Kool-Aid here and buy the ideology. Bitcoin is a deeply flawed idea, and it is not a viable store of wealth.
I’m not opposed to the idea of a free-market parallel currency, and indeed precious metals have served that role to some extent ever since the fall of the gold standard. Some future iteration of a Bitcoin-like currency might be a viable option.
But as of today, we’re simply not there yet.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.